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Wall Street Journal columnist Greg Ip, among others, has repeatedly warned that “this year’s tax cut may overheat an economy already near full employment.”   

This equivocal prediction relies on a theory that inflation is caused by combining low unemployment and large structural (cyclically-adjusted) budget deficits. Inflation is assumed to be a national rather than global phenomenon, and its cause is assumed to be fiscal rather than monetary. 

To support this fiscal theory that tax cuts are inflationary, the evidence Greg Ip and others have always turned to is this brief sample from U.S. history, 1965 to 1967:

“In 1966, inflation, which had run below 2% for nearly a decade, suddenly accelerated to over 3%. Some of the circumstances echo the present: unemployment had slid to 4%, taxes had been cut and federal spending for the Vietnam War and Lyndon Johnson’s ‘Great Society’ programs was surging.”

This legendary “guns and butter” explanation suggests inflation “suddenly accelerated” in 1966 largely because “taxes had been cut” thus supposedly pushing budget deficits much higher than prudent at a time of 4% unemployment. The Fed’s reluctance to even keep the fed funds rate barely above the known year-to-year inflation trend is barely mentioned. Treasury dollar exchange rate policy, including slipping ties of coins to silver and of the dollar to gold, is ignored. 

In February 1964, the Kennedy/LBJ tax cut reduced all marginal tax rates by about 30% over two years, with the top rate falling from 91% to 70% by1965 and the lowest rate from 20% to 14%.  Corporate tax rates were also reduced, particularly for small firms.

Contrary to Mr. Ip, the 1964-65 “tax cuts” can’t possibly explain why inflation “suddenly accelerated” in 1966, because tax revenues in 1966-67 were rising rather than falling, and budget deficits were tiny.

As a percentage of GDP, federal revenues rose from 16.4% in 1965 to 16.7% in 1966 and 17.8% of GDP in 1967 (higher than any year from 1956 to 1963). But percentages of GDP understate the real gain, because real GDP was rising so fast.  

Measured in constant 2009 dollars to adjust for inflation (from Table1.3 of the Budget’s Historical Tables), real federal revenues had long been virtually stagnant before the Kennedy tax cuts, rising only 7.5% between 1952 and 1963 –from $657.7 billion in 1952 to $707.1 billion in 1963.  

After tax rates came down, by contrast, real revenues rose by 29% in just four years.  Real revenues rose to $735.6 billion in 1964, $752.5 billion in 1965, $819.8 billion in 1966, $911.9 billion in 1967.  After a brutal 10% surtax was added in June 1968, real revenues initially fell to $904.6 billion (17% of GDP), though revenues briefly surged in the first half of 1969.

The budget deficit in 1966 was a trivial 0.5% of GDP –down from 0.8% in 1963 (before the tax cuts), and still just 1% of GDP in 1967.  To properly judge the alleged “fiscal stimulus” theory, however, we need to adjust deficits for the state of the economy by removing “automatic stabilizers” that enlarge deficits in recessions: Revenues naturally fall with falling payrolls and profits, while unemployment and other means-tested benefits rise.

The Graph compares Congressional Budget Office cyclically-adjusted budget deficits with changes in consumer price inflation.  Just as there is no evidence that large cyclically-adjusted budget deficits stimulate “overheating” of nominal GDP (as endless Japanese experiments attest), there is likewise no evidence that larger cyclically-adjusted deficits cause (or are even loosely associated with) higher inflation.

In fact, cyclically-adjusted deficits were largest when inflation was low and/or falling in 1983-86 and 2009-14.  And such deficits were small during the big inflations of 1973-75 and 1979-81.  Cyclically adjusted deficit were near zero in 1966-67 when an uptick in (global) inflation was supposedly caused by tax cuts and “guns and butter” spending. Contrary to the theory, cyclically-adjusted budget surpluses in 1998-2000 were not associated slow growth of real GDP or falling inflation.

Cutting tax rates by 30% in 1964-65 did indeed result in faster growth of real GDP, but that also produced rapid growth of real tax receipts.  No measure of budget deficits grew larger because of those misnamed tax cuts, and deficits were insignificant until 1968.  There was no “fiscal stimulus” (as Keynesians define it) from the Kennedy tax cuts.  The deficit reached a modest 2.8% of GDP only after the 1968 surtax, but nothing in1968 explains why CPI inflation “suddenly” touched 3% in 1966.

In short, efforts to blame creeping global inflation in the late 1960s on U.S. budget deficits, much less on lower tax rates that actually brought in a huge revenue windfall, is inconsistent with any relevant facts.

With “Red for Ed” walkouts continuing in Arizona, and ongoing discussion about how well public K-12 schooling has been funded nationwide, here’s part three of our impromptu series on spending. As promised last week, this post presents the total spending charts for the five states that have been most in the news over funding: Arizona, Colorado, Kentucky, Oklahoma, and West Virginia. Please see the previous posts for discussions of national spending levels and data sources. The data here are total, inflation-adjusted, per-pupil expenditures on public elementary and secondary schools.

Arizona

Things are looking down in AZ, though with a similar pattern to the nation overall: Spending generally rising before the Great Recession—total expenditures peaked in 07-08 at $11,141—then dropping afterwards. Unlike much of the nation, however, for the entire period total spending in Arizona fell, from $9,837 per pupil to $8,697. And it has a somewhat pronounced spending valley before the recession.

Where were the cuts? While all of the various types of support services saw increases for the overall period—and some saw increases even after the recession—instructional spending, which most people would probably consider the nucleus of what schools do, fell 6 percent for the full period, or $281 per student. The biggest loser was capital outlays, which dropped 58 percent for the period, or by nearly $1,300.

Colorado

Again we see the pattern of overall spending peaking in 07-08, then falling. We also see a loss from the beginning of the period to the end. But Colorado’s decline is much smaller than in AZ; only $86, or a less-than 1 percent dip.

For the overall period, only two sub-categories of spending saw cuts: capital outlays, which dropped 34 percent, and other support services, which fell about 22 percent. Instructional spending rose by roughly 2 percent and even after the recession fell only 14 percent.

Kentucky

Don’t cry for Kentucky, AZ and CO. The chart for the Bluegrass State is generally one of rising, not falling, spending. Total spending, and all but one subcategory–school administration support services–saw funding increases between the 99-00 and 14-15 school years, and lots of support functions saw increases in the roughly one-third neighborhood. Instructional spending increased nearly 7 percent for the period and capital outlays ballooned by 117 percent. Many areas did see cuts during the recession, but several types of services saw increases even during that period, though of generally small dollar amounts.

Oklahoma

Here’s another case of total spending rising during the full period, from $8,310 per student in 99-00 to $9,114 in 14-15, a nearly 10 percent increase. However, instructional spending barely rose at all—just $7. The biggest increase was in capital outlays, which spiked 79 percent, or by $427. The next largest increase proportionally was for other support services, which increased almost 48 percent. After the recession, instructional spending dropped 13 percent, but capital outlays rose 36 percent, and a couple of support services saw upticks.

