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On September 25, 2017, Iraqi Kurds voted in favor of independence from Iraq in a historic referendum. Out of the 3.3 million Kurds and non-Kurds who voted, 92% voted in favor of independence, which is not surprising. The international community’s reaction is also not surprising: Iraq, Turkey, Iran, Russia, France,  and the United States were all against the referendum, cautioning the Kurdish leadership about the regional impact from various strategic angles. In its quest to secure more non-Arab allies, Israel is the only country that has backed the referendum. The international community’s lack of support is seen as hypocritical by the Kurds, and may very well be. The United States in particular is wary of the creation of new states and their regional impact that tends to increase instability rather than reduce it, like in the case of South Sudan. While discouraging a population from seeking self-determination is thorny—even illiberal—the Kurdish referendum has two important outcomes that should not, be ignored.

First, the referendum has sent a dangerous mixed signal to other populations seeking independence and territorial sovereignty. Currently there are no administrative channels in place that will facilitate Kurdistan’s secession from Iraq—and it certainly cannot be called Kexit in the same vain as Brexit, the nickname for the UK’s vote to exit the EU. For example, Iraq still controls the Kurdistan Region of Iraq’s (KRI) air space and immediately following the referendum, instituted a flight ban from the region’s two international airports. KRI is not economically independent, and the referendum may have actually decreased its chances of becoming so. Even though Kurdistan has been producing 600,000 barrels of oil per day, an impressive feat for a landlocked region surrounded by hostile neighbors, low oil prices gravely impacted the development of its public sector that continues to remain weak and corrupt. Also, Kurds still hold Iraqi passports, and will most likely continue to be Iraqis officially for years to come, if not decades. So how exactly secession will happen is not clear. Therefore, it would be beneficial for other independence-seeking populations like Palestinians, Kashmiris, and Catalonians to pay close attention to how Kurdish independence unfolds, if at all. So then why was the referendum done now? There is speculation that the Kurdistan region’s president, Masoud Barzani of the Kurdistan Democratic Party, wanted his legacy to be putting Kurds on an internationally mandated path to independence. But Kurds are divided; while a majority of them want independence, many feel that is was not the right time, such as the “No for Now” campaign. In the presence of strong criticism from the international community, the referendum’s claim of providing a mandate for Kurdish independence is also questionable.

Second, the referendum has backed the United States in a corner. U.S. foreign policy has been driven by the idea that a unified Iraq is a better regional and counterterrorism partner than a divided one. In its quest to counter the Islamic State, the United States has often sided with Baghdad over Erbil. Yet, the Peshmerga, the KRI’s military force, has been one of the most effective fighting groups against ISIS, and played a crucial role during the battle of Mosul in 2016. But supporting Kurdish independence would have two negative consequences for the United States: 1) it would create a rift with Turkey, a key NATO ally at a time when the U.S.–Turkish relationship is already strained, and 2) U.S.–Iraq relations could weaken, which would be detrimental not only for Iraq’s stability but also for the region’s. Instead, this is a time for the U.S. to thread with caution and practice restraint. Whether or not the Trump administration will heed this advice will become apparent in the upcoming weeks. 

To the relief of many Democrats and the consternation of many Republicans, Congress will not be repealing ObamaCare this month. But that doesn’t mean Democrats are riding high or that ObamaCare is doing well. Premiums are still rising rapidly (Miami Herald: ”Obamacare Premiums in Florida to Rise 45 Percent on Average Next Year”), insurers are still leaving the Exchanges (Healthcare Marketplace: “Nearly Half of the Country Left with One Carrier Option in 2018”), and ObamaCare coverage is still becoming a worse and worse deal for the sick (Wall Street Journal/yours truly: “How ObamaCare Punishes the Sick”). 

Now that repeal is no longer an immediate threat, the conversation has naturally turned to who’s to blame for ObamaCare’s failings. Democrats claim everything was going swimmingly until the Trump administration came along and began sabotaging the law. The funny thing about that line of attack is that’s if it were true, then Democrats’ real complaint would be that voters are sabotaging ObamaCare.

But it’s not true—and reporters should stop repeating this partisan line of attack as if it were. Here are five crucial points:

  • The Trump administration is not causing the instability we are seeing in the Exchanges—ObamaCare is. Specifically, ObamaCare’s community rating price controls have both unleashed adverse selection (sick people enroll, healthy people don’t) and are making coverage worse for the sick (as insurers use plan design to deter the sickest from choosing their plans). There are only two ways to deal with that instability: eliminate community rating, or subsidize the heck out of insurers (either explicitly, or implicitly by encouraging healthy people to enroll).
  • The Trump administration is not stoking the instability ObamaCare is creating in the Exchanges. Democrats claim that by not ending the uncertainty surrounding cost-sharing subsidies to insurers, and by not investing in enrollment activities as much as the Obama administration did, it is in fact the Trump administration that is creating or exacerbating that instability. That is false. As noted above, it is ObamaCare’s community-rating price controls that are creating this instability, not the Trump administration’s actions. The administration is not even adding to the instability. To do so, it would have to make ObamaCare’s community-rating price controls even more binding, which would exacerbate adverse selection. The worst you can say about those actions is that the Trump administration is failing to mitigate the instability ObamaCare creates, which brings us to our next point. 
  • The Trump administration does not have a duty to reduce the instability ObamaCare creates, or to reduce the uncertainty ObamaCare creates, or to make ObamaCare “work.” The Trump administration’s only duty is to execute the law faithfully. So long as it does, it has the prerogative to pursue its political goals however it wants. I’m not aware of anyone accusing the Trump administration of not following the law in its handling of ObamaCare. 
  • Reporters who say the Trump administration is causing or stoking instability in the Exchanges are simply regurgitating partisan talking points. Embedded in that claim is the normative, disputed, and ultimately false premise that the Trump administration somehow has an obligation not just to follow the law, but to make ObamaCare “work.” That is a pretty radical notion, because it implies ObamaCare opponents don’t have a right to use lawful means to press their views through the political process. 

If Democrats or the media want to get angry at someone for sabotaging ObamaCare, there are plenty of targets. They can start with the Democratic politicans who – though they now clamor for bipartisanship now – enacted ObamaCare in 2010 on a purely partisan basis, spent seven years refusing to compromise, and as a result sowed the seeds for the GOP’s electoral gains. Then there’s the Democratic president who – and this was perhaps the sole exception to Democrats’ general refusal to compromise – himself sabotaged the law by agreeing to limit so-called “risk-corridor” subsidies to ObamaCare carriers. Then there was the time when ObamaCare was making voters so angry, that same Democratic president even violated the ACA by allowing people to keep non-ACA-compliant plans. That decision counts as an act of double-sabotage, because it continues to make Exchange premiums higher than they otherwise would be. 

In short, ObamaCare still doesn’t work well; it isn’t popular enough for Congress to paper over all its problems with more taxpayer dollars; Democrats did this to themselves; and they deserve nearly all, if not all, of the blame.

Now stop making me defend the Trump administration, people. Sheesh.

Donald Trump announced a mini-surge of U.S. forces into Afghanistan a month ago. This week the Long War Journal reported the Taliban now control or contest 45 percent of Afghanistan’s districts, up from 40 percent three months prior, which was an increase from 34 percent a year earlier, and you get the idea. The Taliban control more territory today than at any point since 2001, and they have the momentum.

Sixteen years after invading Afghanistan, toppling the Taliban, and routing Al Qaeda elements there, U.S. goals remain as far out of reach as ever.

However, rather than surge additional forces and fall victim to the “sunk cost” fallacy, the U.S. should withdraw military forces and re-align objectives to the threat and national interests. During his August speech, Donald Trump defended the surge by saying, “our nation must seek an honorable and enduring outcome worthy of the tremendous sacrifices that have been made, especially the sacrifices of lives.” His emotional appeal implied that grieving Gold Star families should be the nation’s impetus for continued involvement in the Afghan war (which would also lead to more families who would experience that ultimate loss).

Instead of defending a surge on the basis of efforts already spent, U.S. policy towards Afghanistan should rely on the 16 years of data available since initiation of the war on terror. All of that data strongly communicates two points: 1) the terror threat to Americans remains low and 2) a strategy that emphasizes military power will continue to fail.

The terror threat to Americans remains low as compared to virtually all other threats. Islamist-inspired terrorists have conducted less than one attack per year over the past three decades. In each of those 30 years, though, “regular” Americans murdered between 15,000 and 20,000 of their fellow Americans. Even the horrible attacks of 9/11 represented just a fraction of the Americans murdered that year.

Quite likely, the memory of 9/11 continues to inflate the terror threat, yet September 11th was an outlier. The world never experienced a similar attack prior or since, and for good reason: significant terror attacks almost always take place in failed or war-torn states. America’s second worst attack occurred in 1995, when Timothy McVeigh killed 168 in Oklahoma City. And few Americans can probably even identify North America’s second worst attack. It took place in 1985 on an Air India flight from Toronto, Canada. Three hundred and twenty-nine died at the hands of Sikh extremists.

In 2001, our homeland security was much different than it is today. The 9/11 hijackers received their pilot training in plain sight. They entered the country legally, using their real names. One lived with his flight instructors, and two even argued their way back into the country by assuring border and customs agents that they were, in fact, students—pilot training students—authorized to be here.

If save havens are a concern, the most important one has been eliminated. Even though terrorists may seek to harm Americans, post-9/11 homeland security efforts have severely reduced their opportunity.

