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A lot of ink was spilled last month over President Trump’s criticism of the Fed raising interest rates. Observers worried that those criticisms meant the President was prepared to directly meddle with U.S. monetary policy. But so far, at least, there’s no evidence that any such meddling has occurred.

The Trump administration’s fiscal policies have, however, indirectly influenced the Fed, by straining it’s post-crisis operating system. In particular, the large federal budget deficit has been putting upward pressure on short-term market interest rates; and those rising rates have, in turn, put pressure on the Fed’s “floor” system of monetary control. If the deficit continues to grow, as is expected, it might even bring an end to that system.

To see why, a quick review of the floor system’s workings is in order.

The Fed’s Floor System

In one of its more important but underappreciated crisis-era monetary policy innovations, the Fed switched from a corridor-like operating system to a floor operating system. It did so by paying interest on excess reserves (IOER) at a rate higher than going short-term market interest rates, thereby pushing banks onto the perfectly elastic region of their reserve demand curve. The change allowed the Fed to add reserves to the banking system, as it had been doing through various emergency lending programs, without loosening its monetary policy stance by causing the effective fed funds rate to fall below its target. Changes to the supply of money were thus “divorced” from the setting of monetary policy (Keister et al. 2008).  This divorce was seen by some as a virtue of the floor system, for it allowed the Fed to manage bank liquidity and monetary policy independently, changing the size of its balance sheet to control liquidity, and the IOER rate to alter its monetary policy stance.

George Selgin, however, has noted a number of challenges facing the floor operating system, one of which is its inherent fragility. Maintaining a floor system means keeping the IOER rate at or above comparable market interest rates, so that banks will be willing to hold on to any reserves that come their way. Stated differently, the  return on reserves needs to exceed the risk-adjusted marginal return banks might earn, net of their operating and other variable costs, on other assets.*

The figure below compares the Fed’s IOER rate to both the overnight dollar LIBOR rate and the 1-month Treasury-bill yield for the period from 2009 until 2017, showing how the spreads between the IOER rate and these other representative market rates has almost always been positive. The IOER-LIBOR spread averaged almost 10 basis points, while the IOER-Treasury spread averaged about 20 basis points. Such spreads are what has kept the floor system running.

On a few occasions, however, the spreads in question, and other similar measures, have been very small, and in some brief instances negative. What’s more, the spreads have been declining. Since January 2018 the IOER-LIBOR spread has declined to about 5 basis points, while the IOER-Treasury spread average has fallen to 7 basis points. Were the decline to continue to the point where other short-term interest rates rise above the IOER rate for a sustained period, the Fed’s floor system would unravel: instead of having a practically unlimited demand for excess reserves, banks would start rebalancing their portfolios away from excess reserves and toward other, more profitable investments. Monetary policy would then cease to be “divorced” from money, for changes in the quantity of money and changes in the Fed’s monetary policy stance would once again tend to go hand-in-hand.

Though the floor system is still intact for now, we can already see in the figures below that the narrowing of the spreads is straining the floor system. The first figure plots the IOER-LIBOR spread against the banking system’s cash assets as a percent of all assets. This cash asset category comes from the Fed’s H8 database and has consisted mostly of excess reserves over the past decade. The shrinking of the IOER-LIBOR spread has coincided with a decline in the share of cash assets held by banks.

The next figure plots the same spread against the loan share of bank assets. It has been rising sharply as the spread has declined this year. Banks, in other words, suddenly began investing a larger share of their portfolios in loans starting in early 2018.

These two figures suggest that the Fed may be already pushing the limits of its floor system. The banks appear to be shying away from holding so many excess reserves. That change suggests reserve demand is becoming less elastic at this narrowed IOER spread. The floor system may be more fragile than many Fed officials believe it to be.

The only way to ease this pressure on the floor system would be for the Fed to raise the IOER above these other interest rates. That, though, could lead to an undesirable tightening of monetary policy, putting the Fed in a bind: should the Fed raise rates to keep its floor system intact, at the risk of overtightening? Or should it avoid overtightening at the risk of seeing its operating system come unglued?

Trump’s Policies and Short-Term Interest Rates

But why have IOER-market rate spreads been narrowing? One answer is President Trump’s large budget deficits. His administration’s heavy spending is causing it to borrow a great deal. In addition, the shrinking of the Fed’s balance sheet and the restocking of Treasury’s General Account, which had been wiped out during the recent debt ceiling episode, have also contributed to the rising budget deficit.

To fund this growing deficit, the Treasury has been increasing its issuance of Treasury bills. The next figure shows this surge is evident in terms of both gross and net Treasury bill issuance. The black line shows the trend gross issuance and the blue line shows the net cumulative issuance.

Source: SIFMA

The recent burst of Treasury bill issues has a bearing on the IOER spread over other interest rates. In particular, the greater issuance of Treasury bills should drive up (down) their yields (prices), moving other short-term interest rates in the same direction through arbitrage. This should narrow the IOER spread over other interest rates.

The Federal Reserve agrees. From the June FOMC minutes, we learn the following:

The deputy manager [of the System Open Market Account at the NY Fed] followed with a discussion of money markets… Rates on Treasury repurchase agreements (repo) had remained elevated in recent weeks, apparently responding, in part, to increased Treasury issuance over recent months… Elevated repo rates may also have contributed to some upward pressure on the effective federal funds rate in recent weeks as lenders in that market shifted some of their investments to earn higher rates available in repo markets.

So some Fed officials themselves believe that the increased issuance of Treasury bills is pushing up short-term interest rates via arbitrage.

But is there any evidence for this claim? The figures below suggest the answer is yes, especially as it relates to interbank rates. The first set of figures plot the trend gross and cumulative net issuance of Treasury bills during the Fed’s floor system against the IOER-LIBOR spread. Both measures suggests a fairly strong, negative relationship. That is, a higher supply of Treasury bills shrinks the IOER-LIBOR spread.

One should be careful, though, in looking at the absolute dollar amount of Treasury bill issuance as it may grow secularly due to a rising economy. To account for this possibility, the next set of figures normalizes the two Treasury bill issuance measures by dividing them by total marketable Treasury securities outstanding. Now the relationship is even tighter and stronger. Relationships like these are not found for the issuance of Treasury notes and bonds against the IOER spreads.

President Trump, then, appears to be already influencing Fed policy by putting upward pressure on short-term interest rates and thereby causing pressure on the Fed’s floor system. The Wall Street Journal recently reported this budget pressure is only expected to  increase:

Rising federal budget deficits are boosting the U.S. Treasury’s borrowing… [T]he Treasury plans to borrow $329 billion from July through September—up $56 billion from the agency’s April estimate—in addition to $440 billion in October through December. The figures are 63% higher than what the Treasury borrowed during the same six-month period last year.

To be clear, there are other explanations for the narrowing of the IOER spread. George Selgin, for example, points to the unequal distribution of bank reserves causing problems as the Fed winds down its balance sheet. That seems right and complements the above explanation. Both explanations point to increasing strains on the Fed’s floor system moving forward.

In short, its at least conceivable that the Trump administration’s fiscal policies could compel the Fed to rethink its floor system. Given this possibility, the Fed has yet another reason to start thinking now about its floor system and whether sticking to it will be worth the trouble. Far better for the Fed to leave the floor system on its own terms, than to be forced out by fiscal policy.

*Banks cannot control the total quantity of reserves, but they can control the form of reserves held. That is, banks can choose to hold excess reserves or invest in other assets like treasuries and loans that, in the aggregate, would lead to a rise in required reserves.

[Cross-posted from]

Sanctuary policies on the city, county, and state level are frequently in the news.  Opponents claim that they increase crime in jurisdictions while proponents claim that they allow illegal immigrants, their families, and their American neighbors to rest a little easier knowing that the local government won’t help the federal government enforce its immigration laws.  Both sides assume that sanctuary policies produce those results by decreasing the scope and scale of immigration enforcement within their jurisdictions that, in turn, reduce the number of deportations from there.

There are undoubtedly individual cases where a sanctuary policy helps a person avoid deportation, but the more important question is whether they reduce deportations overall.  If there isn’t much of an impact, then the debate over sanctuary policies is just a costly diversion from other issues.  However, if sanctuary policies do reduce deportations, then perhaps pro-immigration activists and policy-makers should devote more effort to increase their number.  Likewise, opponents of sanctuary policies should also stop opposing them if they don’t have an impact on deportations but expand their opposition if they do reduce deportations by a lot  

There is suggestive evidence that sanctuary policies reduce deportations but many reasons to also be skeptical of big effects.  We decided to look at how the California TRUST Act reduced deportations from California.  Governor Jerry Brown (D) signed the TRUST Act in October 2013 – the beginning of the fiscal year for 2014.  The TRUST Act was a state-level sanctuary policy that limited law enforcement cooperation with ICE unless the arrestee had already been convicted of serious crimes. 

ICE deports people apprehended in specific Areas of Responsibility (AOR).  There are three AORs that include the states of California and Hawaii.  For the purposes of this blog, we assumed that Hawaii was not part of the California AORs.  According to the Center for Migration Studies, Hawaii’s illegal immigrant population was under 40,000 in 2015 while California’s was almost 2.6 million.  Since Hawaii’s illegal immigrant population was only 1.5 percent of California’s, we were comfortable in ignoring it.

Figure 1 shows a steep relative decline in deportations from the California AOR relative to the rest of the country when the TRUST Act was enacted.  In FY2014, the first year that the TRUST Act was in effect, deportations from California dropped 39 percent relative to FY2013.  In the rest of the country in FY2014, they only dropped 9 percent relative to FY2013. 

Figure 1

Annual Percentage Change in Removals by AOR


Sources: ICE and authors’ calculations. 


Figure 2 shows the differences in removal trends before and after California’s TRUST Act became law relative to the other AORs that were not covered by the California law.  Each regression line fit to the pre- and post-TRUST Act, called “Fitted Values,” highlights the change from a steady increase in the number of removals from California’s AOR to a precipitous decline in the number of removals when the TRUST Act became law. 


Figure 2

California Deportation Trends Pre- and Post-TRUST Act


Sources:  ICE and authors’ calculations.


On a statistical basis, these findings are merely suggestive as we only have 12 years of data and we didn’t control for any other factors.  For Figure 2, it appears that the more substantive change transpired in FY2012 prior to the TRUST Act.  Regardless, this simple exercise strongly suggests that the California TRUST Act caused the number of deportations from California to fall faster than they otherwise would have relative to other AORs. 

Last week Facebook, Google, and Apple removed videos and podcasts by the prominent conspiracy theorist Alex Jones from their platforms (Twitter did not). Their actions may have prompted increased downloads of Jones’ Infowars app. Many people are debating these actions, and rightly so. But I want to look at the governance issues related to the Alex Jones imbroglio.

The tech companies have the right to govern speech on their platforms; Facebook has practiced such “content moderation” for at least a decade. The question remains: how should they govern the speech of their users?