West Virginia

Here’s another state where expenditures have been markedly on the rise, not falling, with total spending rising roughly 13 percent—or by $1,468—over the full period, and even increasing since the recession, by $487. A lot of that was not in instruction, however, which grew by only about 5 percent for the overall period, and dipped by more than 4 percent after the recession. And note that spending peaked after 07-08, unlike other states, hitting its highest level–$13,296—in 09-10.

As we’ve seen elsewhere, some of the biggest increases in percentage terms were in support services of various types, the largest of these in instructional staff support, which approached doubling. Meanwhile, the state appeared to go on almost a capital outlay hiatus between 03-04 and 13-14.

Why?

These five states, while they share unrest over funding in common, look different in various respects, including what kind, when, and how much they have cut or increased spending. In the next post—maybe the last of the series—we’ll look at some possible reasons we see these changes.

DownsizingGovernment.org has released a new study on Medicaid. The piece discusses basic problems with the program, examines the rapid rise in spending, and proposes reforms to reduce costs and improve quality.

Medicaid is a joint federal-state program that funds medical services and long-term care for people with moderate incomes. It is one of the largest and fastest-growing items in the federal budget, at almost $400 billion a year.

State governments administer Medicaid, but most of the funding comes from the federal government. The current funding structure encourages expansion and provides little incentive to control costs. At the same time, the top-down regulatory structure of Medicaid distorts health care markets. The 2010 Affordable Care Act increased Medicaid spending and did not fix the program’s structural flaws.

Policymakers should reverse course and restructure Medicaid to reduce costs. The program should be turned into a block grant, with the federal government providing a fixed amount of aid to each state. That was the successful approach taken for welfare reform in 1996. Fixed grants would encourage states to restrain spending, combat fraud and abuse, and pursue cost-effective health care solutions.

Federal deficits are rising, and health care spending is a major reason why. Reforming Medicaid with a block grant structure would allow federal policymakers to control spending while encouraging health care innovation in the states.

The DownsizingGovernment.org study is here.

Michael Cannon’s study here is also a good introduction to this costly program.

Demonstrating the capacity to surprise, North Korea’s Kim Jong-un acted like a modern statesman when he ventured into the Republic of Korea for his summit with South Korean President Moon Jae-in. That doesn’t mean Kim and his heavily armed nation are not potentially dangerous. But after watching Kim in action, as Margaret Thatcher said of Mikhail Gorbachev, “we can do business together.”

Reasons for caution are many. After all, Kim’s father had summits with two successive South Korean presidents, but by earlier this year people were talking about the possibility of nuclear war between the U.S. and North Korea. However, despite the danger of excessive expectations, the diplomatic option first advanced by Kim has shifted the peninsula away from military conflict, at least in the short-term.

Which is a major benefit. As I point out in a new study for Cato, war simply is not an option. It wouldn’t be “over there,” as Sen. Lindsey Graham (R-SC) infamously assured us. Americans would be directly involved, even if the North was not capable of striking the U.S. homeland. In any case, if war resulted, the likely death and destruction on the peninsula, with South Korea a major part of the battlefield, and likely beyond, including Japan, would be far too great to justify the risk.

As a result, President Donald Trump should have modest expectations when meeting Kim. The president’s goal should be to set in motion negotiations and actions that will reduce the likelihood of conflict and hopefully, ultimately, lead to full denuclearization.

One of the most important offers he could make to advance the negotiations is to bring home U.S. troops from the peninsula. Although the American presence is viewed as near sacrosanct by many analysts, Defense Secretary Jim Mattis said that withdrawal is one “of the issues we’ll be discuss in in the negotiations with our allies first and, of course, with North Korea.” He rejected having “preconditions or presumptions about how it’s going to go.” In fact, the ROK’s rapid economic growth and democratic evolution long ago made Washington’s conventional security guarantee obsolete.

But even something short of denuclearization could promote stability and peace on the peninsula and throughout the region. Which would be an accomplishment President Trump could rightly celebrate.

My colleague David Bier and I have written a policy brief on the unmanned aerial vehicles (UAVs) flown by Customs and Border Protection (CBP). We argue that CBP’s fleet of Predator B drones are a threat to the privacy of Americans living along the border and an inefficient tool for locating illegal border crossers and illegal drugs. In addition, state and local use of these UAVs mean that American living in the interior are also at risk of being the target of warrantless surveillance.

Predator B drones may have a reputation as highly efficient military tools, but on the homefront they’ve proven inefficient at contributing to border security. For instance, in the last few years CBP’s predator drones have contributed to less than a percent of illegal border crosser apprehensions at a cost of $32,000 per arrest. When it comes to marijuana seizures, the drone fare little better, being responsible for about 3 percent of marijuana seizures in the same time period.

These inefficient UAVs pose a threat to Americans living along the border and in the interior. State and local law enforcement can request CBP drones for assistance. In fact, the first domestic law enforcement use of UAV to assist an arrest was in 2011, when police in North Dakota requested the use of a CBP Predator. Thanks to three Supreme Court cases from the 1980s warrantless aerial surveillance does not run afoul of the 4th Amendment. While some states have passed warrant requirements for UAVs, it’s not clear whether CBP adheres to state warrant requirements when acting on the behest of state and local law enforcement.

David and I finish our paper with a list of recommendations:

  • CBP should not conduct drone surveillance more than five miles from the border. ƒ
  • If CBP does use its drones to support state and local operations, it should ensure that its drone pilots comply with state and local drone legislation, including warrant requirements. ƒ
  • CBP should not seek drones with facial recognition capability, which puts law-abiding Americans’ privacy at increased risk. ƒ
  • At least six months before deploying new surveillance technology, CBP should disclose details about the technology’s capabilities, including information about the type of data to be collected, how long CBP plans to keep the data, when CBP will share the data, and with whom it will share the data. ƒ
  • CBP should study replacing drones with surveillance technology that limits unnecessary data collection on U.S. residents.

Read the full policy brief here.

hab·i·tat ˈhabəˌtat/ noun: The natural environment of an organism, the place that is natural for the life and growth of an organism; the natural home or environment of an animal, plant, or other organism.

Seems straightforward, right? Unless, of course, you’re the U.S. Fish and Wildlife Service (FWS), which in its role administering the Endangered Species Act (ESA) classified land where a species doesn’t live and can’t survive as “critical habitat” that is “essential” to the survival of that species. Yes, FWS redefined basic terms in the English language and designated a parcel of land in Louisiana as critical habitat for the “dusky gopher frog,” despite the parcel’s utter unsuitably for sustaining the frog’s life cycles.

When the Weyerhaeuser company challenged the FWS designation, first the district court and then the U.S. Court of Appeals for the Fifth Circuit applied Chevron—the doctrine whereby courts give hands-off treatment to agencies when they interpret statutes—and deferred to the agency’s rule. This, even though Chevron itself doesn’t allow “arbitrary and capricious” interpretations.