America’s overseas war on terror, though, has not made Americans more secure. Instead, the number of Islamist-inspired terror groups and terrorists has grown substantially. In 2001, the Department of State identified Al Qaeda and 12 other similar groups. Today, that list includes ISIS, Al Qaeda, and another 42 like-minded organizations.

The proliferation of terror groups, terrorists, and attacks appears to have only occurred in response to U.S. military action. As the chart below suggests, terror activity spiked after the U.S. initiated its war on terror in those seven countries, not before.

 

Source: Global Terrorism Database

And the research supports the point: militaries rarely defeat terror groups. Scholars such as Audrey Kurth Cronin, Seth Jones, and Martin Libicki have concluded that instead of military defeat, most terror groups end by entering the political process, being marginalized, or through active policing. Each of those three options represents a line of operation that the U.S. has little control over.

Despite 16 years of assistance, Afghanistan’s government remains more corrupt than 96 percent of all countries, and its security force of 382,000 cannot halt Taliban gains. As Trevor Thrall and I concluded in a recent policy analysis, it’s time for America to “step back.” Eventually the Afghan government will decide whether competency and transparency matter enough, and Afghans will determine whether the Taliban ends by entering the political process, becoming irrelevant, or at the hands of a capable police force. Until then, the U.S. cannot do it for them. 

——–

Please join us October 10th as Cato hosts a policy forum on the future of U.S. strategy in Afghanistan. Stephen Biddle of George Washington University, Michael O’Hanlon of Brookings, and I will debate the merits of the primary options: surge, negotiate, and withdraw, and a young Army officer with two deployments to Afghanistan will open the forum with his “boots on the ground” perspective. Register here.

The Federation for American Immigration Reform (FAIR) is devoted to reducing legal and illegal immigration. Its recent report, “The Fiscal Burden of Illegal Immigration on United States Taxpayers (2017)” by Matthew O’Brien, Spencer Raley, and Jack Martin, estimates that the net fiscal costs of illegal immigration to U.S. taxpayers is $116 billion. FAIR’s report reaches that conclusion by vastly overstating the costs of illegal immigration, undercounting the tax revenue they generate, inflating the number of illegal immigrants, counting millions of U.S. citizens as illegal immigrants, and by concocting a method of estimating the fiscal costs that is rejected by all economists who work on this subject. 

FAIR’s Errors

Merely using the correct numbers when it comes to the actual size of the illegal immigrant population, the correct tax rates, and the effect of immigrants on property values lowers the net fiscal cost by 87 percent to 97 percent, down to $15.6 billion or $3.3 billion, respectively.  Below is a list of FAIR’s errors and how the correct numbers affect the results:

  1. FAIR assumes that there are 12.5 million illegal immigrants, over a million more than other organizations estimate (FAIR is inconsistent here as the number of illegal immigrants they report on page 34 is 12.6 million).  Pew estimates there are 11.3 million illegal immigrants, the Center for Migration Studies (CMS) estimates that there are 11 million illegal immigrants, and the Center for Immigration Studies (CIS) estimates there are 11.43 million illegal immigrants.  FAIR’s estimate of the number of illegal immigrants is more than a million more than that of their sister organization, the Center for Immigration Studies, that also shares their goal of reducing immigration.  Using the average number of illegal immigrants as estimated by Pew, CMS, and CIS instead of FAIR’s number lowers their report’s estimated cost by $11.6 billion.
  2. FAIR counts the benefits consumed by the U.S. born American citizen children of illegal immigrants.  This means that FAIR also doesn’t count the taxes paid by these U.S. born citizens when they start working.  Counting the benefits consumed but ignoring the tax revenue they pay (or will do so in the future) is one way FAIR gets such a negative result for this report.  If FAIR counts the welfare consumed by the U.S. born children of illegal immigrants then it must also count the taxes that that cohort pays, but it does not.  In this way, the FAIR report biases its results to increase the value of benefits received and diminish the value of taxes paid. Workers with higher education earn more money and pay more in tax dollars.  Counting education entirely as a cost without any effort to actually measure the boosted tax revenue that should result from such a system counts only the fiscal costs.  FAIR argues that those U.S. citizen children should be counted as illegal immigrants for their fiscal cost analysis because they would not be here without their illegal immigrant parents.  It’s a mystery, then, why FAIR does not count the fiscal costs incurred and taxes paid by all of the descendants of illegal immigrants back to when the Federal government first created immigration restrictions in 1875.  Furthermore, does this mean that FAIR will seek to count the fiscal costs and tax revenue of the grandchildren of the illegal immigrants as well?  If they decide to do that then they should use a dynamic generational accounting model rather than their flawed static model.  Using the actual number of illegal immigrant children who are in school lowers FAIR’s estimated education costs borne on the state and local level by $31.7 billion.
  3. FAIR blames the cost of immigration enforcement on illegal immigrants.  FAIR’s argument here comes down to “The U.S. needs to enforce our immigration laws better because the cost of enforcing immigration laws is so high.”  We suggest an easy remedy to this problem – cut immigration enforcement.  In all seriousness, this is silly.  If FAIR was serious about this argument, they would estimate how many illegal immigrants are deterred by immigration enforcement programs and compare that to their bogus budget figures to see the fiscal return on enforcement.  Excluding the costs of immigration enforcement, with the exception of the amount spent on incarceration, lowers FAIR’s estimate by $11.9 billion.
  4. FAIR overcounts welfare benefits consumed by illegal immigrants by including benefits consumed by their U.S. citizen children.  They especially overstate Medicaid benefits by counting U.S. citizen children.  FAIR also relies on old data for the amount claimed by illegal immigrants in Child Tax Credits that overstates the 2015 number by $800 million.  Adjusting downward welfare benefits consumed by eligibility rules reduces FAIR’s estimate by $12.3 billion.
  5. On healthcare issues besides Medicaid benefits, FAIR estimates that illegal immigrants consume an amount of healthcare proportional to their share of the population.  This is a vast overstatement in costs.  Overall, all immigrants consume 55 percent less in healthcare dollars per capita than natives.  According to the National Academy of Sciences report on the integration and assimilation of immigrants, illegal immigrants are “less likely than native-born or other immigrants to have a usual source of care, visit a medical professional in an outpatient setting, use mental health services, or receive dental care. (Derose et al., 2009; Pourat et al., 2014; Rodriguez et al., 2009). Per capita health care spending has been found to be lower for all immigrants, including the undocumented, than it was for the native-born (Derose et al., 2009; DuBard and Massing, 2007; Stimpson et al., 2010).”  Adjusting for lower immigrant per capita health care spending by 55 percent lowers FAIR’s estimate of the uncompensated hospital expenditures, Medicaid births, and Medicaid fraud costs on all levels of government by $13.9 billion.
  6. FAIR also undercounts the tax revenue generated by illegal immigrants.  The first and most egregious undercount is that they ignore how increased housing demand raises the value of all real estate per county which also raises property tax revenue.  According to research by economist Jacob Vigdor, each immigrant raises the value of all homes in their county by 11.5 cents.  The average immigrant also lives in a county with 800,000 housing units.  The locations of illegal and legal immigrants are closely correlated so we can assume that the typical illegal immigrant also lives in a county with 800,000 housing units.  If the typical illegal immigrant increases the value of all housing unit prices by 11.5 cents, then illegal immigrants increase nationwide housing values by about $1 trillion.  Using the 1.15 percent average annual property tax rate, the increase in housing values created by illegal immigrants results in $12.2 billion in additional tax revenue.  Adjusting for the extra property taxes paid by property owners as a result of illegal immigration boosting housing values increases tax revenue by $11.2 billion over FAIR’s estimate.
  7. FAIR also ignores the incidence of taxation when it comes to calculating their Social Security and Medicare contributions.  In law, employers and employees are supposed to evenly split Social Security and Medicare contributions but the reality is more complicated.  A recent literature survey on the incidence of taxation for social programs found that workers pay for 66 percent of all Social Security and Medicare taxes through lower salaries.  Thus, 66 percent of all contributions to those programs are actually paid by the workers.  FAIR also made a mistake.  They claimed that the worker and employer each pay a 2.9 percent tax rate for Medicare when, in reality, the worker and the employer each pay 1.45 percent.  Correcting for FAIR’s error, adjusting for the actual tax rate for Medicare, and including the incidence of taxation boosts illegal immigrant tax revenue by $6.2 billion.  If you include all of Social Security and Medicare taxes paid as a result of illegal immigrant employment, even if employers do pay the actual cost, then it would increase their tax contributions by $18.5 billion
  8. FAIR probably undercounts sales tax revenue.  I write “probably” because one of the sentences on page 54 of their report does not make any sense grammatically or mathematically.  About 30 percent of personal income is spent on sales-taxable goods.  The average combined state and local sales tax rate was 6.44 percent in 2016 but adjusting for states where illegal immigrant live according to FAIR’s estimate, it is 7.6 percent.  FAIR claims that illegal immigrants keep $28,800 in pay after remittances.  Adjusting sales tax revenue for the tax rate and the amount of income spent on taxable goods increases illegal immigrant sales tax revenue by $1.6 billion over  FAIR’s estimate.

Merely using the actual numbers in a correct way reduces FAIR’s estimates fiscal cost of illegal immigrants from $116 billion to $3.3 to $15.6 billion – and that doesn’t even touch their flawed static approach to counting how illegal immigrants impact the economy. 