The question has a simple, plausible answer. Tech companies are businesses. They should maximize value for their shareholders. The managers of the platform are agents of the shareholders; they have the power to act on their behalf in this and other matters. (On the other hand, if their decision to ban Jones was driven by political animus, they would be shirking their duties and imposing agency costs on shareholders). As private actors, the managers are not constrained by the First Amendment. They could and should remove Alex Jones because they reasonably believed he drives users off the platform and thereby harms shareholders. End of story.

For many libertarians, this story will be convincing. But others, not so inclined to respect private economic judgments, may not be convinced. I see two limits on business logic as a way of governing social media: free speech and fear.

Elites in the United States value free speech in an abstract sense, apart from legal limits on government. Platform managers are free of the First Amendment, but not of those cultural expectations. Fear informs online struggles over speech. The right believes that platform managers are overwhelmingly left-leaning and responsive to the values of the left. They believe tech companies are trying to drive everyone on the right off their platforms and into the political wilderness (or worse). The left fears people like Alex Jones having access to a mainstream audience leading to electoral victories by authoritarians. And yet, if the left were to gain enough power to fulfill the right’s fears about deplatforming, the latter might fight back and force the platforms to remove their enemies, a victory that would leave the left in the wilderness (or worse). The cultural power of the left might yet be trumped by the political power of the right and, on another day, vice versa.

Such is the foundation of the platforms’ dilemma. Protecting free speech short of incitement to violence heightens fear while tamping down fear offends free speech. How to cope with the dilemma?

The platforms need legitimacy for their governance. In other words, they need for users (and others) to accept their right to govern (including the power to exclude). Legitimacy would confer authority on the decisions of the platform managers. Max Weber distinguished three kinds of authority rooted in different ways of gaining legitimacy. Two of the three seem irrelevant here. Users are unlikely to accept content moderation because Mark Zuckerberg is a special person with unusual powers (charismatic authority). They also are unlikely to accept Facebook’s power because things have always been done that way (traditional authority). What Weber called rational-legal authority seems to be the only choice for the platforms. In other words, they need a process (or due process) that looks like the rule of law (and not the rule of tech employees).

Facebook seems to be trying to establish rational-legal authority. It set out Community Standards that guide governing speech. Why should that “basic law” be accepted by users? One answer would be the logic of exchange. When you use Facebook for free, you give them in return data and consent to their basic law. That looks a lot like the tacit consent theory that has troubled social contract arguments for political authority. In any case, Facebook itself sought comments from various groups and individuals – that is, stakeholders - about the Community Standards. The company itself wanted more than a simple exchange.

But do the Community Standards respect the culture of free speech? Facebook has banned speech that includes “direct attacks on people based on what we call protected characteristics — race, ethnicity, national origin, religious affiliation, sexual orientation, caste, sex, gender, gender identity, and serious disease or disability.” The speech banned here is often, if loosely, called “hate speech.” Their basic law thus contravenes American free speech legal doctrine. Hate speech is protected by the First Amendment, but not by Facebook.

I conclude that either Facebook’s standard violates the culture of free speech or it reflects a difference between the culture of free speech (which does not include hate speech) and American First Amendment legal doctrine. If the latter, Facebook’s recognition of the difference will foster a greater gap between culture and law.

Facebook’s idea of hate speech may be a relatively limited and stable exception to a generally open platform. But community standards for social media are said to be “living documents” that change over time. And hate speech itself is an ambiguous term. Perhaps all mention of The Bell Curve might one day be removed from Facebook as a direct attack on African Americans. Removing Alex Jones should not prompt fear in any reasonable conservative. Banning Charles Murray should and would. And what of the vast landscape between those two figures? American free speech doctrine largely precludes drawing such lines. Facebook is committed to doing so.

The political context matters in applying standards. In one way, Facebook is less like a court and more like a legislature: it is beset by highly organized interests who seek to convince Facebook to remove content. As with legislatures, those who are organized are those who are heard from, and policy reflects what policymakers hear.

With regard to content moderation, people who lean left are organized and on the inside. This observation applies to the employees of tech firms, the academic experts from whom they seek advice, and the groups organized to guide their decisions about what is removed from the platforms. In contrast, the right is on the outside and less organized, more or less reduced to having elected officials complain about the platforms. How long before cheap talk gives way to serious actions? This asymmetry between inside the companies and outside is not good for the freedom of speech. It is also not good for the legitimacy of content moderation.

As a legal matter, social media companies have broad discretion to police their platforms. That is how it should be. But they need to make their authority legitimate. If they do not, elected officials may one day act to compel fairness or assuage fears. As always, that will not be good news for the freedom of speech or limited government.   

In yesterday’s Washington Post, George Will makes a familiar argument: “if you want peace, prepare for war.”

Drawing mostly on key episodes from the late Cold War period, Will suggests that Ronald Reagan’s military buildup was instrumental to bringing down the Soviet Union. He places particular emphasis, with an assist from John Lehman, on the importance of a massive naval buildup in the 1980s.

As it happens, I served in the Navy during this period. Lehman was the Secretary of the Navy when I was an NROTC midshipman at George Washington University. I witnessed what such a force could do when it was called upon to fight – not the Soviet Union, but rather Saddam Hussein’s Iraq in 1991. And that war was over in a matter of weeks.

But fast-forward to today, and the picture is more complicated. The issue is not whether we are preparing for war, to prevent war, but rather why we fight so many wars in the first place. We have a political class that engages in war, but with little consideration of the long term strategic benefits. War, in short, has become a matter of habit.

It wasn’t always this way, as I wrote this morning at War on the Rocks. Jumping off of two excellent articles – David Montgomery in last weekend’s Washington Post on the proliferation of war memorials in our nation’s capital; and C.J. Chivers in the latest New York Times magazine regarding an Army unit in Afghanistan’s Korengal Valley – I wondered: “Might our war memorials do more than memorialize war? Might they also help us to avoid future ones?”

William Dean Howells, writing in the Atlantic Monthly in 1866, worried that a proliferation of war memorials would “misrepresent us and our age to posterity; for we are not a military people, (though we certainly know how to fight upon occasion).” I worry that the character of the American people has changed. “Judging from the war memorials now adorning the National Mall, and those planned,” I write, “we are a military people, and our constant wars are disrupted only by brief occasions of peace.”

Returning for a moment to Will’s Op-Ed, let’s dismiss the question of whether we have a strong military. We absolutely do. Plus, we have nuclear weapons,thousands of them. Any competent leader, any tin pot tyrant with a return address, knows that an attack on the United States will produce a swift and devastating response. The mere prospect of such retaliation is an effective deterrent against any rational adversary. We should retain such a capability. As I and others have written, however (e.g. here), we don’t need nearly as many nuclear weapons in order to maintain a credible deterrent.

The fact that we spend enormous sums to build a massive military doesn’t mean that everything that we spend is equally effective in preventing future wars – or even of winning the wars we’re in. Back in 2009, then-Secretary of Defense Bob Gates told the Economic Club of Chicago “If the Department of Defense can’t figure out a way to defend the United States on a budget of more than half a trillion dollars a year, then our problems are much bigger than anything that can be cured by buying a few more ships and planes.”

By this standard, we have a big problem.

Adjusting for inflation, Gates’s “half a trillion” would be about $576 billion in today’s dollars. The defense bill awaiting President Trump’s signature authorizes a budget of $717 billion in 2019.

My main concern, therefore, is not about how much we spend, per se. Rather, I’m mostly focused on the wars that the United States has initiated, despite the fact that we have enormous military advantages over any conceivable combination of rivals.

Many of these wars have undermined our security. George Will calls the Iraq war “the worst U.S. foreign policy decision…in American history.” With respect to Afghanistan, Will earlier this year noted that U.S. forces had been there for 6,000 days and asked “What are we doing?”

He’s not alone in wondering such things, and such confusion is unfortunate. These unhappy and inconclusive conflicts may even have sapped the American people’s will to fight the truly necessary wars of the future. And at least some of the additional increments of military power, beyond what is needed for deterrence, have made it easier for us to become involved in foreign wars that do not advance American security.

In that sense, preparing for war hasn’t brought peace, but rather just more war.

In a recent piece at The Hill, I argue that Trump’s terrible approval ratings for his handling of foreign policy will matter more than most people think.

The basic argument consists of four points:

1. Trump has made foreign policy more important to Americans today thanks to his “America First” approach:

The genius of Trump’s “America First” slogan was the way it allowed Trump to connect foreign and domestic politics under a single populist and nationalist banner. When Trump says he’s protecting American workers, he could be talking about tax cuts, illegal immigration, “horrible trade deals,” or terrorism. Trump’s America First strategy has blurred much of the historical difference between foreign policy and domestic policy. All of this makes foreign policy more important moving forward.

2. Trump’s foreign policy has been historically unpopular:

Not only does Trump suffer lower approval for his handling of foreign policy than all presidents back to Ronald Reagan, but majorities of Americans oppose Trump’s calling card issues. Fifty-eight percent oppose building a wall along the Mexican border and 67% think that illegal immigrants currently living in the United States should eventually be allowed to apply for citizenship. Twice as many Americans (49%) think raising tariffs will hurt the economy as think it will help (25%)…

3. Foreign policy approval feeds into overall presidential approval:

… even though the impact of foreign policy is most obvious during a war or international crisis, it plays a key role in shaping the general narrative of a president’s performance while in office. One analysis, for example, found that public approval of the president’s handling of foreign policy has a larger impact on his overall approval rating than does his handling of the economy.

4. Trump’s net-negative presidential approval ratings signal big trouble for Republicans at the midterms:

Research suggests that Trump’s current 41% approval rating historically would typically result in about an 8-point national advantage in voting for Democrats…. Looking at data from each president’s first midterm elections going back to 1946, the four presidents who did not enjoy a net-positive approval rating saw their party lose an average of 49 seats in the House and 6.5 seats in the Senate.

The bottom line is that Trump’s handling of foreign policy hasn’t done Republicans any favors this year and is likely to be an even bigger problem for Trump himself in 2020.

Thanks to Hannah Kanter for the background research and contributing to the writing of the original commentary.

Last week, a transportation consultant named Bruce Schaller published a report claiming that ride hailing was increasing traffic congestion. Since then, we’ve been innundated with wild claims Uber and Lyft were increasing traffic by 180 percent, and these claims are used to support arguments that that cities should tax companies like Uber and Lyft and use the revenues to compensate transit agencies for the riders lost to ride sharing.

Yet the congestion claims are completely inaccurate. Schaller concluded that, because well under half of ride-hailing trips would otherwise have used private automobiles, ride hailing put “2.8 new vehicle miles on the road for each mile of personal driving removed.” He went on to say that this is “an overall 180 percent increase in driving on city streets,” but that would be true only if ride hailing removed 100 percent of private driving from the streets.

The report also said that ride hailing added “5.7 billion miles of driving annually in the Boston, Chicago, Los Angeles, Miami, New York, Philadelphia, San Francisco, Seattle and Washington DC metro areas.” That sounds like a lot, but Federal Highway Administration data show that it is only about 1 percent of driving in those metro areas. Since, by Schaller’s estimation, about a third of ride-sharing travel displaced private auto travel, ride hailing added a net of just two-thirds of a percent of driving in those metro areas.