The Supreme Court agreed to hear the case. Cato has now filed a brief supporting the property owner, joined by the New England Legal Foundation. We argue that the FWS interpretation of the ESA is unreasonable and that this aggrandizement of federal power to regulate property goes beyond constitutional limits. The idea that land that is uninhabitable for a species is nevertheless “essential” to its survival is unmoored from even government logic.

Put simply, the FWS effectively rewrote the ESA in a way Congress never authorized—and could not constitutionally permit. Even if one accepts that the ESA fits into Congress’s power to regulate interstate commerce—in which case critical-habitat designation is undoubtedly a necessary part of the scheme—that power has limits. Mere existence of land does not constitute “economic activity” under the Commerce Clause; if it did, all land in the United States would be subject to federal jurisdiction (as is the case in federal enclaves). Likewise, the regulation here doesn’t fit into the Necessary and Proper Clause. It’s not necessary because the land at issue plays no role in the frog’s conservation; it’s not proper because it infringes on state sovereignty over land-use regulation.

As Judge Priscilla Owen nicely summarized in her dissent from the Fifth Circuit’s decision, the practical implications of the flawed ruling are immense: “If the Endangered Species Act permitted the actions taken by the Government in this case, then vast portions of the United States would be designated as ‘critical habitat’ because it is theoretically possible, even if not probable, that land could be modified to sustain the introduction or reintroduction of an endangered species.”

When it hears Weyerhaeuser v. U.S. Fish & Wildlife Service this fall, the Supreme Court should reverse the lower courts’ determination to allow the federal government to control everyone’s backyards for no particular reason.

In his surprise speech today, Israeli Prime Minister Benjamin Netanyahu presented what he described as Iran’s “nuclear files,” promising to show proof that Iran has cheated on the Joint Comprehensive Plan of Action (JCPOA), the 2015 diplomatic agreement better known as the Iranian nuclear deal.

Instead, what he presented was a curious mix of details on the extent of Iran’s nuclear weapons program prior to 2003—all the major components of which were already publicly known and presented by the United States or the International Atomic Energy Agency—with a series of unfounded assertions about Iran wanting to continue with its nuclear program.

The presentation thus appears to have been far more about politics than anything else, with Netanyahu trying to use details of Iran’s past nuclear activity to argue that it cannot be trusted to comply with the JCPOA today. This is particularly ironic given that these details were among the key reasons which led to international sanctions and the eventual negotiation of the deal itself.  

Nonetheless, with President Trump rapidly approaching another key decision point on May 12th, this presentation will only add fuel to the fire. The president is widely expected to refuse to waive sanctions as required under the JCPOA, despite ongoing Iranian compliance with the deal confirmed and certified by the IAEA, the State Department, and members of his own administration.  

This all raises a key question: What comes after May 12th? Assuming the president does refuse to reissue sanctions waivers, the United States will technically be in default of the deal, regardless of whether we formally withdraw or not. And it remains unclear whether the Trump administration has any coherent follow-through plan.

Last fall, John Glaser and I explored this question in a Cato Policy Analysis, “Unforced Error: The Risks of Confrontation with Iran.” We looked past the JCPOA to ask what other policy options—if any—would be an improvement on the deal. Unfortunately, the four options we examined were all problematic: none resolved the nuclear problem, and several were astoundingly costly and dangerous. Nothing has changed to make these options more palatable in the meantime. 

Option #1 is new sanctions, an option that seems even less feasible now than it did last fall. America’s European allies are largely unwilling to join new sanctions, particularly given Donald Trump’s likely role in blowing up the successful nuclear deal.

Option #2 is a regional military effort against Iranian proxies. Is already underway to some extent, as the Trump administration pursues military-focused policies in Syria and elsewhere. It’s risky for US troops and unlikely to be successful. Whether this effort is effective or not, however, it does nothing to curb Iran’s nuclear potential.

Option #3 is regime change “from within,” a favorite of Trump’s new National Security Advisor John Bolton. As we explored in the paper, there are no viable candidates for such support, and again, it does nothing to resolve the nuclear question.

Option #4 is direct military conflict. While the Trump administration doesn’t appear to be considering large-scale military action against Iran, this is still an option, and one with potentially disastrous consequences that should be clear to anyone who has watched the last two decades of American foreign policy.

In the report, we recommend a fifth option: continued engagement and the negotiation of additional agreements to strengthen and support the JCPOA’s existing parameters. This has by far the best likelihood of success. Yet it is this approach that Trump appears likely to discard, and this approach that Netanyahu today begged the President to ditch.

President Trump has only a few weeks left to make one of the most consequential decisions of his presidency. The JCPOA is not perfect. Yet ripping up the deal now based on old grudges will not improve the situation: the alternatives are far worse.

Read our report and see for yourself.

Last week officers with the Sacramento County Sheriff’s Department arrested Joseph James DeAngelo, the suspected Golden State Killer who allegedly committed a dozen murders, at least 50 rapes, and more than 100 burglaries in California between 1976 and 1986. Police made the arrest after uploading DeAngelo’s “discarded DNA” to one of the increasingly popular genealogy websites. Using information from the site, investigators were able to find DeAngelo’s distant relatives, thereby significantly narrowing their list of suspects. This investigatory technique is worth keeping an eye on, not least because millions of people are using DNA-based genealogical sites.

I’m one of them. I’ve signed up to 23andMe as well as MyHeritage, both of which offer DNA analysis. I did this in part because family history is a minor hobby of mine, but also because 23andMe offers interesting medical information. While both companies offer a DNA service, I’ve only used 23andMe’s because MyHeritage allows its users to upload 23andMe data. One of the features of MyHeritage is its “DNA Matching” service, which updates me when a distant relative is found thanks to automated DNA analysis.

This month alone MyHeritage has altered me to the existence of two more 3rd - 5th cousins. This DNA Matching service has identified hundreds of my distant relatives, with varying degrees of confidence. 23andMe has a similar relative-finding feature. MyHeritage and 23andMe, as well as Ancestry.com, have all denied working with law enforcement in the Golden State Killer case.

According to The New York Times, investigators sent the suspected Golden State Killer’s DNA to GEDmatch, a free genealogical service. A GEDmatch release stated that it had not been approached by law enforcement and warned customers, “If you are concerned about non-genealogical uses of your DNA, you should not upload your DNA to the database.”

The Times report included this important paragraph:

The detectives in the Golden State Killer case uploaded the suspect’s DNA sample. But they would have had to check a box online certifying that the DNA was their own or belonged to someone for whom they were legal guardians, or that they had “obtained authorization” to upload the sample.

Investigators obviously didn’t have DeAngelo’s authorization. However, it’s unlikely that they were constitutionally required to obtain it. From Technology Review:

[GEDmatch co-creator] Rogers didn’t say whether he thought police had acted legally or not, but he says the rule on his website is that “it’s only with a person’s permission.”