FAIR’s Methodological Errors

FAIR’s biggest methodological error is that it does not consider the extra economic activity generated by illegal immigrants that would not occur otherwise.  The tax revenue collected through that extra activity cannot be adequately measured by looking at IRS forms but must include the taxes paid by U.S. citizens who also have higher incomes as a result.  Since the economy is not a fixed pie, removing millions of illegal immigrant workers, consumers, and business owners would leave a gaping economic hole that would reduce tax revenue.  The authors of the FAIR study concocted their own methodology that is uninfluenced by the vast empirical, theoretical, and peer-reviewed economics literature that estimates the fiscal cost of immigration. 

The authors in that literature find that there are three main ways to estimate the fiscal impact of immigration. The first method is by using macroeconomic models—variants of general equilibrium models—to predict the economic effects of immigration relative to a pre-immigration trend line, additional tax revenue, and additional government expenditure. The second is through generational accounting that pays particular attention to the government’s intertemporal budget constraints. The third is through a net transfer profile that starts with a static accounting model in a base year and then builds a lifecycle net transfer profile for individual immigrants. These are only quasi-rigid categories with the possibility of mixing and matching certain characteristics of each methodology, but each one has its own benefits, drawbacks, and several studies that employ each method, sometimes mixing them.  FAIR does not use any of these approaches in constructing their fiscal cost estimate.

The recent National Academy of Science (NAS) study on the fiscal and economic cost of immigrants accounts for the temporal nature of tax revenue and government benefits (people pay taxes at certain parts of their lives and consume more in benefits in others).  In order to properly account for the temporal nature of taxes and expenditures requires reducing the lifetime value of both and discounting it to the present value.  NAS table 8-14 does just that for federal, state, and local governments (displayed in Figure 1).  That Figure does not include public goods like national defense which is unaffected by illegal immigrants (the U.S. states does not require another aircraft carrier if there are 50 million more immigrants here). 

Based on the age of arrival and education, immigrants with less than a high school degree who entered before their 24th birthday pay more in taxes than they receive in benefits.  Illegal immigrants are potentially even better for public budgets in the short run because their consumption of government benefits is more curtailed than their tax payments (including the incidence of taxation) due to their legal status.  Illegal immigrants do not likely consume more in tax benefits than they pay in taxes but, if they do, the figure is small. 

Figure 1:  NPV Fiscal Impact on Federal, State, and Local Government, CBO Long-Term Budget Outlook, by Age at Entry and Eventual Education.  Source: NAS Table 8-14.

Age at Entry Less than HS HS Only Some College Bach More than Bachelors 0-24 $35,000 $239,000 $401,000 $495,000 $446,000 25-64 -$225,000 -$42,000 $157,000 $504,000 $994,000 65+ -$257,000 -$164,000 -$155,000 -$160,000 -$100,000

 

Conclusion

FAIR’s report argues for increased immigration restrictions as a way to address the federal budget deficit.  However, it relies on poor methodology and contains numerous errors that undermine its credibility.  Many years ago, I wrote a criticism of an earlier version this report by FAIR.  It’s disheartening to see that this later version written by different authors is even more sloppy and makes more errors than the older version.  The immigration debate deserves higher quality research than this recent FAIR report.      

We hear a lot about book “banning,” especially when “we” maintain Cato’s Public Schooling Battle Map, but probably lots of other people hear it, too. Indeed, it just so happens that we are in Banned Books Week right now, an event that highlights challenges to books stocked by public libraries, including in public schools. But what is suddenly getting attention is not the Week, but a Cambridge, Massachusetts public school librarian rejecting a bunch of Dr. Seuss books that First Lady Melania Trump selected the district to win. Which raises two questions: Is it not just as much “banning” when public librarians choose not to stock books as when parents or citizens ask that those already stocked be removed? And isn’t it a threat to basic freedom to have librarians or anyone else decide for taxpayer-funded institutions—government institutions—what constitutes acceptable art or thought?

The first answer is of course it is just as much “banning” for public institutions to reject books in the first place as to remove them later on. The ultimate result is the same: not making a book available for the public to borrow. Of course, this is not really banning, which would be to prohibit people from reading a book at all—making it illegal to purchase or possess—not refusing to let people borrow it for free. But if people want to misapply the term, they should misapply it equally.

Which takes us to the root problem: Public institutions force all taxpayers to fund decisions by other people about what books are valuable, or age appropriate, or just plain morally upright. We are forcing them to fund someone else’s speech and opinions, even if they find that speech or those opinions offensive, or just wrong, and even if their views are rejected.

Look at the Cambridge situation. Librarian Liz Phipps Soeiro’s letter rejecting the haul of Seuss books was intensely political—itself a huge problem for someone speaking in an official capacity—but she also condemned the Seuss books themselves. “Another fact that many people are unaware of is that Dr. Seuss’s illustrations are steeped in racist propaganda, caricatures, and harmful stereotypes,” she wrote. “Open one of his books (If I Ran a Zoo or And to Think That I Saw It On Mulberry Street, for example), and you’ll see the racist mockery in his art.”

Perhaps this is a unanimous opinion among people in the Cambridge school district—we know it wouldn’t be if expanded to Springfield, MA—and if so, okay. But if there is just one taxpaying dissenter who does not believe that Seuss’s work is racist, or who believes that his or her kids should grapple with racist works, or who just thinks Seuss is good literature worth reading, this person has essentially been rendered unequal under the law. He or she is forced to pay, someone else decides what is moral or appropriate.

Of course, barring the invention of infinite shelf space—actually, we call that the “Internet”—someone has to decide what is or is not stocked in libraries. At least for education, that is a reason that school choice is essential, especially through tax credit programs in which people choose whether, and for whom, to fund scholarships. With such programs no one is forced to fund or be subject to other people’s decisions about what is moral or age appropriate. It ends the government gatekeeper role, and lets no one impose a “ban” on anyone. It is exactly what justice and freedom demand.

The Republican tax framework released yesterday was generally excellent. However, it appears to include a sneaky and invisible tax hike. The framework “envisions the use of a more accurate measure of inflation for purposes of indexing the tax brackets and other tax parameters.”

The individual income tax is indexed for inflation, meaning that the dollar split points between the rate brackets and other parameters are set to rise a bit each year. Without those adjustments, Americans would lose ground to the government over time, as more of their income would be taxed at higher rates due to the general rise in prices.

Current indexing is based on the Consumer Price Index (CPI). The CPI overstates inflation somewhat, so some analysts have suggested switching tax-code indexing to chained CPI, which produces a lower inflation measure.

If Republicans indexed the tax code to chained CPI, the government would receive an automatic tax increase relative to current law every year until the end of time. The Tax Foundation has a brief on the issue here.

Switching tax-code indexing to a lower measure of inflation is a bad idea for two reasons:

  • It would generate a substantial tax increase over time, and it would be an invisible increase because there would be no tax-filing changes for people to notice.
  • It would be an anti-growth tax increase because it would push people into higher brackets more quickly over time, subjecting them to higher marginal tax rates. The chained CPI proposal is essentially a proposal to slowly and steadily increase marginal tax rates.

Some economists may argue that the chained CPI proposal is a good idea because the tax code would more accurately reflect inflation, and it would. However, the tax code already contains a bias that pushes people into higher tax brackets over time, called “real bracket creep.” Real growth in the economy steadily moves taxpayers into higher rate brackets, since the tax code is indexed for inflation but not real growth.

Long-range projections from the Congressional Budget Office reflect substantial increases in taxes over time from real bracket creep. The agency notes:

… if current laws remained generally unchanged, real bracket creep would continue to gradually push up taxes relative to income over the next three decades. That phenomenon occurs because most income tax brackets, exemptions, and other tax thresholds are indexed only to inflation. If income grows faster than inflation, as generally occurs when the economy is growing, tax receipts grow faster than income.

So, I’ve got a better idea than indexing the tax code to a “more accurate measure of inflation,” as Republicans are suggesting: indexing the tax code to nominal GDP growth. That would adjust for the effects of both inflation and real economic growth on tax-code parameters, and it would prevent stealth tax-rate increases under our graduated income tax system.

More on tax reform here, here, here, here, here, and here.

The Economic Freedom of the World: 2017 Annual Report is out today. Co-published in the United States by the Fraser Institute (Canada) and the Cato Institute, it continues to find a strong relationship between economic freedom on the one hand, and prosperity and other indicators of human well-being on the other.

The United States ranks 11 out of 159 countries, indicating a slight improvement recently in its rating, but its economic freedom remains far below what it was in the year 2000, when it began a long decline. Since 1970, the index has typically ranked the United States among the top four countries. The top countries in this year’s report are Hong Kong, Singapore, New Zealand, Switzerland and Ireland. The least economically free countries are the Republic of Congo, the Central African Republic, and Venezuela.

There is an important innovation in this year’s report: it takes into account inequality in the economic freedoms enjoyed by men and women. Some countries don’t afford women the same level of such freedoms as men, so the index, for the first time, adjusts for these disparities. In her chapter, Rosemarie Fike explains the data and methodology that she used to create a gender disparity index, one that was then used to adjust the economic freedom ratings.

Most countries are only slightly affected (or are not at all affected) by the gender adjustment on the index. However, some 20 countries saw notable changes to their scores. Qatar, Bahrain, and the United Arab Emirates, for example, dropped significantly in the index. Over time, the world has seen shifts in the unequal economic freedoms of men and women. The overall level of gender disparity in economic freedom in the world has decreased since 1970. Women are enjoying more economic freedom than before. The locus of inequality has also changed. From 1970 to 1990, African countries dominated the list of nations with the worst gender disparity scores; since 1995, countries in the Middle East and North Africa now dominate that list. Another finding: the greater the level of economic freedom, the more likely that men and women will receive equal legal treatment.