Nor does even that two-thirds of a percent necessarily add to congestion. A disproportionate share of ride hailing takes place during off-peak hours, so only a small portion of that two-thirds of a percent actually contributed to rush-hour congestion.

Aside from being arithmetically challenged, Schaller is an unabashed opponent of auto driving. “Cities need less driving, not more,” he says, claiming that cities that allow too much auto driving will be “drained of the density and diversity which are indispensable to their economic and social well-being.” The reality is that low-density cities that emphasize driving, such as Dallas and Houston, tend to be more affordable and more socially and economically diverse than high-density cities that emphasize transit such as New York and San Francisco.

To promote transit and limit driving, Schaller advocates imposing fees on Uber and Lyft of as much as $50 per hour. Cities that are already charging such fees (though less than $50 an hour) are using them to compensate transit agencies that have lost riders to ride sharing, a policy Schaller would applaud but one that makes as much sense as taxing pocket calculators to save the slide rule industry.

Only transit, says the report, can “make possible dense urban centers with lively, walkable downtowns; a rich selection of jobs, restaurants, entertainment and other activities; diversity of population; and intensive and inventive face-to-face interactions that make cities fertile grounds for business and artistic innovation.” Has New York City resident Schaller ever been to Silicon Valley? It doesn’t have a dense urban center and it’s transit system carries less than 5 percent of commuters to work and only about 1 percent of local passenger travel. Yet it is one of the most creative and innovative places on earth.

The reality is that the ride-hailing industry is threatening the transit industry, and transit advocates are demonizing Uber and Lyft in order to protect their $50 billion in annual subsidies. Schaller’s report estimates that ride-hailing grew by 710 million trips in 2017, the same year that transit ridership declined by 255 million trips. If just 36 percent of ride-hailing trips would otherwise have taken transit–a number Schaller’s report would seem to support–then ride hailing is responsible for 100 percent of the decline in transit.

The truth is that transit was obsolete before Uber and Lyft were invented. Nearly 96 percent of American workers have cars and most of the 4 percent who do not don’t take transit to work. Outside of New York City, transit plays a minor role in urban transport, and outside of New York, Chicago, Philadelphia, Washington, Boston, and San Francisco, its role shrinks to insignificance. Given a choice between automobiles and transit, Americans have overwhelmingly chosen the former. Given a choice between ride hailing and transit, policy makers should also side with the mode that is faster, more convenient, and least subsidized.

Tuesday was National Lighthouse Day and social media was abuzz highlighting lighthouses’ beauty and their important role in navigation. On August 7, 1789, in one of its first actions, Congress approved an Act that established federal administration and support for lighthouses, beacons, buoys, and public piers. Interestingly, though the Act established tax funding for lighthouses in the United States, the history of lighthouses in the United Kingdom took a very different path and has been a source of debate about public goods and the proper role of government.

Public goods, according to economists, are commodities for which it is impossible (or at least difficult) to restrict consumption to those who pay. Such goods are said to exhibit the free-rider problem. Economists from John Stuart Mill to Paul Samuelson argued that lighthouses were a textbook example of a public good because a private operator would have difficulty collecting payment from passing ships that use the light as a navigational aid. A lighthouse cannot pick and choose which ships view its light. Thus, a privately-owned lighthouse would raise no revenue. If government didn’t provide them through taxation, then no one would.

In 1974, Nobel Prize winning economist Ronald Coase examined the history of lighthouses in Britain and argued that, contrary to the traditional view, the service provided by lighthouses is excludable: passing ships need to dock somewhere, and when they do they can be charged user fees for the lighthouses they passed before docking. Coase showed that there were many privately owned lighthouses in 18th and 19th century Britain that were supported by user fees.

Subsequent scholarship has challenged Coase’s view. David van Zandt found that though many English lighthouses were privately owned, they needed permission from the government to build a lighthouse, enjoyed monopoly privileges, and earned government mandated and collected fees.

Market purists may be disappointed, but van Zandt’s findings add some nuance to discussion about public goods. He created a continuum of possibilities between pure private and full governmental provision:

1. private provision with government enforcement of property and contract rights;
2. private provision with government rate setting and revenue collection, and monopoly concessions;
3. government provision with only user fees as revenue;
4. and government provision with only taxpayer support.

While Coase argued that, historically, some lighthouses fit into the first category, van Zandt found that lighthouses were always in categories 2, 3, or 4. But both agree that dependence on user charges eliminates the budgetary excesses found with government provision of infrastructure, especially when it is funded from general revenues.

During the last few decades, many countries have privatized railroads, airports, energy companies, and postal services, even though governmental provision of them has been widely thought to be appropriate. As my colleague Chris Edwards has discussed, the United States has lagged other countries in this transformation. Lighthouses continue to be supported by tax dollars in the United States and through user fees in the United Kingdom. 

Lighthouses are not only beautiful reminders of our seafaring past. They also have played an important role in the intellectual history of economics, the economics of public policy analysis, and discussions about the proper role of the state.

Written with research assistance from David Kemp.

After a brief hiatus during the run up to the recent Mexican elections, negotiations on the North American Free Trade Agreement (NAFTA) are in the news again, with hints of an agreement by the end of August. We have heard talk of an imminent agreement before and the chances of an agreement within the month may not be very high, and even if it does happen it may be more of an “agreement in principle” with many details still to be worked out. Nevertheless, with the renewed interest, we thought it was worth breaking down some of the key remaining issues (there are a lot of them, which helps illustrate the amount of work still left to do!).

Rules of Origin (RoO) for Autos

This is the focus of the current talks taking place between the U.S. and Mexico (Canada does not appear to be actively involved, perhaps because it does not have strong feelings about some of the outcomes here). In essence, the Trump administration wants to tighten the requirements for having trade in autos benefit from zero tariffs. In this regard, the U.S. wants to increase the percentage of content that must be from North American sources (currently the figure is 62.5%; the U.S. proposed raising it to 85%, and press reports suggest that 75% is the figure being discussed now). It also wants a percentage of the autos to be made by workers who make above a certain hourly wage (reports suggest that the current U.S. proposal is that 40% of light-duty vehicles and 45% of pick-up trucks are to be made by workers that make as least $16 an hour).

The Trump administration’s goal here is to provide an incentive to do more production in higher wage Canada and the U.S., although the actual impact will depend on the percentage required and the wage specified, so the effect of this policy is unclear. If the Trump administration gets what it wants, it is likely that free trade in autos in the North American market will be scaled back.  If the requirements are too burdensome to meet, automakers will simply opt for paying the 2.5% MFN tariff instead and just raise the cost of cars for consumers to compensate; and if they do meet the requirements, their costs will go up as a result of doing so. Either way, it will be bad for the industry and for consumers.

Government Procurement

In October, Secretary of Commerce Wilbur Ross suggested that government procurement rules should be made more “reciprocal” by establishing dollar-for-dollar access to each country’s procurement market. This idea prompted some cheekiness from Mexican negotiators who proposed that the U.S. should receive the same level of government procurement contracts in Mexico as Mexico receives in the United States (about $1.1 million dollars, a very small portion of the overall American procurement market). As with auto rules of origin, the Trump administration seems to be looking to take some of the free trade out of NAFTA.

Canadian Agriculture Restrictions.

The U.S. has had its sights on dismantling Canada’s agriculture barriers for quite some time. The 2017 National Trade Estimate Report on Foreign Trade Barriers highlights concerns with Canada’s supply management for dairy, and also for the chicken, turkey and egg industries. Another bone of contention has been Canada’s Special Milk Class Permit Program that gives domestic processors milk components for discounted prices. Canada has opposed any changes to its supply management system “on principle” and argued that the U.S. also maintains agricultural protections, such as on sugar.  Canada may ultimately give a little bit here, but it is likely to want something in exchange.

Seasonal Growers

There was some talk early on that the U.S. would push for rules that would make it easier for seasonal growers to bring anti-dumping and countervailing duty cases. Current trade remedy laws require domestic producers to account for at least half of domestic industry to access AD/CVD proceedings. This has been a hotly contested issue even within the U.S., as it has pitted produce growers from different states against each other.

Chapter 11: Investor-State Dispute Settlement (ISDS)

The Trump administration wants to opt-out of the investor-state dispute settlement mechanism for investment protection, based on their own concerns about sovereignty, and also to make the agreement more palatable to various critics of trade agreements. The precise scope of the opt-out is unclear, but it seems likely that some form of it will end up in any new NAFTA.

Chapter 20: State-to-State Dispute Settlement

The Trump administration has said it wants to “soften” dispute settlement, by making the outcomes of dispute settlement “non-binding.” It would be hard to see Congress or Canada and Mexico going along with this.

Chapter 19: Binational Panels on Anti-dumping/Countervailing Duty Disputes

Chapter 19 allows special binational panels, rather than domestic courts, to review domestic anti-dumping and countervailing duty decisions involving the NAFTA parties. Though a similar mechanism appeared in the predecessor to NAFTA, the Canada-U.S. Free Trade Agreement (CUSFTA), it has not appeared in any other U.S. trade agreement. There has also been a question of whether Chapter 19 is constitutional. In the first round of negotiations, the U.S. put forward a proposal to completely eliminate Chapter 19. Canada and Mexico want to keep it. Nothing has been said about this issue in recent months.

Sunset Clause/Performance Review

The Trump administration has been pushing for a provision under which NAFTA automatically expires after 5 years unless all three governments affirmatively decide to stay in. Congress, Canada, and Mexico are unlikely to accept this, but there is some possibility that Canada and Mexico would agree to a periodic performance review, so long as it didn’t trigger a lapse in the agreement.

Currency Manipulation

The November 2017 update of USTR’s NAFTA negotiating objectives stated that it would aim to “ensure that the NAFTA countries avoid manipulating exchange rates in order to prevent effective balance of payments adjustment or to gain an unfair competitive advantage” through “an appropriate mechanism.” In the recently renegotiated Korea-U.S. Free Trade Agreement (KORUS), the currency side-deal was said to be “historic” even though the provisions are non-binding. The big question in NAFTA is whether there would be a binding and enforceable chapter on currency manipulation.

Intellectual Property

Intellectual property protection has some powerful industries behind it, and some strong advocates in Congress. In the TPP, the United States pushed hard for stronger protections on “biologic” drugs and achieved some but not all of it what it wanted. And the United States has long complained of insufficient Canadian protections for copyrights and patents. There has been little reporting on these issues during the NAFTA renegotiation, but the outcomes are going to be important for generating Congressional support.


Telecom reform has been a longstanding issue in North America. USTR’s 2017 National Trade Estimate Report on Foreign Trade Barriers noted that “Canada maintains a 46.7 percent limit on foreign ownership of certain suppliers of facilities-based telecommunication services” and that Mexico’s “barriers included limitations on foreign investment in telecommunications and broadcasting, a weak regulatory agency, and an uncompetitive market dominated by a near-monopolistic player.” There seemed to be some progress on this issue in the second round of negotiations, but very little has been heard of it since then.