Investigators, of course, didn’t have authorization from DeAngelo to use his DNA. However, it seems likely they would not have needed it. “Under current constitutional law, the government has a tremendous amount of discretion in how to use crime-scene evidence,” says Erin Murphy, a professor of law at New York University. “DNA abandoned by the perpetrator of a crime basically has no legal protection.”

What’s particularly interesting about this case is that it doesn’t involve police identifying a GEDmatch customer as a suspect and then seeking that suspect’s DNA profile as part of an investigation. Rather, investigators used GEDmatch to build a family tree of the suspect based on information GEDmatch customers had volunteered. GEDmatch’s website includes this warning, “DNA and Genealogical research, by its very nature, requires the sharing of information. Because of that, users participating in this site should expect that their information will be shared with other users.”

23andMe and Ancestry.com both mention law enforcement in their privacy policies. These policies discuss law enforcement in the context of law enforcement seeking customers’ data. For instance, 23andMe’s policy states (emphasis mine), “Under certain circumstances your information may be subject to disclosure pursuant to judicial or other government subpoenas, warrants, or orders” and Ancestry.com’s policy includes the following, “We may share your Personal Information if we believe it is reasonably necessary to […] Comply with valid legal process (e.g., subpoenas, warrants).”

It’s laudable that these private companies have made commitments to protect their customers’ privacy, but the Golden State Killer investigation did not rely on investigators directly accessing GEDmatch customers’ information. Rather, it relied on GEDmatch to do what it’s product is designed to do: find relatives.

Law enforcement use of genealogical sites is a rare investigatory technique. According to a 23andMe spokesperson, the company has only “had a handful of inquiries over the course of 11 years.” Ancestry.com’s 2017 transparency report revealed that the company had only received 34 valid law enforcement requests that year, only 19 of which came from American law enforcement agencies. Each one of these 34 requests related to credit card fraud or identity theft.

Although rare, we should prepare for a time when this kind of investigation is widespread. I doubt that any of DeAngelo’s distant relatives will be upset that their genetic information was used to aid an investigation into a serial killer and rapist, but we should consider what law enforcement looks like in a world where “genetic informants” are commonplace. As UC Davis Law Professor Elizabeth Joh told The New Republic, “Do you realize, for example, that when you upload your DNA, you’re potentially becoming a genetic informant on the rest of your family? […] And then if that’s the case, what if you’re the person who didn’t personally upload the DNA, but you discover that your family member has done that?”

 

In the long, tragic chronicle of the Great Recession, April 30, 2008, doesn’t resonate as an infamous date. It lacks the notoriety of March 16, 2008, when, by guaranteeing $30 billion of Bear Stearns’ assets, the Federal Reserve crossed a last-resort lending Rubicon, extending its safety net to an investment bank for the very first time. Nor does it conjure up headlines like those of September 15, 2008, when the Fed reversed course by letting Lehman Brothers — a much larger investment bank — go under.

Yet April 30, 2008 was no less critical a turning point in the recession’s history than these other dates, for it was then that the FOMC, having cut the Fed’s target interest rate to 2 percent, resolved to cut it no further — drawing a line in the sand by which it unwittingly helped seal the fate of the US, and world, economy.

At the time neither Fed officials nor anyone else knew that a recession had started, let alone that it was to be the worst recession since the 1930s. Not until December would the NBER’s Business Cycle Dating Committee officially decide that the economy had been shrinking for a year. Instead, having apparently calmed markets by helping to rescue Bear, Fed officials imagined that the worst was over. “When I look at where I was in the last [March] FOMC meeting,” Frederic Mishkin told his fellow FOMC members during that fateful late April gathering, “I sounded so depressed…as though I might take out a gun and blow my head off… . But my sunny, optimistic disposition is coming back…. I think there is a very strong possibility that the worst is over.”

Despite the financial system’s shaky state, what several Fed officials most feared that April was, not a looming recession, but inflation. Between the fall of 2007 and the Fed’s April 30th meeting the CPI inflation rate had jumped from about 2 percent to twice that level. Thanks mainly to rising oil prices, it kept going up well into the summer, when it peaked at 5.5 percent. In response the FOMC’s hawks, led by Dallas Fed President Richard Fisher and Richmond Fed President Jeff Lacker, having already opposed the Fed’s last rate cut in March, refused to support any further cuts, and would keep on successfully opposing them until October.

Ben Bernanke, for his part, was determined to avoid any further public displays of inter-FOMC dissent. To Fed Vice Chair Donald Kohn he privately complained, in an email sent the day after the FOMC’s August meeting, that he found himself “conciliating holders of the unreasonable opinion that we should be tightening even as the economy and financial system are in a precarious position and inflation/commodity pressures appear to be easing.” But he did so, he says in his memoirs, because he worried that too many FOMC dissents would “undermine our credibility.”

Thus the Fed’s monetary policy stance continued to reflect a minority of FOMC members’ preoccupation with inflation even as financial markets began to crumble. To shore up those markets, the Fed supplied over $1 trillion in emergency credit, issued through various emergency lending facilities, to various sorts of financial institutions, while extending a further $85 billion line of credit to AIG. Lending on so vast a scale would normally have flooded the banking system with liquid reserves, causing interest rates to fall in turn. The Fed was nevertheless determined to hold the line it drew that April, and to do it by hook or by crook.

In the event the Fed used both a hook and a crook. The crook consisted of its decision to “sterilize” those emergency loans, yanking-back as many reserves as its emergency loans created by emptying its portfolio of Treasury securities worth as much as the loans it made. That strategy lasted until Lehman’s demise, after which the volume of Fed lending exploded, while its Treasury holdings dwindled. So on October 6th out came the hook, consisting of the Fed’s offer to start paying interest on bank reserves. By paying banks more to hoard reserves than they could make by lending them, the Fed could effectively sequester those reserves, preventing them from contributing to increased lending, spending, and prices.

By then, however, the Fed’s Maginot Line had already been breached. With market interest rates in free fall, the Fed’s 2 percent rate target was mere wishful thinking. Consequently, on the same day that it announced its plan to pay interest on bank reserves, the Fed at last relented by cutting its rate target to 1.5 percent. But no sooner had it done so than reality made a mockery of the new target as well. Eventually the Fed settled on an interest-rate target “range,” with the interest rate paid on bank reserves as its upper bound, and a lower bound of zero. The new target range had at least one undeniable advantage: the Fed couldn’t miss it. But despite that innovation it wasn’t until sometime in November 2008, as the unemployment rate approached 7 percent, that the FOMC determined that monetary stimulus was, after all, just what the economy needed.

The anniversary of a blunder is a good time for taking stock. Could it happen again and, if it could, what can be done to keep it from happening?

The bad news is that it certainly could happen again, and that it probably will happen so long as many Fed officials insist on treating the inflation rate as an all-purpose indicator of the stance of monetary policy. The good news is that there’s a far better alternative, if only the FOMC will use it. That alternative, which Market Monetarists like David Beckworth, Lars Christensen, and Scott Sumner have been pushing ever since the Great Recession started, is for the FOMC to keep its collective eye, not on the inflation rate, but on the level and growth rate of nominal GNP — a measure of the flow of spending on goods and services in the economy. While oil supply shocks and such can cause misleading upsurges in inflation, as happened in the summer of ’08, they don’t make people spend more. Nor, so long as spending grows at a reasonable pace, can money be said to be over-tight. Finally, a Fed that maintains a stable growth rate of spending is less likely to blow an asset-price bubble than one that obsesses over the inflation rate.