Another chapter looks at the relationship between economic freedom and anti-immigrant populist parties. Although it is often asserted that globalization is causing much of that populist sentiment, authors Krishna Chaitanya Vadlamannati and Indra de Soysa find that countries with lower levels of economic freedom and higher levels of state welfare spending see more support for nativist, populist parties. It appears that some of the policies intended to provide social protection from the market might be encouraging populist politics.

Read about those and other findings in the new report here

The Merchant Marine Act of 1920, commonly known as the Jones Act, is impossible to defend with a straight face. The Act requires that all people and goods travelling from one U.S. port to another be carried on U.S. owned, flagged and crewed ships. The rationale usually offered these days in support of the Act is that it protects American jobs, and that our military needs to have a fleet of ships it can borrow in case of some sort of emergency. Neither can be taken seriously.

For starters, the Jones Act probably costs us jobs. The high shipping costs engendered by the Jones Act encourage businesses to ship more things via rail or truck. Where that’s not possible (as with Puerto Rico), it incentivizes businesses to import goods, rather than buy from a domestic customer and pay the prohibitively expensive toll the Jones Act imposes. In either case, fewer jobs result.

The Act makes it cheaper for U.S. livestock farmers to buy grain from overseas than from American sources, and forces states such as Maryland and Virginia to import their road salt rather than buy it from Ohio. The East Coast of the U.S. cannot afford to get lumber from the Pacific Northwest. And shipping oil from Texas to New England costs about three times as much as shipping it to Europe.

The Jones Act survives because it’s hard for people to see what it costs them. As long as constituents aren’t complaining, politicians are happy with the status quo - especially since ship builders will write big checks to anyone willing to protect the Act. 

The recent relaxation of the Jones Act for Puerto Rico has the potential (albeit slight) to change this calculus, but since it is scheduled to only last for ten days, the residents of this island won’t see how much they could potentially save from not having this burden. 

And those savings would be immense: In a study I recently did with Russ Kashian, we estimated that U.S. consumers would save billions of dollars if we got rid of the Jones Act. And places like Puerto Rico, Hawaii and Alaska would benefit most of all, since they are overly dependent upon shipping prices.

However, as those are only two low population states and a territory with no voting representation, their inconveniences won’t resonate much with Congress. 

In the wake of this month’s hurricanes that pummeled the Gulf states and Puerto Rico, an archaic piece of U.S. corporate welfare is coming under much-needed scrutiny.

The Merchant Marine Act of 1920, better known as the Jones Act, requires that all people and goods transported by water between U.S. ports be transported on U.S.-built ships, with U.S. owners, registered and sailing under the U.S. flag, and crewed by U.S. citizens or permanent residents. The law originally was justified as ensuring a robust U.S. merchant marine in wartime, but it really is (and probably always has been) a cynical sop to American shipbuilders, shipping companies, and (ostensibly) their employees because it gives them an oligopoly that allows them to charge higher prices. Policy analysts have long understood this; for instance, a 1991 Regulation article by Federal Maritime Commission member Rob Quartel chastised the law for creating “America’s Welfare Queen Fleet.”

Traditionally, Jones Act criticism has focused on its financial harm to American consumers. One recent estimate is the law results in higher prices totaling $1.8 billion a year, which is about $5.50 for each American man, woman, or child. But now there’s growing evidence that it also exacts a cost in human lives.

In the new issue of Regulation, North Carolina State University economist Thomas Grennes argues that, because American-built vessels are significantly more expensive than comparable ships built elsewhere, American shipping companies operating under the Jones Act delay replacing their older vessels. As a result, American-flagged vessels are nearly three times older on average than comparable foreign vessels. International data show that as ships age, they become more dangerous for their crew. Indeed, the 2015 sinking of the El Faro, a Jones Act vessel, raised troubling questions about the law’s role in the deaths of the ship’s 33-member crew.

Now, the Gulf hurricanes are showing another deadly aspect of the Jones Act.

As President Trump recently noted, “you can’t just drive” truckloads of emergency and rebuilding supplies and workers to Puerto Rico; they must be transported by plane and boat. That desperately needed relief is dramatically slowed and made more expensive by the Jones Act’s artificial barrier on what ships can move supplies from the U.S. mainland to the stricken island—and what ships do carry those supplies must be diverted from other transport work between U.S. ports.

The White House recently temporarily suspended the Jones Act for emergency supplies heading to the ravaged Gulf states, using a provision intended for national defense purposes. Now the Trump administration is being asked to do the same for Puerto Rico.

But instead of temporarily suspending the law under a dubious “defense” claim, Congress and the White House could simply repeal it. After all, pointless corporate welfare shouldn’t be opposed just during emergencies.

Legislation to end the Jones Act could be drafted quickly and easily; for a rough draft, lawmakers could use Sen. John McCain’s 2015 effort to repeal the law. The new bill could then be brought directly to the floors of the House and Senate for approval, and then taken to the president for his signature. 

Given congressional leaders’ statements of concern for the people of Puerto Rico, and given the Trump White House’s vows to pare back unjustified regulations and “drain the swamp,” repeal of this harmful piece of corporate welfare should be a slam dunk. Unless, of course, lawmakers have different priorities than helping consumers, protecting sailors, and aiding the desperate people of Puerto Rico.

Dormant for a while, the debate over India’s demonetization program of last fall has been revived by new evidence. The new evidence on note returns and GDP vindicates the critics, and has the defenders in strategic retreat.

To recap: On November 8, 2016, India’s Prime Minister Narendra Modi shocked the nation by announcing the immediate “demonetization” of the two largest rupee currency notes (Rs 500, worth about $7.50, and Rs 1000, worth about $15). Noteholders would have only 50 days to turn them in for new Rs 500 and Rs 2000 notes. The move, Modi promised, would sharply penalize holders of unaccounted “black money,” namely tax evaders, bribe-takers, professional criminals, and terrorists. Their currency hoards would become worthless — a welcome one-time wealth loss — or they would expose themselves to detection by trying to swap or deposit large batches. Anyone depositing a large sum in old notes would face scrutiny by tax authorities.

In order to keep the move a surprise (the better to catch the black money holders), new notes to replace all the discontinued notes had not been printed in advance. The cancelled notes represented 86% of the currency in circulation, and more than half of M1 (currency plus checking deposits), India having a highly cash-intensive economy with half the population unbanked. As criminals were far from the main users of currency, the impact was unavoidably felt well beyond the black-money set. A serious currency shortage immediately arose, with predictable consequences. Honest wage laborers in the huge cash economy went unpaid, honest construction projects came to a standstill, honest shopkeepers saw sales dry up, and honest businesses failed. Honest people wasted billions of hours waiting in queues to exchange old notes for the trickle of new notes.

As Shruti Rajagopalan and I noted in November last year, there was also a fiscal angle: for every billion of old rupee notes not turned in (for fear of being scrutinized), the government could issue a replacement billion and pocket it as one-time seigniorage revenue. For example:

if 20% of the old notes are never turned in, the government’s revenue windfall is up to Rs 2.9 trillion ($42.5 billion).

The destruction of the private wealth of non-redeeming old-note holders, combined with the revenue windfall to the government, makes the currency policy effectively a large capital levy, a massive one-shot transfer of wealth from the private to the public sector.

We speculated: “The wealth transfer to government may help to explain Prime Minister Modi’s enthusiasm for the currency cancellation and re-issue, despite its likely ineffectuality against black money.”

Economically literate defenders of demonetization have been fewer than critics. The most prominent defenders have been the well-known trade economist Jagdish Bhagwati of Columbia University together with his former students Vivek Dehejia and Pravin Krishna, and with his Columbia colleague Suresh Sundaresan.

In a December 2017 piece in the prominent Times of India, Bhagwati, Krishna, and Sundaresan (hereafter BKS) praised the demonetization program as “a courageous and substantive economic reform that, despite the significant transition costs, has the potential to generate large future benefits.” BKS recognized that “the process is inconvenient, and subjects many households to hardships,” but thought it worthwhile for “potentially increasing transparency and expanding the tax base and revenues to the government from taxes and surcharges.” The fiscal angle was foremost: since “unaccounted deposits will be taxed, this will yield a windfall for the government permitting large increases in social expenditures.” In addition, it would promote a “switch into digital transactions” and “put a major dent in counterfeiting.”

In an Op-Ed published on December 27, Bhagwati, Dehejia, and Krishna (hereafter BDK) defended the demonetization program entirely on the grounds that it would impose an effective capital levy. It was, they wrote, “a policy designed, in effect, as a one-time tax on black money.” They noted that the government’s revenue gain would not come just from replacing unreturned notes. Under “voluntary disclosure” rules promulgated after the initial announcement, depositors of old notes who acknowledged their holdings as illegitimate would also pay: “deposits of unaccounted money will be taxed at 50% — with a further 25% taken by the government … as an interest-free loan for a period of four years.” Thus there would be a one-time fiscal gain to the government not only from notes never returned, but also from notes returned under such terms.

BDK proposed the size of the revenue gain as a sufficient criterion for judging the success of the program: “at least from the perspective of its effectiveness in dealing with the black money issue, success has to be measured by the sum of tax revenue generated [from the 50% tax on acknowledged black deposits] and black money destroyed [i.e. revenue from replacing unreturned notes].” For the sake of illustration, they supposed (calling it an “estimate”) “that one-third [Rs5 trillion] of the approximately Rs15 trillion in demonetised notes is black money.” Then if by the end of the turn-in period “Rs1 trillion is unreturned, as is believed, and we further assume that only half of the remaining Rs4 trillion of black money that is returned falls within the tax net, the net gain works out to Rs1 trillion of black money destroyed and 50% times 2 trillion = Rs1 trillion in tax revenue.” With such a total fiscal gain of Rs2 trillion, “the government could reasonably claim this as a successful outcome.”