This is a key component of the “modernizing” elements of a new NAFTA. It was widely suggested that the e-commerce provisions in the TPP would be the starting point for negotiations on this chapter, and would cover issues such as digital trade and data localization.

De Minimis Threshold

The U.S. has been pushing for Canada and Mexico to increase their de minimis threshold for duty-free treatment of express shipments to the higher U.S. standard of $800. Currently, Canada and Mexico have a $20 and $50 threshold, respectively. Christine McDaniel of the Mercatus Center has noted the value to small businesses from raising this limit.

Regulatory Cooperation

Inu talked in detail about the possibility of a regulatory cooperation chapter in the new NAFTA after a proposal was tabled in the second round of negotiations. In March, it was reported that a chapter on Good Regulatory Practices was closed, but it was unclear as to what it would include. Will this go beyond the TPP? How much of the current bilateral regulatory cooperation initiatives would be incorporated? In June 2018, a memorandum of understanding was signed between the U.S. and Canada reaffirming their commitment to the Regulatory Cooperation Council. This could be a signal that this process will remain outside of NAFTA.

State-Owned Enterprises

In the TPP, the United States and others pushed for the most detailed provisions on SOE behavior in any trade agreement. This issue has flown under the radar in the NAFTA talks, but the TPP provisions are likely to be carried over to the new NAFTA.

Labor and Environment

The labor and environment side-letters were brought into the original NAFTA by President Clinton to increase Democratic support. Over the years, many groups have argued that the lack of enforceability has made these chapters little more than symbolic gestures. All parties seemed to be on board to include them as individual chapters in the agreement, but the revised content remains unclear. Will there be, as Canada proposed, some sort of provision on combating climate change? Will Mexico concede in addressing concerns over unions and the minimum wage? Will there be updates to the standard labor chapter language in response to the Dominican Republic-Central America Free Trade Agreement (CAFTA-DR) panel ruling related to Guatemalan labor practices? And finally, what will happen to the NAFTA institutions that were created to monitor the labor and environment side letters?

Trudeau’s “Progressive Trade Agenda”

Canadian Prime Minister Justin Trudeau has made his “progressive trade agenda” a central marketing pitch in his government’s trade policy. What this means in practice, however, has been rather vague. In NAFTA, Canada has pushed for the inclusion of a chapter on trade and gender, as well as on indigenous rights. Questions that remain are: (1) whether the U.S. and Mexico would agree to an indigenous rights chapter at all, and (2) to what extent would a trade and gender chapter be any more than just opening up a dialogue, as it is in the Canada-Chile FTA?

What’s Next?

Given the deadlines set out by Trade Promotion Authority (TPA), it is clear that the current Congress will not vote on a new NAFTA, even if it is completed this month. However, it is possible that the deal can be voted on in Mexico ahead of the presidential transition, as President-Elect Lopez Obrador will assume office in December. His domestic agenda will be ambitious, and it is possible that NAFTA would not get the high-level attention it has received up until this point. What we do know is that we are down to the final grind, and no deal this year may lead to this being dragged out for quite a while.  The Trump administration says it wants to sign many new trade deals, but it is hard to see how they can do anything new if they struggle to update an existing agreement with our closest neighbors.

Ten years after the 2008 financial crisis we are again facing the possibility of economic turmoil as the Fed and other central banks exit their unconventional monetary policies by raising interest rates and shrinking their balance sheets. Although central banks will move gradually, unforeseen circumstances could trigger a flight to safety and a collapse of asset prices that had previously been stimulated by near-zero interest rates and large-scale asset purchases, popularly known as “quantitative easing.”

This book brings together leading scholars and former policymakers to draw lessons from the decade of unconventional monetary policies relied upon to stimulate the global economy in the aftermath of the financial crisis. The articles included in this book combine historical perspectives and forward-looking views of the Fed’s exit strategy and monetary normalization, along with the arguments for a rules-based monetary policy both at the domestic and international levels.

Kevin Warsh, a former member of the Board of Governors of the Federal Reserve System, reminds us in his article that, although the economy has improved since the crisis, the tasks facing the Fed are still large. “So we should resist allowing the policy debate to be small or push aside ideas that depart from the prevailing consensus. The Fed’s job is not easier today, and its conclusions are not obvious.” The contributors to this volume meet Warsh’s challenge by questioning the status quo and offering fresh ideas for improving monetary policy.

The financial crisis highlighted the uncertainty that confronts policymakers. Having failed to prevent the 2008 financial crisis and the Great Recession, the Federal Reserve and other major central banks all subsequently adopted similar policies characterized by near-zero interest rates, quantitative easing and forward guidance. Those unconventional monetary policies were designed to increase risk taking, prop up asset prices, increase spending and restore full employment.

While asset prices have risen and unemployment is at historic lows, the Fed’s balance sheet ballooned from about $800 billion before the crisis to more than $4 trillion today, and the long period of near-zero interest rates has created a series of asset bubbles, which risk being burst as interest rates rise again.

Moreover, the Fed has engaged in preferential credit allocation through its large-scale asset purchase program, in which it has acquired billions of dollars’ worth of mortgage-backed securities and shifted out of short-term Treasuries to longer-term government debt.

In order to expand its balance sheet, the Fed has radically changed its operating procedure. Instead of engaging in open market operations nudging the policy rate toward a single target rate by buying and selling short-term Treasuries, the Fed now establishes a target range for the funds rate—with the rate of interest on excess reserves (IOER), introduced in October 2008, as its upper limit and the Fed’s overnight reverse repurchase (ON RRP) agreement rate as its lower limit.

Because the IOER exceeds comparable market rates, some banks now find it worthwhile to accumulate excess reserves instead of trading them for other assets. The economy is, in other words, kept in a purpose-made “liquidity trap,” so that the traditional monetary “transmission mechanism” linking increases in the monetary base to changes in bank lending, overall spending, and inflation, no longer functions as it once did. Under the new operating arrangements, the Fed changes its policy stance by changing its IOER and ON RRP rates, thereby influencing not the supply of but the demand for the Fed’s deposit balances.

Meanwhile, the Fed’s regulatory powers have increased dramatically as well. The Federal Reserve System, which was intended to be decentralized so that policymakers would take account of divergent ideas, has become even more centralized with each new crisis. As a result, monetary policy has also become more politicized.

Finally, the lack of any systematic policy rule to guide long-run decisions has increased regime uncertainty. The so-called knowledge problem—and the limits of monetary policy—need to be widely recognized. Policymakers err by paying too much attention to short-run remedies and too little attention to the long-run consequences of current decisions. If human judgments were perfect, then purely discretionary monetary policy would be ideal. However, as Karl Brunner (1980: 61) wisely noted, the reality is that:

We suffer neither under total ignorance nor do we enjoy full knowledge. Our life moves in a grey zone of partial knowledge and partial ignorance. [Consequently], a nonactivist [rules-based] regime emerges … as the safest strategy. It does not assure us that economic fluctuations will be avoided. But it will assure us that monetary policymaking does not impose additional uncertainties … on the market place.*

Before serious consideration can be given to implementing any rules-based monetary regime, the Fed needs to normalize monetary policy by ending interest on excess reserves and shrinking its balance sheet to restore a precrisis federal funds market. Once changes in base money can be effectively transmitted to changes in the money supply and nominal income, the Fed can then implement a rules-based regime to reduce uncertainty and spur investment and growth.

The ideas put forth in this volume for monetary reform are meant to inform policymakers and the public about the importance of maintaining a credible monetary policy regime both for financial stability and economic prosperity. Ensuring long-run price stability, letting market forces set interest rates and allocate credit, and keeping nominal income on a steady growth path will create new opportunities and widen the scope of markets to promote economic performance.

This article originally appears as the Editor’s Preface in Monetary Policy in an Uncertain World: Ten Years After the Crisis

* Reference: Brunner, K. (1980) “The Control of Monetary Aggregates.” In Controlling Monetary Aggregates III, 1–65. Boston: Federal Reserve Bank of Boston.

[Cross-posted from]

The Constitution’s Taking Clause provides that government cannot conscript property to its own purposes without compensating the rightful owner for the value of what is taken. The most direct application of this principle is in cases of eminent domain, where the government takes title to a piece of land for some public purpose—or sometimes a not-so-public purpose. But the takings principle applies to other impositions on property rights as well, such as regulations that render a previously expensive piece of property valueless. Courts recognize that in these cases there is likewise an infringement on property rights in the name of the public good, and that such a public good should come at the expense of the public as a whole, not some particularly unlucky land owner.

The Supreme Court has repeatedly recognized the potential for these abuses and, in a series of cases beginning with 1987’s Nollan v. California Coastal Commission, it has demanded that permit requirements and development exactions bear some relationship to the actual impacts of the project. If one wishes to build an apartment building, its reasonable enough to say one should contribute to the public expense that creates when the municipality needs to build a new road to serve it. Requiring a landowner to pay for an unrelated project many miles away for the privilege of making perfectly legal improvements to their own property should be out of bounds.

But lower courts friendlier to acts of state extortion believe they have found a loophole: Nollan and its progeny dealt with specific ad hoc permitting requirements by local planning agencies. Where the legislature imposes the exaction as part of a general ordinance, however, these courts claim Nollan doesn’t apply. What principle of aggregation renders an act that is unconstitutional when applied to a specific person constitutional when applied to the public generally?

Such was the fate of William Dabbs. Anne Arundel County, Maryland required him to pay an “impact fee” to build a house on a piece of property he owned. Ostensibly, this fee was to compensate for the costs of new development on “public schools, transportation, and public safety,” but a brief glace at the ordinance demonstrates that this pretext is illusory: rather than charging, say, per unit of new development, the fee is based on the size of the house. A family living in a 3,000-square-foot house does not, on average, use more public schooling or transportation than a family in a 2,000-square-foot house (if anything, arguably the opposite), but under the ordinance it is charged more. This therefore represents an attempt to raise general revenue on the backs of disfavored individuals—precisely the evil the Takings Clause is supposed to prevent.

Dabbs has filed a petition asking the Supreme Court to hear his case and affirm that takings performed by ordinance are no less offensive to the Constitution than takings performed ad hoc. Cato, joined by the Reason Foundation, has filed a brief encouraging the Court to take the case.

New development is often opposed by a coalition of vested interests, be they governments like Anne Arundel County who demand their cut or environmental activists who live in perpetual fear of paving paradise to put up a parking lot. Thankfully, the Constitution recognizes that property rights are central to the liberty of citizens and should not be enjoyed at the sufferance of ninnying NIMBYsim.

The Supreme Court should take up Dabbs v. Anne Arundel County and reaffirm that these protections cannot be circumvented by legislative gamesmanship.

I recently wrote about how ideology and confirmation bias has infiltrated research into the opioid overdose issue. I spoke about how researchers can “spin” their findings to comport with the prevailing narrative and improve the likelihood of getting published in peer-reviewed journals.

An example occurred yesterday, when the University of Michigan’s Institute for Healthcare Policy and Innovation announced, with the headline “Unwise opioids for wisdom teeth: Study shows link to long-term use in teens and young adults,” the publication of a research letter in JAMA that day by a team of its researchers.