For evidence, consider the chart below, showing (1) the Fed’s preferred inflation measure (the so-called PCE inflation rate) (dashed line), (2) the unemployment rate (dotted line), and (3) nominal GDP growth (solid line), from 1996 until recently. The vertical shaded bars mark the dates of the dot-com and subprime recessions. Suppose that, instead of paying attention to the inflation rate, the Fed had set itself the task, from 1996 onward, of keeping nominal GDP growing at a steady rate of, say, 4.5 percent. Would we have had more or less severe cyclical ups and downs, and accompanying jumps in unemployment? In macroeconomics, nothing is ever perfectly clear. But here, for once, the answer seems clear enough.

It so happens that the latest GDP growth rate figure, for the last quarter of 2017, was just shy of 4.5 percent. So, here is a modest proposal: let the Fed commemorate the decennial of April 30, 2008, by announcing that it intends, henceforth, to devote itself to keeping that growth rate from changing. Would that step solve all of our monetary and macroeconomic problems? Heck no. But it sure could help.

(I thank Sam Bell for his helpful feedback on an earlier version of this article.)

[Cross-posted from Alt-M.org]

Cato trade policy analyst Colin Grabow explains the sordid details in today’s Wall Street Journal:

America’s Finest, a brand-new 264-foot fishing trawler, ought to be the pride of the fleet. As a newspaper in its birthplace of Anacortes, Wash., explained, the ship features an “on-board mechanized factory, fuel-efficient hull, and worker safety improvements”—priceless features for fishermen operating in the treacherous seas off Alaska. The ship is also said to have a smaller carbon footprint than any other fishing vessel in its region. According to Fishermen’s Finest, the company that ordered the ship, it would be the first new trawler purpose-built for the Pacific Northwest since 1989.

Sadly, it seems increasingly doubtful that the ship will ever ply its trade in U.S. waters. That’s because it contravenes the Jones Act, the 1920 law mandating, among other things, that ships carrying cargo between U.S. ports be domestically built

Direct diplomacy between North and South Korea has picked up in recent weeks, culminating on Friday in a summit meeting between North Korean dictator Kim Jong-un and South Korean president Moon Jae-in. The Panmunjom Declaration, a joint statement detailing goals and objectives for ongoing negotiations, included language about “denuclearization” as well as a commitment to work toward formally ending the Korean War. Images of both leaders holding hands and stepping over the border were moving.

To top it all off, on Sunday, the South Korean government said that Kim Jong-un told President Moon Jae-in “that he would abandon his nuclear weapons if the United States agreed to formally end the Korean War and promise not to invade his country.” This is now the context heading into the planned meeting between Trump and Kim in May or June.

What is driving this apparently historic diplomatic engagement? Why does Kim Jong-un suddenly seem so willing to compromise after years of obstinacy? If you listen to the White House and its supporters, all the credit is owed to Trump. At a rally in Michigan on Saturday, President Trump noted that some people were questioning what his policy of “maximum pressure” had to do with this outbreak of diplomacy. “I’ll tell you what,” Trump boasted to the crowd, “like, how about everything?”

Vice President Mike Pence concurs, saying in a statement, “The fact that North Korea has come to the table without the United States making any concessions speaks to the strength of President Trump’s leadership and is a clear sign that the intense pressure of sanctions is working.” National Security Adviser John Bolton, too, believes that “the maximum pressure campaign that the Trump administration has put on North Korea, along with the political and military pressure, has brought us to this point.”

Even the president’s antagonists on the Democratic side are giving him credit. “I think it’s more than fair,” Rep. Adam Schiff told ABC News, “to say that the combination of the president’s unpredictability and indeed, his bellicosity had something to do with the North Koreans deciding to come to the table.”

So, the claim here is that Trump’s toughness, his insistence on ever-harsher economic sanctions, his uncompromising posture, his threats, and his bombast, terrified Pyongyang into capitulating. This is a remarkably self-serving narrative that ignores important context. It looks more like a perceptual bias than a persuasive explanation. As Robert Jervis wrote in his famous work on Perception and Misperception in International Relations, “people perceive what they expect to be present” while ignoring discrepant information.

To begin with, while the diplomacy between Kim and Moon has seen many impressive (though mostly symbolic) precedents, this is not the first inter-Korean summit pledging peace and disarmament. In the summits of 2000 and 2007, much of the same rhetoric appeared in joint statements, accompanied with hopeful images of Kim Jong-il and Moon’s predecessors holding hands and smiling. And while the planned Trump-Kim meeting is the first of its kind (no sitting president has met with North Korea’s Supreme Leader), it is not the first time that Pyongyang has asked for such a face-to-face meeting. Clinton, Bush, and Obama also received such offers.

Moreover, Trump’s posture isn’t the only pebble on the beach. There are other factors influencing Kim Jong-un’s decision-making. First, Pyongyang has recently achieved its objectives on its nuclear and ballistic missile programs, profoundly strengthening Kim’s bargaining position. A viable nuclear deterrent has likely boosted Kim’s confidence and made him more comfortable with offering compromise deals.

Second, it is not apparent that Trump’s bombast has been the driving force in this unfolding drama. President Moon Jae-in has orchestrated most of it. He campaigned on restarting the “sunshine policy” and has already met with Kim several times, mostly on his own bold (and conciliatory) initiative. This suggests the diplomatic progress is a victory for doves, not hawks. At best, this is a good-cop, bad-cop dynamic, but even that is likely giving Trump more credit than he deserves.

The importance of Moon’s diplomatic approach should not be overlooked. In fact, Seoul’s posture has always been a major determinant of progress on the peninsula. As the Wall Street Journal reports, “Failure to deliver on past promises was less a sign of North Korean duplicity and more a reflection of how progress stalled when a more hawkish Seoul administration took power not long after the 2007 summit, leading to a decade of increasing tensions.”

Indeed, hawkish postures from both Seoul and Washington are not correlated with this kind of diplomatic progress. Much the opposite. According to a study by the Center for Strategic and International Studies, over the past 25 years, periods of diplomacy correlate with a reduction in North Korean provocations.

The causal logic that both Democrats and Republicans are buying into here—that Trump’s bluster and threats of nuclear war scared Kim into some kind of slow-motion surrender—doesn’t stand up to scrutiny. However, Trump does deserve credit for his willingness to meet with Kim Jong-un. Too often in the past, Washington has accompanied economic sanctions with both political isolation and military pressure. That is a recipe for failure. Trump decided instead that political isolation wasn’t going anywhere and, as is his wont, he ignored the prevailing wisdom in DC that says America shouldn’t meet with enemies without preconditions.