In a commentary on the BDK piece, Rajagopalan and I pointed out that, from the economist’s point of view, the costs of any measure must be taken into account before judging it worthwhile or efficient. What matters is effectiveness per unit cost. Unlike the earlier BKS piece, BDK had simply neglected the costs incurred in collecting revenue or suppressing black money through demonetization. We noted a think tank’s estimate of Rs. 1.28 trillion in losses during the transitional period from expenses of printing new notes, lost income of those waiting in queues, additional costs to banks tied up with exchanging currency, and (the largest item) lost business sales due to the currency shortage. It was then too early to replace the estimate of lost business with measured effects on GDP, but we noted that one percentage point of lost annual growth equals Rs1.45 trillion. These costs need to be set against the revenue. Even if the revenue were as high as Rs2 trillion, collecting it at a deadweight cost of 64% or more would be a very bad bargain.

Doesn’t it matter that the transfer in this case is coming from bad actors whose welfare one may disregard? No. In the above reckoning, as in standard tax analysis, the pure wealth-transfer losses of taxpayers don’t figure in the deadweight loss calculation, which only counts the costs associated with extracting the transfer.

BDK had noted in passing the argument “that the short- to medium-run economic impact post 8 November will be contractionary” due to a “temporary liquidity shortage induced by an insufficiently fast replacement of old notes with new notes.” But they dismissed on theoretical grounds that “this is not necessarily the only outcome possible.” Government could avoid a currency shortage by promptly providing new notes, they reckoned. This was a very odd line to take seven weeks into demonetization, given that the government was not in fact providing new notes sufficiently fast, and when the evidence of currency shortage was plain to see. Alternatively, they proposed, hoarded currency could come out from under mattresses, be deposited in banks, and actually expand M1 “via the classical money multiplier.” This was an odd line to take given that expansion of deposits (even should it happen) would not remedy the currency shortage being suffered by the unbanked half of India’s population.

In March 2017, Bhagwati was quoted by the Indian newspaper Firstpost making the surprising claim in an email interview that demonetization had actually promoted economic growth: “On the effects of demonetisation on growth, I should say that I was the one economist who had argued (with my co-authors), from first principles, that demonetisation would increase, not diminish, growth. And that is exactly what appears to have happened.” The factual basis for saying that it appeared to have happened was not clear.

In a March 30 piece, BDK cited a new 2016Q4 GDP report as showing that GDP had suffered “only a modest dip … of roughly half of a percentage point” below pre-demonetization projections. This was not an increase in growth. But they counted it a victory compared to “the economic disaster that the critics had imagined.”

The debate over demonetization was revived this month (September 2017) after the Reserve Bank of India finally announced the count of returned currency. It announced that 99 percent of the discontinued notes, Rs 15.28 trillion out of Rs 15.44 trillion, had been returned. As Vivek Kaul has noted, “The conventional explanation for this is that most people who had black money found other people, who did not have black money, to deposit their savings into the banking system for them.”

The trivial size of unreturned currency of course obliterates BDK’s projection of a government seigniorage windfall.

What about BDK’s other projected source of revenue, the 50% tax on acknowledged black deposits? Whereas in BDK’s scenario, black currency holders would make Rs2 trillion in voluntary-disclosure deposits, which would yield Rs 1 trillion in revenue, the actual collections under the scheme were reported in April at Rs 23 billion, or 2.3% of the BDK-imagined sum. Such paltry revenues mean that demonetization, from the fiscal perspective, was all pain and no gain.

The accumulating evidence on economic growth, meanwhile, has become damning. Between July and September 2016, India’s GDP grew 7.53 percent. Between January and March 2017 it grew 5.72 percent. Former head of the Reserve Bank of India Raghuram Rajan, now returned to the University of Chicago, links the drop to demonetization: “Let us not mince words about it — GDP has suffered. The estimates I have seen range from 1 to 2 percentage points, and that’s a lot of money — over Rs2 lakh crore [i.e. trillion] and maybe approaching Rs2.5 lakh crore.” Kaul adds that GDP does not well capture the size of the informal cash sector, where the losses from demonetization were greatest.

In response to the RBI report and GDP data, and to their credit, BDK have substantially retreated from claims of success to what can be regarded as the claim that there is still a chance to break even. They have recently written:

First off, it must be conceded that if demonetisation is to be judged narrowly on the basis of the triple rationale originally advanced … , it would at best be unclear if it could be accounted a success. For, little black money was literally “destroyed” and there is scant evidence that the policy had much if any impact on counterfeiting or terror finance.

Although they acknowledge that they “overestimated the quantum of black money that would ultimately be unreturned” and thus overestimated the seigniorage gain, they still contend that the “money deposited into bank accounts can also generate fiscal gain, as these will invite the scrutiny of tax officials.” For about two-thirds of the deposits of old currency by value, even though no admission was made and thus no 50% tax was paid, the sums deposited were large and “are mostly open to scrutiny by tax officials.” Thus it is conceivable that tax investigators may eventually squeeze taxes and fines out of them, and it is premature to rule this out.

Conceivable, but unlikely. The investigatory capacity of the tax authority is finite and it already has its hands full, as Vivek Kaul spells out in detail.

BDK concede: “Should, however, the government fail in identifying and taxing black money deposits in any significant quantity, we can all conclude that demonetisation will have failed in achieving its primary goal.” Welcome as this reasonable concession is, the converse does not follow: whether even significant eventual revenue counts as success depends on how it compares to the sizable costs of demonetization. A deadweight burden of less than 100% seems highly unlikely.

BDK add an odd coda. They acknowledge transition costs in the program actually followed, but suggest that it could have been otherwise:

in principle, had demonetisation occurred without transition costs — for instance, if old notes could have been seamlessly converted or deposited within a few days after 8 November, or if demonetisation had been pre-announced to occur with a lag, allowing time for an orderly remonetisation — there could only have been largely upside gain without any downside cost.

It is hard to square this with BDK’s earlier statements that demonetization without secrecy would have been pointless because it would not have caught out the black money holders. Are BDK saying that if the aim had been merely to introduce new notes with better anti-counterfeiting features, the Modi government’s demonetization program was an unnecessarily costly way of doing it? Well yes, the critics have said that all along. High transition costs were a feature and not a bug of the dramatic scheme to penalize black money by surprise.

[Cross-posted from Alt-M.org]

One federal statute says that Rony Estuardo Perez-Guzman, who claims refugee status, isn’t eligible for asylum. Another one says that he is. Whose duty is it to reconcile this glaring legislative contradiction, and how should it be remedied?

Mr. Perez-Guzman fled to the United States to escape violence and persecution in Guatemala. He was stopped by border patrol agents and deported, but reentered the United States because he still feared for his life. The asylum statute (8 U.S.C. § 1158) guarantees the right of “any alien … physically present in the United States … irrespective of such alien’s status” to apply for asylum. The reinstatement statute (8 U.S.C. § 1231) states that an individual who has previously been removed from the United States “may not apply for any relief under this chapter” (which includes asylum). The U.S. Court of Appeals for the Ninth Circuit held that the two statutes conflict—so far so good—and are therefore are ambiguous, which is where the judicial mischief starts. A finding of statutory ambiguity often leads courts to simply defer to administrative agency interpreting the statute, which here means the Justice Department refused to let Perez-Guzman apply for asylum.

Perez-Guzman has petitioned the Supreme Court to review his case. Cato has filed an amicus brief supporting that petition and challenging the lower-court holding that statutory conflict triggers Chevron deference (named after the 1984 Supreme Court case that created the doctrine).

Chevron deference provides that courts must defer to administrative agency interpretations of the authority granted to them by Congress (1) where the intent of Congress is intentionally ambiguous and (2) where the interpretation is reasonable or permissible. The Court has curtailed Chevron by carving out important limitations, which mean that Chevron deference will not apply without an implicit congressional delegation for an agency to “fill in the gaps” in ambiguous statutory language.

The notion that Congress intentionally drafts ambiguous language so an agency may interpret that language as it sees fit is itself suspect as a matter of the separation of powers: our Constitution doesn’t allow a delegation of legislative power to the executive. But the notion that Congress commits that same folly by drafting directly conflicting statutory language is ludicrous.

The Administrative Procedure Act mandates that courts interpret statutory provisions and determine the applicability of agency actions; it attempts to reinforce the importance of the separation of powers. Chevron asks us to forget all about it. Expanding the doctrine further, to incorporate not just ambiguous statutes but conflicting ones will further erode the rule of law.

If the Court wants a way to resolve these conflicting statutes, it should look to the “rule of lenity.” It provides that in construing ambiguous criminal statutes, courts should resolve the ambiguity in favor of the defendant. The rule is also applied in deportation statutes. It reflects the fundamental principle that Congress must speak clearly if it wants to impose on an individual an especially severe deprivation of liberty—which deportation most assuredly is. When removal from the country is at stake, courts shouldn’t defer to an agency interpretation that commands a greater infringement on liberty than a statute requires (however restrictive or expansive that statute may be).

The Supreme Court should review Perez-Guzman v. Sessions, restore the balance of constitutional power, and reclaim the judiciary’s authority to say what the law is.

The Trump administration and Republicans in Congress have released a framework for tax reform legislation that they hope to pass in coming months.