The study of over 70,000 dental patients, ranging from 13 to 30 years in age, who had wisdom teeth extracted between 2009 and 2015 found, 

In all, 1.3 percent of 56,686 wisdom tooth patients who filled their opioid prescription between 2009 and 2015 went on to persistent opioid use, defined as two or more prescriptions filled in the next year written by any provider for any reason. That’s compared with 0.5 percent of the 14,256 wisdom tooth patients who didn’t fill a prescription.” 

Set aside the fact this study shows prolonged use is very low. Is there something inherently bad about refilling opioid prescriptions and staying on opioids longer than the average person if one is not addicted? Since we know that opioids have very few harmful effects on organs compared to alcohol, acetaminophen, or NSAIDs (with prolonged use), and since the addiction and misuse rate is somewhere around 1 percent, why are the authors so upset if some people stay on the drug longer than others. The lead author calls this a “long term ill effect.” Really?

Meanwhile, on the same day, another research letter was also published in JAMA by researchers at Brigham and Women’s Hospital in Boston that looked at 1.3 million patients who received 22 types of surgical procedures between the years 2004 and 2015. The study found a 30-day post-discharge overdose rate of 10.3 per 100,000 patients (0.01 percent), dropping to 3.2 overdoses per 100,000 patients (0.0032 percent) for those 61 to 90 days post-discharge. The authors found overdoses within 30 days post-discharge were very low in patients who were “opioid naïve”—2.8 per 100,000 patients (0.0028 percent)—as opposed to patients who were receiving opioids prior to surgery. In patients who were chronically receiving high-dose opioids prior to the operation (defined by the authors as greater than the equivalent of 100mg of morphine per day) that rate jumped to 142.5 per 100,000 patients (0.14 percent).

The authors stated in their concluding discussion:

This study demonstrated that opioid overdose after surgical discharge was rare. Patients were at risk of experiencing an overdose after leaving the hospital, especially in the first month. Furthermore, patients using high quantities of opioids preoperatively were at a heightened risk compared with those not receiving high-dose opioid therapy prior to the operation.”

The big takeaway from this study is that overdose rates in patients discharged on opioids postoperatively are extremely low—even in those who had been chronically receiving high-dose opioids preoperatively. But the authors of the study spent most of the time discussing the fact that overdoses can and do occur in patients discharged from surgery on opioids and occur more frequently in patients who had been on opioids preoperatively.

Give credit to the medical news service MedPage Today for providing dispassionate, no-spin coverage to both studies by covering them together in a story on August 7 entitled: “Post-Surgery Overdoses Are Rare—but higher odds of persistent use seen following some procedures.”

In a new op-ed I take issue Rep. Duncan Hunter (R-CA) for his unstinting support of maritime special interests and the Jones Act at the expense of average Americans. Particularly egregious is Hunter’s promotion of a recent report funded by a special interest group, the American Maritime Partnership, which makes the incredible claim that the Jones Act imposes no cost to consumers in Puerto Rico. Indeed, Hunter actually presided over a gathering of the House Subcommittee on Maritime Transportation meant to highlight its dubious findings.

While Hunter’s support for the AMP and the unseemly nexus between legislators and maritime special interests is the op-ed’s focus, the shortcomings of the AMP-funded report are worth exploring in greater detail.

From simply a theoretical perspective, the notion that the Jones Act would leave consumers in Puerto Rico unscathed is highly implausible. The Jones Act, which among other provisions prohibits foreign-flagged ships from transporting cargo between domestic ports and Puerto Rico, is a protectionist law. Keeping out competition is the entire point. It violates our understanding of economics to believe this is consequence-free for either costs or prices. Further note that competition among Jones Act carriers that provide service to Puerto Rico is sufficiently restrained that several of them were found guilty of price fixing.

Even if we were to believe that a perfectly competitive market exists in Puerto Rico despite the Jones Act’s restrictions, let us also remember that the law raises costs to those providing cargo transport by mandating the use of ships built in the United States. These ships are wildly more expensive than those constructed overseas, with a purchase price up to eight times higher. If consumers aren’t feeling the impact of these higher costs, then who is? Are we to believe that profit-maximizing companies that transport the cargo or the retailers who sell the goods in Puerto Rico happily absorb the costs of these expensive vessels?

If the theoretical underpinnings of the AMP’s claim are questionable, the methodology used to support it is doubly so. The finding that the Jones Act has no impact on consumers in Puerto Rico is in large part based on a price comparison, conducted via Walmart’s website, for 10 grocery items and three durable goods at the retailer’s locations in Jacksonville, Florida and San Juan, Puerto Rico. For these 13 items the price of each was found to be either the same or less in San Juan.

The defects of this approach are numerous. For starters, no explanation is provided for how the basket of goods was selected. Walmart sells thousands of items—why were these chosen? This is significant as it isn’t difficult to find items for sale at both locations that tell a rather different story. A 48 oz container of Breyers ice cream, for example, is priced at $2.98 in Jacksonville but $8.12 in San Juan. Numerous other price discrepancies indicating a premium paid by consumers in San Juan are easily found.

Beyond questions over how the limited basket of goods was selected, one must also wonder why Walmart should be considered representative of Puerto Rico’s retail sector and the impact that the Jones Act has on the territory’s consumers. Walmart is an extraordinarily efficient firm famous for its ability to squeeze margins from suppliers, likely including those it depends on for transportation. Do other retailers in Puerto Rico enjoy Walmart’s cost structure, or share in any discounts on ocean transport it is able to negotiate? 

Furthermore, why should retail prices be regarded as a proxy for transportation costs or evidence of their burden? As Crowley Maritime, a member of AMP and the largest carrier that provides service to Puerto Rico states, “There are many factors affecting prices on the island – energy, taxes, trucking, warehousing, rent, market size and more.” Indeed. Unless all other costs are controlled for, the impact of transportation alone is unknowable.

One retailer. Thirteen items. No explanation for how the goods are selected. No controls to isolate the cost of transportation. And yet on this basis we are offered a rather sweeping conclusion.

A conclusion, it should be added, that is at odds with respected resources on cost of living differences in the United States. According to the Instituto de Estadísticas de Puerto Rico, grocery items in the territory are the 13th most expensive out of 297 locations in the United States. The group also shows food items, contra the AMP report, as 18.4 percent higher in Puerto Rico than in Jacksonville.

Other aspects of the report’s approach are similarly questionable. To bolster its case that the Jones Act does not impose higher costs on Puerto Rico the report offers up a chart (based, it appears, on confidential data from the carriers that is unverifiable) which shows revenue per container for ships traveling between the continental United States and other ports in the northern Caribbean:

At first glance this appears to show that Puerto Ricans are getting a relative deal compared to a number of neighboring islands, but are they really? St. Croix, for example, has a smaller container port than San Juan, and likely operates with less efficiency due to its reduced scale. The fact that Puerto Rico has vastly greater trade volumes with the rest of the United States—nearly four times that of other Caribbean countries combined per a 2002 report—also likely unlocks efficiencies unavailable to other Caribbean ports.

To the extent higher revenue per container reflects the higher prices necessary to cover the higher costs of providing service on less efficient routes, this tells us nothing about the Jones Act’s impact or what freight rates between Puerto Rico and the continental United States might look like in a post-Jones Act environment. In short, it is not apparent that this is an apples-to-apples comparison or that such figures provide much in the way of relevant information.

The remainder of the report in large part consists of claims about the high level of service provided by Jones Act carriers to Puerto Rico. It cites, for example, that the use of “vessels and intermodal equipment that are uniquely designed to closely integrate the commonwealth with the advanced logistics systems of the mainland provides cargo owners with major economic and service advantages.”

But the alleged advantages and cost-effectiveness of the Jones Act carriers raises the question of why the law is then needed. If the Jones Act carriers already provide a high-quality service at a competitive price, then why should they fear a change to the status quo? If they are as competitive as they claim to be, why not open the market for sea transport with other parts of the United States to foreign competition?

The evident fear of such competition and employment of dubious analytical methods are instructive. Equally so is that pro-Jones Act politicians such as Duncan Hunter eagerly seize on this special interest-funded report despite its obvious flaws. It’s time to give the residents of Puerto Rico, and the rest of the United States, a break from this costly and outdated law.

Transit ridership has been dropping for four years and increased subsidies won’t fix the problem. Data released by the Federal Transit Administration yesterday show that nationwide ridership was 3.1 percent less in June 2018 than it had been in June 2017. Ridership fell for all major modes of transit, including commuter rail (-2.6%), heavy rail (-2.5%), light rail (-3.3%), and buses (-3.8%). 

June 2018 had one fewer work day than June 2017, which may account for part of the ridership decline. But ridership in the first six months of 2018 was 3.0 percent less than the same months of 2017, and again ridership declined for all major modes of transit.

As in previous months, I’ve posted an enhanced spreadsheet that has all of the raw monthly data from the FTA spreadsheet but includes annual totals from 2002 through 2018 in columns GZ through HP, modal totals in rows 2125 through 2131, transit agency totals in rows 2140 through 3139, and urban area totals for the nation’s 200 largest urban areas in rows 3141 through 3340. The same enhancements are included on the “VRM” or vehicle-revenue miles worksheet.

June 30 is the end of the fiscal year for many if not most transit agencies, so now we can compare transit’s 2018 fiscal year performance against 2017 (see columns HU to HW in the spreadsheet). Nationwide ridership in FY 2018 declined 2.7 percent from 2017 and of course it fell for hundreds of transit agencies.

Of the nation’s 50 largest urban areas, June ridership grew in eleven, January through June ridership grew in ten, and fiscal year ridership grew in just six. Seattle is one of the six, having grown by 1.4 percent, the others being Pittsburgh (0.2%), Providence (1.1%), Nashville (3.5%), Hartford (3.3%), and Raleigh (6.1%). Except Seattle, these urban areas have seen declines in other recent years so this increase is not a great victory and probably won’t be sustained for long in the future. 

As I’ve noted elsewhere, Seattle has enjoyed steady growth in transit ridership not because it built light rail but because it has increased downtown jobs from 216,000 in 2010 to 292,000 in 2017. Downtown jobs are the key to transit ridership because most transit agencies run hub-and-spoke systems focused on central city downtowns. But replicating Seattle’s downtown growth is impossible in most regions, as all but six American cities have far fewer downtown jobs; nor would most people agree to accept the costs Seattle is paying in terms of subsidies to new employers, traffic congestion, and high housing prices resulting from land-use restrictions that prevent jobs and housing from moving to the suburbs.

Fiscal year ridership declines in many urban areas were larger than the increases in the few regions where ridership grew. The worst were Charlotte (-15.1%), Cleveland (-11.7%), Miami (-10.3%), St. Louis (-8.2%), Memphis (-7.7%), Jacksonville (-7.0%), Baltimore (-6.6%), Richmond (-6.6%), Philadelphia (-6.5%), Cincinnati (-6.2%), Virginia Beach (-6.1%), Dallas-Ft. Worth (-5.9%), Phoenix (-5.6%), and Boston (-5.2%). This is in addition to significant declines in all of these urban areas between 2014 and 2017.