If Trump understood that his willingness to talk, more than his bullying, had contributed to success so far, then his meeting with Kim in several weeks would have much better chances for success.

An overwhelming majority—95 percent—of Americans are confused about the state of global poverty. A survey from the late Hans Rosling’s web project Gapminder assessed the public’s knowledge on that subject. The survey asked twelve thousand people in fourteen countries if, over the last two decades, the proportion of the world’s population living in extreme poverty has a) almost doubled, b) stayed the same, or c) almost halved. 
 
The correct answer, as frequent visitors of HumanProgress.org know, is c. Extreme poverty has halved. But a staggering 19 in 20 Americans got the answer wrong. In fact, most people in all fourteen countries surveyed got it wrong. How is it possible that so many people are unaware of the extraordinary and unprecedented decline in world poverty that has been achieved in the last twenty years? In some cases, they’re following the headlines instead of the trend lines: people in the news know that pessimistic narratives attract more clicks than heartening long-term trends. As the saying goes, “If it bleeds, it leads.” And, of course, many in the media share the broader public’s ignorance of the progress that humanity has made in its fight against world poverty. We at HumanProgress.org will continue to do our part to correct mistaken perceptions about the state of humanity and advocate for a realistic, empirically-based view of the world.

Writing in the New York Times recently, Louis Uchitelle calls for labor unions to be strengthened in order to prevent American firms from closing factories in the United States and shifting production abroad. Implicit in his argument is the notion that factories and the employment they provide are inherently desirable and the more the merrier.

Before addressing this point, however, let’s first acknowledge that the decline in the number of factories and factory workers in the United States is overwhelmingly a story about automation and improved use of information technology rather than trade or outsourcing. A widely-cited study by researchers at Ball State University found that increases in productivity explain almost 88 percent of such job losses.

Uchitelle’s contention, meanwhile, that greater unionization would stave off factory closures or even cause more to open in the United States is debatable. Sweden, the United Kingdom, and Japan, for example, all have significantly greater rates of unionization than the United States and yet have experienced higher percentage declines in manufacturing employment since 1990. And while he laments the “nearly neutered industrial unions” in the United States and their diminished proclivity to engage in strikes, a fondness for such worker protests hasn’t prevented France from similarly experiencing a greater percentage decline in factory jobs.

 

But even if increased unionization held the promise of fewer factory closures, it’s still not apparent why that outcome should be desirable. In fact, a blind obsession with the preservation of factory employment would almost assuredly make us worse off. 

Economies are not organisms encased in amber but systems that must continuously evolve and adapt. If a company decides to relocate a factory overseas it is because its task can be accomplished cheaper or more efficiently elsewhere. Realizing such efficiencies and doing more with less is the sine qua non of economic growth that frees up additional resources. While the job losses that result from such dislocations are apparent, invariably less appreciated and less noticed is that the resulting cost savings will allow for either new investments by the firm, cost savings to consumers in the form of lower prices—both of which contribute to new job creation—or some combination thereof. Trade and outsourcing destroy jobs, but also create new ones.

One example of this dynamic is the economic relationship between the United States and China. Although China is frequently blamed for manufacturing job losses, less noticed is that trade with the country has also produced commensurate employment gains elsewhere in the economy (as well as within manufacturing—among the top export categories to China in 2016 were a combined $49 billion worth of aircraft, machinery, and vehicles).

According to economist Maximiliano Dworkin of the Federal Reserve Bank of St. Louis, competition from China resulted in the loss of 800,000 jobs between 2000-2007, primarily in the production of computer and electronic goods, primary and fabricated metal products, furniture, and textiles. However, he also found that the economy gained a similar number of jobs in other sectors, such as services, construction, and wholesale and retail trade (significantly, Dworkin also says that as a result of savings to firms of lower production costs and access to cheaper Chinese-made goods, “U.S. consumers gained an average of $260 of extra spending per year for the rest of their lives.”).

While we cannot know with exact precision which jobs were lost and which were gained as a direct result of this bilateral trade, it’s worth noting that Bureau of Labor Statistics data show average wages (a metric which does not include other forms of compensation such as health insurance) within the categories of “Textile, Apparel, and Furnishings Workers,” “Miscellaneous Textile, Apparel, and Furnishings Workers,” and “Textile, Apparel, and Furnishings Workers, All Other”—one of the areas in which the United States lost jobs to China—to range from $26,810 to $35,180. Among construction workers, meanwhile—an area the United States experienced job gains as a result of trade with China—average wages for “Construction Laborers” are $38,890, “Construction Trades Workers” are $48,620, and “Construction Equipment Operators” are higher still at $51,050.

This does not mean that every production job lost was replaced by a superior one, but we should also dispense with the notion that lost factory and production jobs are invariably better paying than those lost to trade and outsourcing. Worth considering is the fact that hourly wages for production and nonsupervisory employees within manufacturing—currently $21.35—is lower than the private sector as a whole at $26.82. Furthermore, with the economy either at full employment or close to it, efforts to prevent the closure of factories means fewer workers available for new and potentially more lucrative employment elsewhere.

None of this is to suggest that factory employment is undesirable or that shifting production overseas should be actively encouraged. Indeed, to the extent such jobs are being driven out by undue tax and regulatory burdens policy changes should be implemented to ameliorate them. Rather we must avoid the government placing its thumb on the scale, through policies which promote unionization or otherwise, and placing a particular premium on such jobs. Decisions about the location of production are best left to market forces whose ongoing quest for new efficiencies help unlock a higher standard of living. To actively thwart this or throw policy-driven sand in the gears of economic change is to halt such progress, and ultimately to harm workers. 

On Monday morning (April 23, 2018), the Grim Reaper cut down Leland Yeager—a great scholar, collaborator, and friend. I share the sentiments about Leland that have already been expressed by David Gordon, David Henderson, and George Selgin.

To fill in the picture, I will recount my first encounter with Leland, which took place in the summer of 1967. Then, I will leap ahead to the last email I received from Leland on April 5, 2018.

I first met Leland in the summer of 1967, when I attended a short course on the principles of economics at the University of Virginia. The course was offered to young faculty with an interest in free-market economics. I qualified because I had recently joined the faculty of the Colorado School of Mines. What a course it was.  The Big Guns lectured. They included: Armen Alchian, Bill Allen, Bill Breit, Jim Buchanan, Warren Nutter, Gordon Tullock, and Leland Yeager. Leland presented the lectures on international trade. I can still recall them. He arrived fully prepared and ready to go—armed with a yardstick. Yes, a yardstick, which Leland used to draw complicated trade diagrams. And, typical of Leland, he did so with great precision. Indeed, Leland is the only professor I have ever observed who could, and did, draw picture-perfect diagrams on a chalkboard. Even while lecturing, Leland was an ever-careful and precise scholar.