There were few surprises in the framework. The pro-growth elements that party leaders have championed for months are there, including: 

  • Cutting the corporate tax rate from 35 to 20 percent.
  • Cutting the top rate for businesses that pay under the individual code from 40 to 25 percent.
  • Expensing business equipment purchases.
  • Replacing the worldwide corporate tax system with a territorial system.
  • Repealing the estate or death tax.
  • Repealing the individual and corporate alternative minimum taxes.
  • Simplifying the individual tax rate structure to 12, 25, and 35 percent.

The other main tax cut in the plan is a doubling of the standard deduction, which would not do much for growth but would simplify the system.  

The framework suggests that reforms may impose a higher individual rate than 35 percent “to ensure that the wealthy do not contribute a lower share of taxes paid than they do today.” But why shouldn’t high-earners pay less tax? They pay a hugely disproportionate share of federal income taxes today, and they generally have the most dynamic responses to tax cuts.

High-earners generally add more to economic growth than other taxpayers. They are investors, executives, doctors, and other highly skilled individuals. Basic theory indicates that it is the highest tax rates that do the most economic damage. Indeed, tax damage rises rapidly as tax rates rise. If Congress is going to cut any individual tax rates, it should cut the highest rates.

That said, the most important goal for tax reform right now is to cut the corporate tax rate, and the GOP framework moves boldly in that direction. High corporate tax rates reduce capital investment, and that ultimately suppresses wages and opportunities for U.S. workers.

On the whole, the GOP is on the right track. Now they need to really hustle and move specific legislation through Congress and finally deliver a reform plan to the president’s desk.

Some recent comments on tax reform are here, here, here, here, and here.

A week ago Walter Olson noted, quoting the Washington Post, that

D.C. lawmakers are preparing to take a break from further beefing up labor standards [in] an abrupt shift for a city whose leaders have been in the vanguard of the national campaign for workers’ rights….

“Businesses like certainty, and if we’re constantly changing the tax burden or the tax environments, or constantly changing the regulatory burden, then it becomes more difficult to do business in the District,” said D.C. Council Chairman Phil Mendelson (D), who has proposed a moratorium through the end of 2018 on bills that would negatively affect businesses.

Meanwhile, at the very moment that councilmembers are promising to stop adding new burdens to businesses and job creation, the Council is debating a new rule that would require employers who offer their workers free parking to offer that same benefit—in cash—to workers who want to walk, bike, or ride public transit to work instead.

“This bill would be easy to implement,” says one bike commuter, “because it builds on DC’s Commuter Benefits Law, which requires all employers with 20 or more employees to provide them with the option to use their own pre-tax money to pay for transit.” Easy for the regulators, anyway. Maybe even easy for business HR departments, since “the systems employers already have to make” for other mandated benefits can be adjusted. But each new mandate requires some new learning for HR officers, some effort to notify employees, some adjustment to the payroll software. Those burdens add up.

Not to worry, though! Businesses might even save money under this proposed new mandate:

Proponents point out that the bill could even wind up benefiting employers in the long run. According to the World Resource Institute, converting a non-active employee into a bike commuter saves $3,000 in employer health care costs and reduced absenteeism.

Critics insist that corporations are greedy, crafty, always focused on the bottom line. And yet they believe that there are all these free lunches—these $20 bills lying on the sidewalk waiting to be picked up, as economists say—that businesses are just missing. Just maybe, when businesses oppose new regulations, they have a better sense of their costs and opportunities than councilmembers and activists do.

D.C. currently has an unemployment rate of 5.9 percent, higher than the national average of 4.4 and much higher than the D.C. metropolitan area rate of 3.9 percent. If the Council would like to see some of those suburban jobs move into the District, it might consider reducing the burdens on business. 

Want to increase college-going while saving some dough? Scholarship tax credit programs may be for you, or so indicates a new report from the Urban Institute.

The report, from co-authors Matthew Chingos and Daniel Kuehn, finds that the low-income students who enrolled in private schools via the Florida Tax Credit scholarship program were about 15 percent—or 6 percentage points—more likely to enroll in college than statistically matched public school students. The effect was greater the longer kids were in the program. There was also a small, more tenuous positive effect on associate degree attainment for scholarship users. Topping it all off, while cost was not the focus of the report, the authors note that the superior outcomes were achieved at a saving to the state: “The positive effects are noteworthy in light of the evidence that the FTC program more than covers the foregone tax revenue through reduced spending on the public schools many participants would have attended.”

There are, of course, important caveats to the findings. First, this was not a random assignment study, so unobserved characteristics such as differing degrees of motivation between scholarship users and matched public school students could not be well controlled for. Next, the study only looked at students entering Florida public colleges, though this might have underestimated the program’s positive effects due to low-income private school students tending more to attend private or out-of-state colleges than their public school peers. Finally, there is good reason to question whether credentials represent much increase in real, useful, learning.

Even with these caveats, this is clearly encouraging evidence for school choice. Alas, some of the early media reports about the study seem to want to temper it with mentions of a few recent choice evaluations, focused on standardized test scores, that have not been so hot. Of course, those studies have important caveats too, but more important, the articles I have seen about the Urban report have mentioned the recent spate of negative reports while ignoring the many positive studies that preceded them. Fortunately, the Urban authors give readers one more useful nugget, noting, “Until recently, this research showed neutral to positive effects of private school choice on student achievement.”

The choice debate will continue, but most of the evidence remains on the side of freedom.

The “big news” from Janet Yellen’s recent press conference, which was hardly news at all to those who have followed the Fed’s past announcements, was that Fed officials, having long promised to eventually undo much if not all of the vast balance sheet growth brought about by the Fed’s various QE operations, and having delayed paying the piper for as long as pressure from without permitted, are finally about to get started.

But don’t imagine that Fed staff have been idle during the long delay. On the contrary: they spent much of it developing their highly scientific balance-sheet reduction strategy, first revealed back in June. As the Fed doesn’t seem to have given that highly scientific plan a name, I hope I may take the liberty of proposing one. Let’s call it “Operation SNAIL.”

In case you haven’t guessed, the acronym stands for “Stall Now And Inch-along Later.” For if there’s any clear point to the strategy the Fed has chosen, it’s to shrink as slowly as possible — more slowly, even, than it would if it merely allowed maturing assets to passively roll-off its balance sheet.

A purely passive unwind would, to be sure, have been problematic, for it would have meant slimming down at a very uneven pace, with bunches of assets rolling off the Fed’s balance sheet during some intervals, and relatively few rolling off in others.

The Fed has chosen to address only the first of these problems, by placing varying limits or “caps” on the value of assets it will allow to roll-off its balance sheet during any particular month. Starting in October with maximum roll-offs of $6 billion in Treasuries and $4 billion in MBS, it plans to increase the caps by those same amounts every three months for a year, after which they’ll remain fixed at $30 billion for Treasury securities and $20 billion for MBS. Whenever the value of maturing assets of either sort exceeds its assigned cap, the Fed plans to reinvest the difference.

Following this plan it will take until sometime in 2020 for the Fed to slim-down from its current $4.5 trillion in assets to a bit more than $3 trillion, or well over three times its (not exactly svelte) size before the crisis. It’s a diet of sorts, to be sure. But then, so is skipping the cheesecake now and then.

In his Econbrowser blog post on the subject, James Hamilton illustrates the progress of the Fed’s unwind in several nice charts, including the one reproduced below.  Besides showing the slow pace of the unwind, the chart also shows that $3 trillion or so is as low as the Fed is likely to go: by the end of 2020, it’s balance sheet will start swelling once again.

In comparison, were the Fed committed to getting its balance sheet back on its pre-crisis trajectory by the end of 2020,  it would be planning on slimming down by at least another $500 billion, and perhaps by as much as another $1 trillion.

Why So Slow? Why So Little?

Were the Fed’s plan the only way for it to achieve a smooth unwind, its snail-like pace might be justified. But it isn’t: the Fed might easily have provided for a smooth unwind, at a faster pace, by combining higher roll-off caps with occasional active asset sales during low roll-off periods.

And what about the limited extent of its planned diet? Hamilton argues, correctly, that so long as the Fed sticks to its present operating framework, the volume of reverse repos it conducts, as well as the value of Treasury balances held with it, will remain highly volatile, and that it will take “a lot of reserves sloshing around the system to cover that kind of variation.” However, as Hamilton also notes, such changes as would make all that extra cash unnecessary are neither revolutionary nor difficult to implement. Instead, they consist of things like “changing the way it conducts reverse repos, using temporary open-market operations to add or withdraw reserves as needed to offset changes in the Treasury balance, or moving to a true corridor system for controlling interest rates” (my emphasis).

Hamilton’s last suggestion brings us to the true crux of the matter, which is that, despite all its talk of “normalization,” which to the general public means getting back to its pre-crisis ways, the Fed has no intention of normalizing its operating procedures. That is, it doesn’t plan to return to its pre-crisis, zero-IOER “corridor” system, or to any other sort of corridor arrangement. Instead, it wants to keep the (leaky) “floor”-type system it introduced in October 2008. In a floor system, banks are kept flush with excess reserves, and monetary control is exercised, not be adjusting the quantity of reserves so as to achieve a particular equilibrium federal funds rate, but by manipulating the interest rate the Fed pays on banks’ required and excess reserves holdings, alone or along with the Fed’s overnight reverse-repo (ON-RRP) rate. Because an abundant supply of excess bank reserves is a necessary feature of any floor-type operating system, the Fed’s decision to retain such a system is the proximate reason why it’s planning to stay pudgy.