Officials at the Charlotte Area Transit System must be proud that the light-rail expansion they opened in March led to a 65 percent increase in June light-rail ridership over June 2017. Yet this was a hollow victory as the agency lost 36,000 more bus riders than it gained in rail riders.

Transit agencies get about a third of their operating funds from fare revenues, and the decline in ridership has forced many to reduce service. The vehicle-revenue miles page shows that nationwide transit service declined by 5.1 percent in June 2018 vs. 2017. While some people blame the ridership declines on the service reductions, at least one study says it is the other way around: service has declined because riders abandoned transit, forcing agencies to cut back on spending.

Transit ridership has declined in many urban areas despite increasing service. Among many others, Phoenix increased 2018 service by 11.0 percent yet lost 5.6 percent of its riders; San Jose increased service by 3.1 percent but lost 4.2 percent of its riders; Indianapolis increased service by 4.3 percent yet lost 3.9 percent of its riders; Austin increased service by 6.5 percent yet lost 1.1 percent of its riders.

It appears that ride hailing is the principal factor in ridership declines. A recent study estimates that ride hailing grew by 710 million trips in 2017. If just 36 percent of those trips were people who would otherwise would have taken transit, then ride hailing is responsible for all of the decline in 2017. Declining ridership leads to service reductions, which results in more ridership declines, producing a death spiral of revenue shortfalls followed by service reductions followed by more revenue shortfalls.

Some cities are supplementing transit revenues by taxing ride-hailing companies, which I’ve noted elsewhere is a little like taxing word processors to protect the typewriter industry or pocket calculators to protect the slide rule industry. At least one city is looking at taxing marijuana to subsidize transit.

It doesn’t really matter. The decline in transit ridership is beyond the control of transit agencies, and increasing subsidies to what is already the nation’s most-heavily-subsidized form of transportation won’t make much difference. The only question is when will appropriators realize that it is pointless to continue subsidizing a dying industry and start winding down those subsidies.

Last week the Trump administration announced its intent to freeze Corporate Average Fuel Economy standards (CAFE) at 2020 levels. Rules implemented in 2012 under the Obama administration would require a fleet average fuel economy of 54.5 miles per gallon (mpg) by 2025, but the new rule change would instead hold average fuel economy at about 37 mpg.

Predictably, the announcement created a flurry of criticism, with the New York Times editorial board characterizing the plan as reckless in the face of climate change. Much of this criticism misses a key point: CAFE has been repurposed to manage a problem for which it was not designed and is thus a very costly and imperfect remedy. 

Enacted after the 1973-74 oil shock, CAFE was a political solution to a political problem: soaring oil prices. The standards were premised on the belief that consumers would not pay more for cars that used less fuel even if the reduced fuel use more than paid for the extra initial cost. Instead, CAFE sought to force automakers to produce higher mileage cars and thereby reduce fuel use despite the supposed myopia of consumers. But subsequent economic research has shown that consumers were not myopic. Consumers’ willingness to pay for higher mileage capability approximately equals the expected future fuel cost savings without government intervention.

Even though the original rationale for CAFE has been undermined by the evidence, CAFE lives on with a new purpose: climate change. Since the 2007 Supreme Court decision in Massachusetts v. Environmental Protection Agency that the EPA has authority to regulate tailpipe greenhouse gas emissions, CAFE has become a tool for CO2 emissions reduction. But, as I have previously argued and my colleague Randal O’Toole recently discussed, CAFE is an inefficient and clumsy tool because it targets only one source of greenhouse gas emissions and it does so indirectly. Directly taxing carbon emissions would much more effectively incentivize businesses and consumers to reduce their greenhouse gas emissions.  The indirect CAFE program costs the economy at least six times as much as a carbon tax that reduces emissions equivalently. If reducing greenhouse gas emissions is a worthwhile goal, we should pursue policies that directly address the problem and utilize market forces to reduce emissions.

Another key component of the Trump administration’s plan is its proposal to revoke a waiver that allows California to set its own vehicle emissions standards and allows other states to follow  California’s lead. Currently, California standards are set to continue on the Obama 2012 path. So, if the Trump administration freezes national standards but California’s separate standards are permitted, then automakers would be forced either to sell different cars in California and the states that follow its lead or comply with California standards in all states.

The origin of the California waiver, like CAFE in general, is divorced from its original intent. The waiver’s purpose was to allow California to impose its own regulations on conventional emissions because of unique weather and geographic conditions around Los Angeles that make it especially susceptible to smog.

Smog forming pollutants and greenhouse gases are very different emissions. As I noted in the 2017 Cato Handbook for Policymakers, regulation of pollutants that affect local air quality should be decentralized because both the costs and benefits are local. But reduction of CO2 emissions is a global public good. Any benefits accrue to the world’s climate even though the costs are local. This mismatch between the geographic incidence of costs and benefits imply that a waiver that exempts one state makes no sense in the context of CO2 emissions and has the potential to unduly increase compliance costs for automakers.

CAFE should have ended a long time ago.  The problem for which it was designed (consumer myopia) never existed.  Because that is not politically possible the proposed freeze is defensible.  In contrast state control of conventional pollutants is appropriate, but the California waiver should not be repurposed for greenhouse gas emissions.    

Written with research assistance from David Kemp.

In two maps today, the New York Times illustrates the growing dependence of Americans on federal government subsidies or welfare.


This post co-authored with Rafael Fonseca, MD, Chairman of the Department of Medicine, Mayo Clinic, Phoenix, AZ

Much has been written about how politics and ideology influence research funding, suppress research in certain areas, and lead to the cherry-picking and misrepresentation of evidence in support of a narrative or agenda. Science journalist John Tierney explored “The Real War on Science” in an excellent essay in City Journal in 2016. Reflecting on this phenomenon in 2011, Patrick J. Michaels stated:

The process is synergistic and self-fulfilling. Periodicals like Science are what academia uses to define the current truth. But the monolithic leftward inclination of the reviewing   community clearly permits one interpretation (even if not supported by the results) and not another. This type of blatant politicized science is becoming the norm in the environmental arena, and probably has infiltrated most every other discipline, too.

It certainly has infiltrated research into the emotionally charged opioid overdose problem afflicting the US and many other western nations. Policy decisions have been rooted in a narrative seemingly immune to the facts: that the problem is largely the result of greedy pharmaceutical companies manipulating careless and poorly-trained doctors into “hooking” patients on highly addictive opioids and condemning them to a nightmarish life of drug addiction.

Tierney writes of confirmation bias—the tendency of people to seek out and accept information that confirms their beliefs and prejudices. He bemoans the “groupthink” that allows confirmation bias to infiltrate the peer review process. He cites a well-known study that demonstrated reviewers were more likely to find problems with a study’s methodology if the findings were contrary to their prejudices yet overlook methodological shortcomings if the findings were confirmatory.

Sometimes investigators try to “spin” their findings to make them comport to the narrative and appear confirmatory, increasing the likelihood that their research gets published. 

Both of us are practicing physicians, and each of us recently experienced reminders that research into the opioid overdose issue is not exempt from politicization and confirmation bias. We would like to present two recent examples where this confirmation bias became self-evident. 

One of us, Rafael Fonseca, recently encountered a peer reviewed publication that asserted, and concluded by conjecture, that opioid manufacturers, by providing meals to physicians at educational presentations, were skewing prescription patterns and increasing the number of opioids being prescribed. A cursory review of the published data suggested that correcting for variables such as specialty was needed to understand such putative association. After undertaking a full data analysis (reported in the Healthcare Blog with Dr. John Tucker), we were able to refute the findings of that publication. In short, we found that the influence of meals provided on prescribing was negligible, and that similar effects were seen when providers attended meals provided by companies that produce other products used for the treatment of pain, but not opioids.  We provided a compelling case that increased attendance to these meals, and opioid prescription, was more of a reflection of the practice pattern of such physicians (i.e. they treat pain patients) rather than a heinous quid pro quo.  Readers are referred to our analysis and the original paper.

We remain disappointed by the apparent ease with which such publications appear in major medical journals as well as the scarcity of detailed rebuttals.  The authors of this paper did not discuss considerations that are relevant such as multivariate analyses. Not only were these missing, but the article concluded by suggesting that policy changes are needed, and that companies should be prevented from supporting such meals. Individuals who served as peer reviewers of this article apparently missed the limitations we presented in our independent review and accepted at face value the conclusions presented. The editors of the journal did not consider confounding covariates, which as we have shown, would make the analysis questionable. Perhaps, most troubling, is that a letter to the editor was submitted with our findings and was rejected as being of “low priority.” This was problematic given that, even though our letter was an abridged version of our full analysis, it directly refuted the conclusion of the paper.  We cannot claim ill intention in the process but are surprised that even when pointed out, it seems that a prevailing narrative trumped scientific rigor. The prevailing current narrative is that greedy pharmaceutical companies duped doctors to inappropriately prescribing opioids.  If we want to curtail deaths associated with opioid overdoses we must find the correct factual context of the problem. Facts are established with science and can be distorted by heuristics serving ideology.

At the time of this blog post we have requested the primary data from the authors to resolve data inconsistencies. We have not received the data, because the authors claim they intend to make it public at some point in the future pending a publication they have submitted. Through social media channels an Associate Editor of the journal was recently made aware of our analysis and stated it should be submitted as a letter to the editor or as a publication. We offered to write it as a full report and noted that our letter had already been rejected, and we received no further response. We have also contacted the Editor but have yet to get a response.

An example of how researchers “spin” their findings to comport with the prevailing narrative and increase the likelihood of publication occurred on January 17, 2018 when Jeffrey Singer encountered a story in the Los Angeles Times touting a recently published study in the peer-reviewed medical journal BMJ, in which the principal finding was that refilling opioid prescriptions given to patients for acute pain dramatically increased their risk of addiction. The Times reporter wrote:

A study published Wednesday in the BMJ finds that for every additional week a patient takes drugs like oxycodone and hydrocodone, the chance that he or she will wind up abusing the drug increases by 20%. And every time a prescription for opioid painkillers is refilled, the risk of abuse rises by 44%.”

The reporter was accurate. The study by researchers at Harvard and Johns Hopkins looked at 568,000 opioid “naïve” patients in the Aetna health insurance data base given prescription opioids for acute postoperative pain over the period of 2008-2016. It began the conclusion to its abstract with: “Each refill and week of opioid prescription is associated with a large increase in opioid misuse among opioid naïve patients…” But what the Times reporter neglected to mention, and what the study’s authors only mentioned in passing, was the initial finding: the “total misuse rate,” i.e., rate of all opioid misuse diagnostic codes (defined separately as dependence, abuse, and overdose—a broad category within which addiction is only one component) among the 568,000 patients prescribed the opioids, was 0.6 percent. It was only upon reading the actual study as opposed to the press coverage that this rather encouraging news—opioids prescribed for acute pain have a very low misuse rate—became apparent.