Fast forward 50-plus years, and we arrive at the last email I received from Leland (April 5, 2018). Our correspondence over the past few years has largely focused on a book project that we have been collaborating on. Our book’s main idea – to treat waiting as a factor of production, and its price (the interest rate) as a reminder of the opportunity cost – contributes to unifying economic theory and identifying errors.  Fortunately, our manuscript for Capital and Interest is complete, thanks largely to Leland’s work and scholarship. As I recently promised Leland, I anticipate having the manuscript cleaned and ready to go to the publisher this summer.

As our work on Capital and Interest progressed, Leland would always add what I considered to be a throw-away line about his advancing years and ill-health. I thought Leland would make it into triple digits. However, in his last email, Leland alarmingly went way beyond his usual grumblings about his age and ill-health. He wrote, “At age 93 and suffering from weakness, fatigue, various ailments, and severe pains (most recently from osteoporosis), I must admit that I am in no condition to contribute much more to the MS.”  Leland’s shot across the bow shocked me because he remained as sharp as a tack. Indeed, in his last email, Leland did what he had always done: he never stopped turning over ideas and fretting about the quality of his work. Until his dying day, Leland remained to me that precise professor who lectured with a yardstick – a master of rhetoric, blackboard economics, and much, much more.

As crude oil prices recently approached $68 a barrel, a Wall Street Journal writer concluded that “inflation fears got an added jolt this week as oil prices rose to a three-year high.”

Two other Wall Street Journal writers added that “If crude continues to move higher, it could begin to stifle economic growth.”  They suggest that “higher consumer prices for gasoline and other energy products act like a tax, while pushing inflation higher and increasing pressure on the Federal Reserve to raise interest rates more aggressively.” 

Such anxieties about $70 oil are obviously overwrought. Crude prices were usually above $100 from March 2011 to September 2014, yet nobody was then fretting about inflation fears forcing the Fed to raise the fed funds rate.   

But this does raise two very important issues: First, the importance of soaring oil prices in the recession of 2008-2009.  Second, the way the Federal Reserve has overreacted to surging oil prices by pushing up interest rates before and during oil-shock recessions and (in 2008) leaning against their fall after the recession was well under way.

In May 2009, economist James Hamilton of U.C. San Diego testified before the Joint Economic Committee.  He noted that, “Big increases in the price of oil that were associated with events such as the 1973-74 embargo by the Organization of Arab Petroleum Exporting Countries, the Iranian Revolution in 1978, the Iran-Iraq War in 1980, and the First Persian Gulf War in 1990 were each followed by global economic recessions. The price of oil doubled between June 2007 and June 2008, a bigger price increase than in any of those four earlier episodes.”  

Like every postwar recession except 1960, the “Great Recession” of 2008-09 was preceded by a spike in the price of crude oil.  West Texas crude soared from $54 at the start of 2007 to $145 by mid-July 2018.  Yet U.S. reporters and economists still write as though the Great Recession had nothing to do with a global energy shock but was instead a “financial crisis” that began with the collapse of an investment bank (Lehman Brothers) on September 15, 2008.  This is a stubborn myth.

In reality, the inability of unemployed homeowners to pay their mortgage bills, and the failure of investments tied to those mortgages, were secondary complications of a global energy shock which cut industrial production in Canada and Europe in 2017 before that happened in the U.S.  By the end of 2008, the contraction of real GDP “was twice as deep in Germany and Britain  [as it was in the U.S.] and much worse in Japan and Sweden.”

Because energy is a key part of the cost of doing business, higher energy costs made production and distribution less profitable and thereby shrunk the global economy’s supply.  Yet even as late as June 2008, as crude prices soared above $140, The New York Times and Washington Post were hysterical about illusory inflation – not recession. 

Did the Fed also mistake a temporary oil price spike for a sustained rise in the overall trend of inflation?  I believe it did that in 2008 and even more obviously in prior incidents of a sudden surge in oil prices.

The big oil price spikes (and recessions) between 1973 and 1980 that Hamilton mentioned were clearly matched by huge spikes in the Fed-controlled interest rate on federal funds.  Oil prices and the fed funds rate were also rising before the 1991 and 2001 recessions. When crude rose from $34 to $74 from May 2004 to June 2006, the fed funds rate rose from 1 percent to 5.25 percent.  Once recessions were well underway the Fed always began to bring interest rates back down, but always (including 2008) too slowly.

On January 2, 2008, The Financial Times published my article, “Why I am Not Using the-R-Word This Time.”   Citing James Hamilton, I wrote that “if the emphasis on oil prices in Prof Hamilton’s 1983 study is correct, the US economy is likely to slip into recession because of higher energy costs alone, regardless of what the Fed does. If Mr. Bernanke’s 1997 study is right, timely reductions in the Fed funds rate should avert such a recession.”  Once he became Fed chairman, unfortunately, Bernanke did not aggressively cut the funds rate in a timely manner – but instead tried hard to prop rates up.  As Cato’s George Selgin documented, “Between December 2007 and September 2008, the Fed sold over $300 billion in Treasury securities, withdrawing a like amount of reserves from the banking system, or just enough to make up for reserves it created through its emergency lending,” One result was to keep the fed funds rate above 2 percent until September when oil prices finally fell.  In October the Fed also began paying interest on bank reserves (above 1 percent until mid-December) to discourage bank lending.  

Although an oil price of around $70 is only half as high as the peak in 2008, and lower than it was just a few years ago, we do have a lot of experience with sudden increases in oil prices that always ended in recession.  And we have a lot of experience with the Fed acting as though they were not focused on “core” inflation at all (i.e., excluding energy) but were unduly influenced by the misleading and ephemeral impact of oil price gyrations on headline inflation numbers.  

So, the Wall Street Journal’s recent warning that “If crude continues to move higher, it could begin to stifle economic growth” would be likely only if crude moved a lot higher.  And the warning that a higher oil price must put “pressure on the Federal Reserve to raise interest rates more aggressively” would be likely only if the Fed has still not learned anything from one of its biggest and most frequently repeated mistakes.

When it comes to increasing police accountability and transparency it’s policy, not technology, that does the heavy lifting. Police body cameras, tools that are overwhelmingly popular among the public, are sometimes cited as a valuable resource for addressing police misconduct and secrecy. They can be, but only if the right policies are in place. Absent policies that balance privacy interests with the need to increase police accountability, body cameras are surveillance tools. The risk of body camera surveillance is especially pronounced at a time when a major body camera manufacturer is doing more work on artificial intelligence, a development that may result in the widespread use of police body cameras with real-time facial recognition capability.

Axon, the company that makes one of the most popular police body cameras, released a Law Enforcement Technology Report last year. That report outlined some of the technology that’s on the horizon: “Soon, you’ll be able to tell almost immediately if someone has an outstanding warrant against them, thanks to facial recognition technology.”

According to reporting by The Wall Street Journal, the merger of body camera and facial recognition technology is months rather than years away.

I’ve written on this blog before about why body cameras with facial recognition capability are a threat to civil liberties. I’m hardly alone in highlighting this threat. Axon’s leadership is clearly aware of the concerns raised by civil libertarians and has convened an AI Ethics Board. Yet it seems as if this board will have little if any impact on Axon’s development of technology that poses a significant risk to civil liberties.