Budget Maximizing Bureaucrats

I wrote “proximate” because the question remains: why is the Fed so hung-up on its post-crisis floor system? If you think the answer is “Because it allows for improved monetary control,” kindly let me know your address and hat size so I can mail you a dunce cap. For far from it being the case that the Fed’s new operating system has proven its worth as a means of overall monetary control, it is largely owing to that system that the Fed has failed for the better part of six years now to hit its two-percent inflation target.

If that failure strikes you as inconsequential, or even desirable, consider that its cause — a flawed monetary transmission mechanism that lacks the usual link between growth in the stock of bank reserves on one hand and growth in the broad money stock on the other — poses the grave risk of a far more spectacular failure the next time we face a substantial decline in the velocity of broad money like the one that struck in 2008. And if you don’t believe that, consider that the Fed’s moneyless (“Portfoli-O-Matic”) transmission mechanism has already had one “stress test” — the one administered between late 2008 and 2015, which it failed miserably, by proving incapable of transforming $3.5 trillion in fresh reserves into more than a few percentage points of NGDP growth, or far fewer than were required to restore that growth to its pre-crisis path.

If successful monetary control isn’t the Fed’s first priority, what is? In a word, fatness itself. That is, the Fed likes having a big balance sheet for the same reason that bureaucracies generally like having big budgets to play with. A big budget translates into more generous salaries, lavish facilities, and, other perks. Most importantly, it enhances to the Fed’s prestige.

And if you don’t think Fed officials care about prestige, you may be entitled to a second dunce cap, because they care very much indeed. According to someone I know who was part of the Fed’s deliberations at the time (but who prefers to remain anonymous for now), “the prestige of the central bank” was the answer he was given when he wondered out loud, before a gaggle of top Fed officials in the 1990s, what the Fed had to lose by dispensing with reserve requirements, as central banks in most other advanced economies had already done by then. It was chiefly owing to this desire to maintain its prestige that the Fed sought then, and has sought ever since, to come up with various schemes for making up for the erosion of demand for its liabilities caused by banks’ resort to sweep accounts.

Because it allows a central bank to expand its balance sheet arbitrarily without unduly altering its overall monetary policy stance, a floor system is a central bank bureaucrat’s dream-come-true. It allows the central bank to vastly increase its size and earnings, ergo its prestige. It also makes it easier than ever for the central bank to effectively buy-off two powerful interests that might otherwise look askance at its aggrandizement, namely, (1) the U.S. Treasury and (2) the banking industry. That the biggest banks and most politically influential banks receive a disproportionate share of the Fed’s interest payments only adds to the scheme’s overall efficacy.

Since the late 2000s, seigniorage passed along from the Fed to the Treasury has almost tripled in real terms. At the same time, the Fed’s expenses, which account for that portion of its earnings that it doesn’t pass on to the Treasury, have also grown substantially, mostly owing to its interest payments on bank reserves. According to The Economist, and as can be seen from the chart reproduced from it below, the Fed will pay out $27 billion in interest this year, and is expected to pay out $50 billion in 2019. Once its planned unwind is complete, the Fed expects to continue paying out about $10 billion a year in interest, which is still a tidy bit of baksheesh.


Source: “Is the Federal Reserve Giving Banks a $12bn Subsidy?” The Economist, March 18, 2017

Cracking Yellen’s Code

If the Fed’s unwinding plan is really based on its determination to maintain its current, bureaucratically advantageous operating system, how did Yellen manage to avoid revealing any hint of this in her recent press conference?  The answer is that she didn’t: the hints are there, as they were in some of Yellen’s past press conferences. Only the hints were so cleverly ciphered that Yellen could be understood to being saying just the opposite of what she was really saying!

Specifically, in reply to questions about the Fed’s future plans for monetary control, Yellen says that the Fed intends to use changes in “the fed funds rate” rather than adjustments to its balance sheet as its chief means of monetary control. This reply could be taken to mean that it won’t be engaging again in Quantitative Easing, and that it plans to return eventually to pre-2008 style fed funds rate targeting. The interpretation squares well, after all, with the Fed’s claim that it is intent on “normalizing” monetary policy.

But that interpretation is wrong. What Yellen’s words really mean is that the Fed plans to keep its current IOER-based operating system going. The changes in the “fed funds rate” to which Yellen refers are really changes to the Fed’s IOER and ON-RRP rates, which define the upper and lower bounds, respectively, of the Fed’s current fed funds rate “target range.” It follows that when Yellen says that the Fed won’t be implementing monetary policy by means of balance sheet changes, she doesn’t just mean that it will no longer engage in post-2008 style Quantitative Easing. She also means that it won’t be making use of conventional (that is, pre-2008 style) open-market operations to influence an otherwise market-determined federal funds rate. All this in turn requires that banks be kept flush with excess reserves, and that the Fed maintain a correspondingly enlarged balance sheet.

How do I know this? Do I have a specially-made Enigma-type machine designed to crack Fed code? I do not. But I have talked to Fed officials, and kept up with Fed publications, and all indications from those support my understanding, as does the theory of bureaucratic behavior to which I referred previously.*

In other words, I might be wrong. But who wants to bet on it?

_________________________

* For example, the New York Fed just recently published a Liberty Street post defending the Fed’s interest payments on required reserves, and promising a follow-up post that will address “the payment of interest on excess reserve balances and discuss some of the benefits to the financial system of operating in a reserve-abundant regime.” The lack of any reference to the costs of operating a “reserve-abundant” regime gives the game away.

[Cross-posted from Alt-M.org]

Today is the 60th anniversary of the desegregation of public schools in Little Rock, Arkansas, a deeply disturbing event for the explosive racism it revealed, but also an inspiring episode for the courage displayed by the children who braved it.

One thing for which it serves as a reminder is that it was public schooling and government generally that for decades forced segregation. Recent attacks against school choice have glossed over this fact, as well as that the absence of choice meant even those who wanted something different were almost certainly hard-pressed to get it.

The anniversary also reminds us that repairing race relations that have been poisoned by centuries of slavery, Jim Crow, and still-present hate, racism, and racial suspicion, is not likely something that will happen quickly—would it were otherwise—including with any kind of public policy panacea. Too much history, too many emotions, and increasingly, diversity that makes race relations more than black and white, are all in play. Which may be another argument for school choice: we need to let myriad educational arrangements be offered because no solution might be right for any two people, much less the entire country. Different individuals—and that is what we are, though race is an often crucial component of our identities—may desire different discipline policies, or curricula, and by allowing numerous arrangements to proliferate we can discover which ideas work best, for whom, without education being a zero-sum, winner-take-all contest.

Alas, the Little Rock 60th anniversary has been eclipsed by President Donald Trump’s remark that National Football League owners should fire players who refuse to stand for the national anthem, resulting, in a few cases, in entire teams this weekend refusing to come out of locker rooms for the singing of the Star Spangled Banner. Perhaps this too offers a lesson in the dangers to race relations posed by government, in this case highlighting how politics can amplify divisions and animosity. What had been an ongoing but relatively calm national debate about some players taking a knee during the anthem to protest what they see as racial injustice in the country exploded into a massive, headline-dominating demonstration by players and owners. This is partly because the current president seems to revel in aggravating people. But anytime a politician comments on something it almost inherently becomes a more political—and politicized—issue, and politics by its nature tends to make people act in ugly and divisive ways.

This, too, suggests that the nation would be better off if we looked not for sweeping government solutions to racial divides, but to the maximum extent possible left it to individual people and communities—to civil society—to do the complex, highly personal work of healing and uniting.

President Trump extended, expanded, and made some important alterations to his earlier executive travel ban. However, the national security justification for the new order is just as weak as for the original order because it could only have prevented nine terrorists who planned domestic attacks, at the maximum, from entering. Since four of the nine terrorists were Iranian students in 1979 who would not have been banned under this order, it’s likely that it would have stopped only five terrorists from entering and saved zero lives if it was applied backward in time.

The Number of Immigrants, Migrants, and Travelers Impacted

Gauging the impact of this new executive order requires looking at the number of foreigners blocked by it. The following calculations are based on the number of visas issued at Foreign Service posts by the State Department in 2016. The number of visas issued by the State Department under this metric is different from the number of those who actually enter and yet still different from the number of actual admissions. The new regulations for Venezuelans only apply to tourists who are related to government officials. There is not a good way to estimate that so Table 1 leaves that category blank for Venezuela. Still, this gives a decent approximation of how President Trump’s new travel ban will impact the flows of immigrants, migrants, and travelers. 

If this new proclamation was active in 2016, it would have halted the travel, migration, or immigration of roughly 66,000 people from these eight countries (Table 1). That’s equal to about 0.6 percent of all visas issued by the State Department at Foreign Service posts in that year. About 58 percent of those blocked would have entered on tourist visas while about 39 percent were immigrants. 

Table 1

Visas Issued by Category/Type that are Banned under the New Executive Proclamation

Country Immigrant Visas Nonimmigrant Visas Total Visas in Banned Categories Chad

40

900

940

Iran

7,727

25,036

32,763

Libya

383

1,445

1,828

North Korea

9

100

109

Somalia

1,797

0

1,797

Syria

2,633

9,096

11,729

Venezuela

0

?

?

Yemen

12,998

3,933

16,931

Total

25,587

40,510

66,097

Source: 2016 Visas Issued by the State Department.

The other way of measuring this is the number of admissions as calculated by the Department of Homeland Security. As a percentage of all admissions in 2015, the last year for which data is available that was not affected by President Trump’s previous executive orders, this new executive order would have stopped 0.04 percent of all admissions—or about 81,306 out of approximately 181,300,000 admissions. In relation to the number of visas issued and admissions, this new order will have a small impact.