Instead of emphasizing this encouraging finding, the bulk of the study investigates the effect the duration of time a patient is on opioids—expressed principally by numbers of refills—has on the misuse rate. The authors indeed found that each refill and additional week of opioid use was “associated with an adjusted increase in the rate of misuse of 44%.”

However, looking at the actual numbers behind those percentages finds the incidence of opioid misuse rose from 145 cases per 100,000 person years, or 0.15 percent per year, in patients who had no refills, to 293 cases per 100,000 person years, or 0.29 percent per year, for persons who had one refill. Indeed, that is nearly double. But if you nearly double a very low number, you still get a low number. Also, the correlation of prescription refills with an increase in misuse does not prove causation. Possible causes are debatable, with many confounding possibilities. The study lacks any discussion or exploration into matters of cause and effect.

Rather than point out that the incidence of misuse is extremely low in patients given opioids for acute postsurgical pain, even after multiple refills, the authors chose to pass over the low overall incidence of misuse and instead focus on the “large increase in opioid misuse” seen with each refill and week of opioid use.

These are just two examples of how scientific research is susceptible to the biases of the researchers and influenced by political exigencies. They both fed into the prevailing narrative animating policy toward opioid use, abuse, and overdose. Both provide good examples of how researchers as well as peer reviewers fall easy prey to confirmation bias.

Readers should approach every new “study” reported in the peer-reviewed science literature with a modicum of skepticism.

The World Trade Organization is facing an existential crisis because of bullying by President Trump. That crisis can only be resolved if the United States and the 163 other members of the World Trade Organization negotiate a solution to what is most motivating these actions: American angst over the global rules for imposing anti-dumping and other trade remedies against unfair trade practices.

Central to Trump’s assault on the longstanding liberal international order in trade is his threat to grind the settlement of international trade disputes to a halt in the WTO. He is doing this by blocking the appointment and reappointment of the WTO judges whose rulings help resolve the trade disputes. U.S. intransigence may soon reduce the WTO Appellate Body from its full roster of seven judges down to the minimum of three needed to decide an appeal.

If the U.S. continues this strategy, the appellate court will be left with only three judges in September, and only one judge by December 2019—not enough to hear an appeal. Already slowed by the current shortage of judges, the rule-based dispute settlement system that has resolved more than 500 international trade disputes since its creation in 1995, and that has prevented an untold number of additional disputes, could come then to a standstill. 

The impasse over judicial appointments in the WTO is ostensibly about what U.S. officials see as the supposed straying of WTO appellate judges from the strict bounds of their instructions into forbidden legal terrain in some of their rulings. Overlooked in the U.S. is the inconvenient fact that there are 163 other WTO members that have not professed to observe a pattern of judicial “over-reaching.”

Actually, the blockade is driven by the decades-long frustration of some within the U.S. with their failure to negotiate WTO rules that would assure the U.S. virtually unlimited latitude in imposing anti-dumping duties and other trade remedies on imported goods, and that would mandate that WTO judges largely defer in their rulings on such remedies to U.S. decisionmakers.  

Trump and his trade collaborators see America as possessing the sovereign right to impose anti-dumping tariffs and other remedies to alleged unfair trade practices with a domestic discretion akin to international legal impunity. This is not a new view—American industries challenged by foreign competitors and American protectionists representing those industries in the trade bar have long abused U.S. trade remedies to keep foreign competition out of the domestic market. Now they also hold power in the Trump Administration.

But other countries hold a different view. For decades, other countries, like American consumers and many American producers reliant on imports, have been repeatedly victimized by U.S. administrative agencies under the sway of protectionist interests. These agencies tend to rig U.S. domestic trade rules against foreign producers and then apply those rules in ways that discriminate against foreign goods under the legal pretense of fighting trade unfairness. This has happened for decades already with steel imports.

These protectionists forget that there is just one set of WTO trade remedy rules for all WTO members – not one set of rules for Americans and another set of rules for everyone else. Given this, do we want other countries to be able to use their own trade remedies laws to treat our exports the same way we treat theirs? And why should other countries eliminate their own trade abuses if we refuse to eliminate ours?

Since the establishment of the WTO in 1995, the main constraint on the unchecked use by the U.S. of trade remedies has been the WTO rules the U.S. helped negotiate and place in the WTO treaty – rules that have been consistently upheld by the Appellate Body. While the U.S. has (despite what Trump tells us) won about 86 percent of the cases it has brought against other countries before the WTO, it has lost about 75 percent of the cases other countries have brought against the U.S. (which is better than the global average of 84 percent).

Most of these losses have been in politically sensitive disputes over U.S. anti-dumping and other trade remedies. And many of them have been over repeated challenges to the same US trade actions because the U.S. has either refused to comply fully with adverse WTO rulings or has only pretended to comply.

In dumping in particular, the U.S. prefers to retain practices that find dumping where it does not exist and magnify the extent of dumping – and thus maximize the amount of anti-dumping duties – where dumping does exist. (In trade jargon, this is called “zeroing.” The U.S. has lost a long series of “zeroing” disputes.)

Fueling the U.S. foot-dragging is the belief that it has not gotten the extent of legal deference from WTO judges it thought it had secured in the WTO rules for applying anti-dumping duties. Americans who favor the unfettered use of anti-dumping measures feel they have been cheated.

Their legal problem is this:

A sentence the U.S. succeeded in putting in the WTO anti-dumping rules provides that if one of those rules “admits of more than one permissible interpretation,” then WTO judges must defer to the domestic decision “if it rests upon one of those permissible interpretations.” But the previous sentence, on which the U.S. also agreed, instructs the WTO judges to interpret the anti-dumping rules “in accordance with customary rules of interpretation of public international law.” And the use of those interpretative rules always results in a judicial finding of one ordinary meaning for international rules – never two.

Thus, the Appellate Body, in doing its job by following the rules of treaty interpretation it has been instructed by the WTO members to use in the WTO treaty, has never found that an anti-dumping rule “admits of more than one permissible interpretation,” and so it has never given the U.S. the extent of deference that it desires and still believes—wrongly—it negotiated.

Other WTO members are uncertain about how best to react to President Trump’s bullying on judicial appointments. In response, they must not yield to his intimidation by curtailing the jurisdiction of WTO judges by, in effect, allowing the U.S. to be the judge and the jury in its own cases. Instead, they should embrace a proposal that has already been made by the European Union. In exchange for an end to the U.S. blockade of WTO judicial appointments and U.S. agreement to WTO reforms that reinforce the indispensable independence and impartiality of WTO judges while also strengthening the whole WTO dispute settlement system, the 163 other WTO members should agree to negotiate anew on the true core of U.S. concern – the rules on dumping.

This does not mean acquiescing to the arrogant American ambition of having the international legal discretion to do whatever it chooses in applying trade remedies, while expecting other countries to do exactly as the U.S. wishes. It does mean resuming anti-dumping negotiations on the degree of deference owed to domestic authorities – and this time reaching an agreed solution in more precise wording of the anti-dumping rules in the WTO treaty – wording that has consistency and clarity.  

In the wake of the recent “trade agreement” between President Trump and EU Commission President Jean Claude Juncker, we have seen a surfeit of commentary heaping praise on the U.S. president for his strategic trade policy vision and tactical brilliance. Much of that praise has come from people who share the president’s flat-earth view that trade is a zero-sum game played by national governments where the objective is to promote exports, block imports, and secure a trade surplus. Trump throwing U.S. weight around to assert the rule of power over the rule of law is music to this crowd’s ears.

But then there are the apologists who know better; the enablers. They are the bigger problem. In their obsequious tones, they explain how our brilliant president is blazing his own path toward free trade and that the evidence of his success is all around us. If we just disregarded Trump’s nationalist rhetoric, ignored his belief that the trade deficit means the United States is getting ripped off, shoveled away his mounting pile of destructive, protectionist actions, and stopped believing our own lying eyes, we too would rejoice in the greatness of a man who is committed—above all else and above all others—to free trade. 

Engaging in such extreme mental contortions is no easy task, but that’s exactly what an op-ed by tax reform luminaries Steve Moore, Art Laffer, and Steve Forbes in the New York Times last week expects readers to do.

Moore, Laffer, and Forbes (MLF) portray Trump’s “gunboat diplomacy” (you open your markets fully or I’ll close ours!) as strategic genius, akin to Reagan’s nuclear arms race, which broke the Soviets’ backs.  They conclude: “Just as no one ever thought Mr. Reagan would stem nuclear proliferation, if Mr. Trump aggressively pursues this policy, he could build a legacy as the president who expanded world commerce and economic freedom by ending trade barriers rather than erecting them.” Well, yeah, maybe he could.  But so far Trump has only increased trade barriers, more are coming, and there are no negotiations underway—with anyone—aimed at lowering tariffs or other barriers to trade.  But just close your eyes and imagine.

MLF make the following claim:

President Trump won a victory for freer trade last week when he and the president of the European Commission, Jean-Claude Juncker, agreed to find ways to lower tariffs and other barriers to each other’s exports. The outlines of the deal are still sketchy, but it calls for the Europeans to buy more American petroleum, soybeans and manufactured goods and for Mr. Trump to reduce his auto and steel tariffs. We were particularly heartened that Mr. Trump and the Europeans now have a handshake agreement to aim for zero tariffs on both sides of the Atlantic.

The only accurate part of this paragraph is that “the outlines of the deal are still sketchy.” As I described last week, nothing was agreed at that meeting except that new tariffs would not be imposed for the time being. In his Rose Garden statement after meeting with Juncker, Trump said they had agreed to “work together toward zero tariffs, zero non-tariff barriers, and zero subsidies on non-auto industrial goods (my emphasis).” But there is no timetable and if there were, those discussions would exclude agricultural products, natural resources, services, and—well—automobiles and parts, which together constitute a big chunk of transatlantic trade.

Instead of moving us in the direction of lower tariffs and broader trade liberalization, a more accurate interpretation of the meeting is that Trump made clear that he is digging in for a trade war of attrition with China and that he fully expects Juncker to have his back.  The plan includes such banana republic tactics as buying the quiet of Trump’s trade war casualties ($12 billion for farmers and likely more to come for manufacturers) and compelling the EU (and other trade partners) to purchase more U.S. soy, natural gas, and other products previously destined for China, lest the steel and aluminum tariffs remain in place, and auto tariffs follow—perhaps as early as October.  Considering that the EU will have a tough time absorbing much of the U.S. supply rendered “excess” by Trump’s tariffs and the retaliation they incited, it is only a matter of time before Trump loses patience and transatlantic discord starts boiling again.


This was Mr. Trump’s idea. The night before the agreement, he proposed in a tweet that “Both the U.S. and the E.U. drop all Tariffs, Barriers and Subsidies! That would finally be called Free Market and Fair Trade!” Amen.

Of course, zero trade barriers would be great. But Trump’s idea? Hardly. In 2002, in the Doha Round, the Bush administration put forward a far more ambitious proposal for zero tariffs on industrial goods for all countries by 2015. More recently, the Transatlantic Trade and Investment Partnership (TTIP) negotiations included proposals to eliminate tariffs, non-tariff barriers, and subsidies. Neither of those efforts was successful, but the idea has been in play since well before Trump came to town and is not especially radical.