An “Ethics Board” sounds like the kind of body a company that builds surveillance equipment and weapons should have. However, Axon’s AI Ethics Board lacks any kind of authority to ensure that the company’s products aren’t used unethically.

Yesterday, a coalition of civil rights groups wrote a letter to the Axon AI Ethics Board outlining their well-founded concerns. The letter calls for board members to assert themselves and oppose real-time facial recognition on body cameras, consult with community members with direct experience with the criminal justice system, limit sales to law enforcement agencies with appropriate body camera policies, and ensure that they have an oversight remit that covers all of Axon’s digital products.

Members of the AI Ethics Board, which includes eight volunteer civil liberties, AI, and criminal justice experts, do not currently have the authority to veto Axon products. A functional ethics board should be free to halt products or at the very least publish reviews of all Axon devices.

If Axon’s ethics board guaranteed that only departments with policies that increase accountability and transparency while also protecting civil liberties could buy Axon products the company would sell fewer body cameras. Dozens of America’s largest and most prominent police departments fail to implement praiseworthy body camera policies. For example, an Upturn examination of 75 police department body camera policies found that the Baltimore Police Department is the only department with strict limits on body camera footage being analyzed with facial recognition software, and that not a single department requires officers to write a report before reviewing body camera footage related to any incident. Giving the AI Ethics Board the power to dramatically affect sales is one of the reasons that Axon is unlikely to adhere to the recommendations in the recent coalition letter.

In all likelihood, Axon will continue to sell products that can, if governed by poor policies, erode civil liberties. Although Axon is signaling that it’s concerned about the ethical implications of its products, it doesn’t look as if its ethics board will prevent the proliferation of body cameras that will become known as tools of surveillance, not police accountability. In order for body cameras to achieve their potential as tools that improve policing it’s policymakers rather than private companies who will have to implement necessary changes.

Paul Krugman’s column yesterday lamented Republican policy towards the poor. He has particular gripes with Ben Carson’s changes to housing subsidies, increased work requirements for those seeking food stamps, and waivers granted to states to enable new work requirements for Medicaid.

I’m not going to get into these specific policy changes here. But let’s take Krugman’s analysis of the changes and the motivation for them at face value, and pose a question: how robust is an anti-poverty agenda that depends so much on political and societal attitudes to the poor?

As I outlined in a recent blog, it’s a mistake to think of policy towards the poor being merely about government transfers, services and benefits-in-kind. In fact, this focus on income and services has blinded the debate about poverty from the truth that there are lots and lots of state, local and federal policies that increase the price of goods and services the poor spend a disproportionate amount on.

Zoning laws and urban growth boundaries raise house prices. Regulations make childcare more expensive. Sugar, milk programs and the ethanol mandate increase food costs. Tariffs on clothes and footwear have particularly regressive effects. Energy regulations which seek to subsidize renewables rather than being “technology neutral” can raise prices. CAFE standards, constraints against ride sharing, and some regulations on gas taxes raise some transport prices too. Not to mention the broader effects of protectionism and occupational licensing in both raising prices and reducing efficiency across the economy.

Some of these things affect families by orders of magnitude greater than the changes Krugman is concerned about. Combined, they would have a huge impact for many households. What’s more, most of the status quo interventions make the economy less efficient too, reducing market-wages and, in the case of housing and childcare, deterring the mobility of labor over different dimensions. One cannot talk about a “war on the poor” without acknowledging these fronts and the armies which battle on them, not least because these bad policies in part drive significant demands for redistributive transfers in the first place.

In my view, it would be far more fruitful for liberals concerned with the well-being of the poor to focus on all these issues as part of a “first do no harm” poverty agenda. Why?

1. There’s evidence that fiscal transfers may have hit diminishing returns in terms of their role in poverty alleviation.

2. The fiscal environment is not conducive to huge new expenditures on programs, and evidence from other countries (not least Britain) suggests working age welfare is the first port of call for cuts when a fiscal crisis hits.

3. There are clear economic trade-offs where transfers are concerned. As this accompanying Twitter thread by Paul Krugman acknowledges, even increasing the availability and generosity of transfers to more people disincentivizes people from earning more income.

4. And crucially for Krugman’s column, attitudes to redistribution are volatile, and support can be replaced by narratives about “moochers” or “welfare queens” relatively quickly.

In contrast, a pro-market agenda seeking to undo existing damaging regulations at the local, state and federal levels could: reduce poverty, reduce the demands for redistributive activity, would not undermine work incentives and would be harder to undo given its dispersed nature. Those in favor of extensive redistribution should see this too: you do not have to believe existing anti-poverty programs have failed to acknowledge they can have negative unintended consequences, hit diminishing returns, or that their effectiveness is undermined by bad policies which drive up living costs.

A pro-market cost of living agenda would not “solve” poverty, of course. And there are major vested interests in each of these areas who would resist reform. But there are clearly lots of different wars on the poor being raged, even if inadvertently. As long as the poverty debate focuses on just income transfers and government services, the more bountiful battles against vested interests who drive up the poor’s living costs go unfought.

The Grace Cathedral church near Akron, Ohio, found itself in big legal trouble for running a (money-losing) cafeteria open to the public in which much of the labor was provided free by volunteer members of the congregation. Beginning in 2014, the U.S. Department of Labor investigated and then sued it on the grounds that for an enterprise, church or otherwise, to use volunteer unpaid labor in a commercial setting violated the minimum wage provisions of the Fair Labor Standards Act (FLSA) of 1938. A trial court agreed with the Department and found liability, but now, in Acosta v. Cathedral Buffet et al., the Sixth Circuit has reversed the ruling and sent the case back for further proceedings, noting that “to be considered an employee within the meaning of the FLSA, a worker must first expect to receive compensation.”

Judge Raymond Kethledge, writing in concurrence, takes issue with what may be the most remarkable argument advanced by the Department of Labor: that the congregation volunteers should count as employees because “their pastor spiritually ‘coerced’ them to work there. That argument’s premise — namely, that the Labor Act authorizes the Department to regulate the spiritual dialogue between pastor and congregation — assumes a power whose use would violate the Free Exercise Clause of the First Amendment,”

Judge Kethledge goes on to note that as “the record makes clear, the Buffet’s purpose was to allow the church’s members to proselytize among local residents who dined there,” and that along with its congregation volunteers the establishment “had 35 full-time paid employees — all of whom, incidentally, have lost their jobs as a result of this lawsuit.” 

A footnote: Given that the Obama Labor Department’s stance flies in the face both of sound labor policy and principles of church-state separation, why didn’t the Trump administration reverse position on it? One clue to a possible answer (via Ted Frank and commenters on Twitter) is that the nomination of a new solicitor for the department did not clear the Senate until December 21, 2017, two weeks after the case had been argued before the Sixth Circuit panel. (cross-posted and adapted from Overlawyered). 

 

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