This is a winning strategy that we’ve long endorsed with our friends at the White House because it is fully consistent with what Mr. Trump has often told us: his threat of tariffs is a negotiating tactic to get to lower trade barriers and a “level playing field.”

I’m not sure where MLF have been lately, but they seem to have overlooked the fact that the president is not only “threatening” tariffs. He has already imposed them on $100 billion of imports from Europe, Canada, Mexico, Japan, China, and most of the rest of the world. In the next week or so, another $16 billion of imports from China are likely to be hit, and another $200 billion could be subject to 25 percent duties by as early as September.

Last week, Commerce Secretary Wilbur Ross wondered why there was so much handwringing over the matter of assessing 25 percent tariffs on another $200 billion of Chinese goods: “Fifty billion dollars a year on an $18 trillion or so economy is three-tenths of one percent. It’s not something that’s going to be cataclysmic.” Well, it might not be immediately cataclysmic, but a more relevant comparison is that the total value of all duties collected by U.S. Customs in 2017 was just $33 billion. Only in a George Orwell novel could this beefing up of duty collection be called free trade.


The next step should be to extend this zero tariff offer to other key allies, including Britain, Canada, Mexico and South Korea.

Again, this is willful ignorance, right?  Anyone who writes about trade in the New York Times has to know that nearly all tariffs between the United States and Canada and between the United States and Mexico are already zero today under the NAFTA, and that the Korea-U.S. free trade agreement includes a roadmap to get us almost all the way there in a decade. One major exception is Trump’s insistence on preserving the 25 percent U.S. tariff on pick-up trucks until the year 2041.


If Mr. Trump’s goal is‎ more jobs and higher wages, America comes out the big winner under the zero tariff scenario. Most of our major trading partners have higher tariffs than we do. A study by the president’s Council of Economic Advisers calculates that the average American tariff is 3.5 percent, while the average European Union rate is 5 percent, China’s is nearly 10 percent and the world average is around 10 percent. On a level playing field, American companies can compete with anyone, and our exporters will gain advantage if trade barriers are abolished.

Actually, what this tells us is that the U.S. government has been better to American businesses and households than the governments of China and the EU have been to their own domestic entities. Trump’s tack amounts to his threatening to reduce the freedoms of Americans unless and until the other governments allow their citizens to be freer. So much for America first.

Moreover, jobs and wages are linked to the performance of businesses. American workers benefit, generally, when their employers are profitable. Profits are maximized by maximizing revenues and minimizing costs.

Generally speaking, U.S. export revenues could be higher if U.S. exporters faced lower barriers abroad. But import tariffs don’t compensate for those foreign barriers. They exacerbate the problem because half of the value of U.S. imports are inputs to U.S. production and tariffs raise their costs. Threatening to raise the cost of production on U.S. businesses (and the cost of living for U.S. households) unless foreign governments reduce their own tariffs makes no economic or business sense. Higher tariffs abroad and higher tariffs at home conspire to squeeze profits from both ends, and that’s not good for U.S. employment or compensation. This back of the envelope analysis shows how Trump’s tariffs imperil the expected benefits to U.S. manufacturers from the tax reforms, which MLF were instrumental in advancing.

The optimal response to higher foreign tariffs, which work to reduce U.S. business revenues, is to lower our own tariffs, which would reduce U.S. production costs. So not only is the economics wrong, but the strategy hasn’t produced the results that MLF are celebrating. So far China and nearly every country hit with steel and aluminum tariffs has refused to negotiate under duress. What if these governments continue to remain unwilling to submit to Trump’s gunboat diplomacy?  Even if they were inclined to, why would they have any reason to believe that Trump wouldn’t use the same tactics to get more concessions next time? This is a dubious and very dangerous “strategy.”

In any case, the fact that the United States has lower average tariffs than most countries helps explain the relative success of the U.S. economy over the years. The United States remains the world’s top destination for foreign direct investment, and lower tariffs give us an advantage in the competition to attract and retain that investment. One of the arguments for corporate tax reform with which MLF presumably agree is that lower rates would free up profits to be reinvested in the U.S. economy. Lower taxes on imports have the same effect. We didn’t need agreement from Beijing or Brussels to reduce U.S. corporate rates and we certainly don’t need their consent to do the same for tariffs.


The alternative is higher tariffs on steel, aluminum, autos and hundreds of products imported from other countries, particularly China. Those actions have led to retaliatory tariffs imposed on products grown or manufactured in America. This has hurt farmers, the stock market and economic growth.

It’s difficult to fathom that MLF consider higher U.S. tariffs on these inputs and consumer goods to be leverage. Those U.S. tariffs are hurting the economy and threatening to negate the benefits of the tax reform they helped achieve. Those enduring costs, as well as the retaliation impacting U.S. farmers and others are what Trump’s trade policies have wrought.


A no-tariffs trade strategy would also allow the United States to seize the moral high ground in the debate. Mr. Trump would be transformed from the evil disrupter of international commerce to a potential savior — just as 30 years ago Mr. Reagan’s international image changed from superhawk to peacemaker almost overnight.

After insulting and bullying U.S. trade partners, imposing enormous costs on the global economy, fomenting profound business uncertainty and diplomatic angst, and snuffing out any remaining fumes of good will toward his administration, it is unlikely that President Trump would ever be considered anything more sparing than an evil disrupter. But in the final analysis, it is apparent that the intended audience for the MLF op-ed is none other than President Trump himself. 

The last few paragraphs make clear that the authors—all Trump advisors—are trying to encourage the president to end up on the right side of history. For that they deserve some credit. But they still lose more points for excusing the president’s numerous transgressions, giving intellectual cover to mercantilists and nationalists who believe the United States shouldn’t be constrained by the trade rules, and for supposing that Trump would ever read the New York Times.

The federal government dispenses unequal treatment to Americans through subsidies, regulations, and narrow tax breaks. The unequal treatment generates lobbying and corruption as the government-determined winners dig in to defend their lucre and the losers agitate for a share.

Washington is a universe of thousands of separate special-interest galaxies, each with spiraling masses of lobbyists orbiting politicians and bureaucrats whose power is a gravitational force. Scientists say that the universe is mainly filled with dark energy, and the same is true of the nation’s capital.

The Tax Cuts and Jobs Act of 2017 created a new special-interest galaxy called “Opportunity Zones.” O Zones are tax structures that infuse governors and U.S. Treasury officials with the power to divide every state in the nation into winner and loser areas. Projects in the winner areas receive capital gains tax breaks, while projects in the loser areas get the shaft.

O Zones are already generating dark energy, as a recent Washington Post story illustrates:

The Treasury Department last week reversed itself after lobbying by Nevada Republicans and agreed to let a previously ineligible county reap huge benefits from the new tax law.

The effort was led by Nevada’s governor, Brian Sandoval (R), and Sen. Dean Heller (R-Nev.), who separately spoke with Treasury Secretary Steven Mnuchin and pushed for Storey County to win designation as an “Opportunity Zone,” which was established in the law to help distressed areas attract money.

Working behind the scenes to help the effort was a Storey County brothel owner and real estate investor, Lance Gilman, who told local officials that the designation could lead to a surge of investments within the next few years. Gilman is also a major GOP donor and made a $5,000 campaign contribution to Heller in the midst of the process, the biggest contribution he had ever given to a candidate for federal office.

Treasury officials had initially deemed that Storey County’s income levels were too high to qualify, based on the metrics they had used to judge every other nomination for the special tax status. But after weeks of prodding from Nevada officials, Treasury relented and gave the designation to Storey County using new data.

The successful campaign to win this lucrative designation illustrates how political pressure can redirect billions of dollars in federal benefits, which are supposed to be distributed in a non-arbitrary manner.

It shows how the new tax law, meant to simplify the tax code when it passed in December, is creating opportunities for gamesmanship — in this case by public officials and business executives seeking to exploit the Trump administration’s discretion in interpreting the law.

…several other Nevada business owners are furious at the designation. To push Storey County for the Opportunity Zone designation, Sandoval had to withdraw the April 20 nomination of Dayton, Nev., an economically depressed neighboring community that lacks Storey County’s huge industrial center.

This has led to accusations of unfairness, and several executives said they haven’t gotten the straight story about why their nomination was pulled without their knowledge.

Unequal treatment generates bad feelings and divisions, negative forces in the universe. The dark energy of O Zone corruption was entirely predictable, and there will probably be lots more of it.

Corruption has similarly swirled around the federal LIHTC tax break, which empowers officials to make winner and loser decisions in local communities, as Vanessa Brown Calder and I discuss here and here.

Vanessa and I have further thoughts on O Zones here, here, and here.

In the summer of 1982, after the Cato Institute’s week-long seminar at Dartmouth, I drove to Boston with one of the other attendees. Touring the city, we encountered a protest rally on Boston Common. I don’t remember just what the rally was about – probably the “nuclear freeze” or a general protest against nuclear weapons, which was a strong movement then. As we watched, a young woman approached and handed us flyers calling for socialism. “Like in Russia and China?” I asked her. Unwilling to defend those disastrous results, she responded “We’re more interested in the experiments currently going on in Zimbabwe and Nicaragua.” I knew very little about those “experiments” and had nothing much to say.

Now, though, 36 years later, we know a great deal about those experiments in socialism. The photograph at right appears on the front page of Friday’s Washington Post with the caption “Paramilitary members stand guard on July 17 at a dismantled barricade after police and pro-government forces stormed the Monimbo neighborhood of Masaya, Nicaragua, which had become a center of resistance.”

I was reminded of something very candid that the socialist economist Robert Heilbroner wrote: that socialism depends on central planning and a collective moral commitment and thus on command and obedience to the plan. And that means that “The rights of individuals to their Millian liberties [are] directly opposed to the basic social commitment to a deliberately embraced collective moral goal… Under socialism, every dissenting voice raises a threat similar to that raised under a democracy by those who preach antidemocracy.” Democratic liberties like free speech and free press are an inherent threat to the planners’ control.

And of course Zimbabwe suffered for some 37 years under the increasingly authoritarian rule of Robert Mugabe, which may or may not have changed with Mugabe’s replacement by his vice president. 

Consider not just democracy but standard of living. In the 36 years since I had that conversation, Nicaragua has been under the rule of socialist Daniel Ortega for about half that time, and Zimbabwe under Mugabe for the entire period. Nicaragua’s GDP per capita is the lowest in Central America – far below market-liberal Costa Rica and 50 percent below war-torn Honduras. Zimbabwe is even poorer. These aren’t just numbers. They indicate how people live. They tell us that in 2018, in a world growing rapidly richer, where poverty is plummeting, people in these countries remain desperately in need of businesses, jobs, food, and medicine. 

I wonder if my socialist interlocutor from 1982 is still interested in the socialist experiments in Nicaragua and Zimbabwe. 

Footnote: Kristian Niemetz of IEA wrote about how socialist “experiments” always become embarrassing after a few years. Except for “very short-lived experiments, such as the Paris Commune…. Those are the Jim Morrisons of socialism. They ended before they could turn into embarrassments.”