Economic Effects

This section uses a simple method to estimate the economic effects of this executive order over the next decade. This method specifically calculates the immigration surplus which is the wage benefits that accrue to native-born Americans as a result of immigration.This only counts the new green card holders and ignores the tourists and economic effects of nonimmigrants. George Borjas estimates the immigration surplus at 0.24 percent of America’s $18.57 trillion GDP, which works out to an average of $1,018.95 in positive wage spillovers per immigrant in 2016.

If the ban continues to block 25,587 green cards each year for ten years then the total loss in wages to native-born Americans would be equal to about $1.4 billion. That’s a small percentage of GDP but it still does not pass a cost-benefit test. Blocking that many immigrants would have to save about 96 lives in thwarted terrorist attacks to be equal to the expected economic damage borne entirely by native-born Americans based on a high $15 million per statistical life saved valuation

Conclusions

President Trump’s new executive proclamation would not pass a cost-benefit test. Foreigners from those countries have killed zero people on American soil in terrorist attacks from 1975 through the end of 2015 and the 96 deaths that would have to be prevented are more than all of the non-9/11 domestic victims of foreign-born terrorism from 1975 through 2015. There are other costs associated with this new iteration of the travel ban such as the continuation of the cut in refugees that also impacts American wages negatively, fewer nonimmigrants, and a falloff in tourism as a result. It’s near-impossible for this to pass a cost-benefit test even when the welfare of immigrants, foreigners, and their American families are taken into account beyond the economic effects.

 

 

 

Senators Tillis (R-NC), Lankford (R-OK), and Hatch (R-UT) today introduced the Solution for Undocumented Children through Careers, Employment, Education, and Defending our Nation (SUCCEED) Act to legalize some DREAMers. After analyzing this bill and performing a residual statistical analysis to isolate DREAMers in the American Community Survey (ACS), this blog estimates that SUCCEED would allow approximately 1.5 million unlawful immigrants eventually to earn citizenship. Our population estimates are close to those of the Migration Policy Institute.

SUCCEED allows DREAMers to legalize if they earn an associate’s degree or higher, enlist in the military, or work for a period. We assume that about half of those with a high school degree and below eventually earn citizenship. 

Using the National Academy of Sciences (NAS) Table 8-14 as a framework, we find that that SUCCEED will boost revenues by about $94.7 billion above expenditures, in net present value, relative to keeping the DREAMers in illegal status along with a steady rate of deportation. These extra revenues would accrue to the federal, state, and local governments. They are 75-year projections discounted at 3 percent as the NAS recommends. This long-term projection and discounting guarantees that the future fiscal costs of entitlements and the descendants of the DREAMers are included. Our estimate is similar to another conducted by the Niskanen Center.

Methods

This figure is calculated by weighting the findings in Table 8-14 of the NAS by the age of entry and eventual education level of DREAMers who would be legalized under SUCCEED. A general finding of the NAS is that the fiscal impact of an immigrant is more positive when he or she is more educated and younger. The NPV fiscal estimate in Table 8-14 is positive for immigrants who arrive between ages 0 and 24 regardless of eventual education level. All DREAMers must have entered the United States before their 16th birthday under the SUCCEED Act so they are fiscally positive. According to the NAS findings.

We estimated the eventual level of education for DREAMers using the ACS by assuming that all those under the age of 25 would eventually be as educated as those aged 25 years or older. This likely undercounts their eventual education level and, hence, their net contribution to the federal budget. We assumed that unlawful immigrants consumed 35.7 percent fewer benefits and paid 10 percent lower taxes than other workers of the same age until 40 years old, based on estimates from Figure 8-21 of the NAS. We picked age 40 as we assumed it would take 15 years for DREAMers to earn citizenship because their current average age is 25 according to our ACS sample.

Conclusion

There are many reasons to legalize the DREAMers. This is their home, they did not intentionally violate American immigration laws when they entered, and they are culturally American. But, the argument for economic self-interest is also compelling. Only a few commentators doubt that there is a positive economic effect from immigration in general. However, the welfare state could turn those economic benefits negative and actually cost Americans more than they gain in boosted income. Fortunately, the American welfare state is not so far gone and DREAMers came at young enough ages, earned enough education, and worked to an extent to make up for the expensive deficiencies of our bloated government. 

Today we’re releasing one question from the forthcoming national Cato 2017 Free Speech and Tolerance Survey of 2,300 Americans conducted by the Cato Institute in collaboration with YouGov.

The national survey finds that a solid majority, 61%, of Americans oppose firing NFL (National Football League) players who refuse to stand for the national anthem before football games in order to make a political statement. These results stand in contrast to President Trump’s remarks over the weekend and his urging NFL teams to fire players who refuse to stand for the anthem. A little more than a third (38%) of Americans align with Trump and support firing these players. 

Conservative Republicans stand out in their support for firing NFL players who refuse to stand for the national anthem. Nearly two-thirds (65%) of Republicans say NFL players should be fired for this reason. Only 19% of Democrats and 35% of independents agree. Punishing NFL players for their political speech distinguishes political Conservatives from Libertarians. Using a political typology method to identify these ideological groups, the survey finds that Conservatives (62%) are the only political group to support firing NFL players. Conversely, 60% of Libertarians, 85% of Liberals, and 62% of Communitarians (social conservatives who support larger government) all oppose punishing players.

People who are older, with less education, and living in smaller towns and rural communities are most likely to support punishing NFL players who kneel during the national anthem in political protest.

A majority (57%) of Americans over 65 think such players should be fired while 71% of Americans under 30 think they should not. Those without college degrees (44%) are more likely than college graduates (32%) and those with post-graduate degrees (26%) to similarly support punishing NFL players who engage in this form of political protest. Americans living in rural communities are divided in half over whether teams should fire NFL players who refuse to stand for the national anthem. Conversely, those living in large urban centers solidly oppose (69%) such firings.

Majorities across racial groups oppose firing NFL players who kneel during the national anthem before football games. However, African Americans (88%) are about 30 points more likely than Hispanics (60%) and whites (55%) to oppose. 

Not wanting to fire NFL players because of their political speech doesn’t mean that most Americans agree with the content of this speech. Surveys have long shown, as well as this one, that most oppose burning, desecrating, or disrespecting the American flag. Thus, Americans appear to make a distinction between allowing a person to express (even controversial) political opinions and endorsing the content of their speech. The public can be tolerant of players’ refusing to stand for the national anthem, even while many disagree with what the players are doing.

In sum, Americans don’t want to strip people of their livelihoods and ruin their careers over refusing to stand for the national anthem. Even if they don’t agree with the content of the speech, that doesn’t mean they support punishing people who do.

Topline results and methodology can be found here.

The Cato Institute 2017 Free Speech and Tolerance Survey was designed and conducted by the Cato Institute in collaboration with YouGov. YouGov collected responses online August 15-23, 2017 from a national sample of 2,300 Americans 18 years of age and older. The margin of error for the survey is +/- 3.00 percentage points at the 95% level of confidence. The full survey report is forthcoming.

President Trump signed a new proclamation this weekend that bans or restricts the travel and immigration of nationals from eight countries. This order drops the pretext of being a temporary measure and includes no end date. In our amicus brief for the Supreme Court case challenging his prior executive order banning travel from six countries, we criticized the ban as lacking a basis in the evidence regarding terrorism threats and terrorism vetting failures. This new order fares no better. It is even further divorced from threats of terrorism to the United States than the prior order.

The new targets are the nationals of the following eight countries: Chad, Iran, Libya, North Korea, Syria, Venezuela, and Yemen. Like prior orders, it justifies the restrictions based on the false premise that the government needs certain information to adjudicate visas. In reality, because the visa applicant bears the burden of proof to prove his claim, the lack of information hurts the applicant, not the government. In any case, very few visa vetting failures have allowed terrorists to enter since 9/11 from these countries. Here are the facts:

  • Only one nationality (Somalia) of the eight targets has had any immigration vetting failures for terrorism offenders since 9/11. This compares to two nationalities under the second executive order, and three nationalities under the first executive order.
  • The three vetting failures of terrorism offenders from Somalia were refugees who the new proclamation does not exclude. The other executive order covered refugees.
  • This new travel ban would have prevented no terrorists—that is, people who planned to attack the United States—from entering the United States since 9/11. The only offender whose entry would have been prevented by the new order radicalized after entry—and so was not a vetting failure—and did not attempt an attack in the United States. He played a “minimal role” in sending a small amount of money to a terrorist group overseas.

In a prior post, I identified just 34 individuals who entered through the U.S. immigration system legally since 9/11—when the visa vetting system was revamped—and who went on to be killed or convicted of terrorism offenses as of March 2017 when the president signed the second executive order. Of these, I could plausibly describe only 18 as likely vetting failures—people who the government determined radicalized prior to entry or people who committed attacks soon after entry (see here for a longer explanation). Just half of these planned attacks in the United States, and only one killed anyone.

As seen in the table below, the 34 offenders who entered after 9/11 came from 22 different countries and the 18 vetting failures from 13 countries. Only two nationalities (Somalia and Iran) of the seven targeted in the new executive order had any terrorism offenders who entered since 9/11 at all. Only one (Somalia) had any terrorism vetting failures. Critically, as my colleague Alex Nowrasteh points out, no person of a designated country has killed anyone in the United States in a terrorist attack in over 40 years.

Table 1
Foreign Terrorism Offenders Killed or Convicted Who Entered Through the Immigration System After 9/11

  Country of Birth All Terrorism Offenders Who Entered Since 9/11 Likely Vetting Failures

1

Somalia

4

11.4%

3

16.7%

2

Iraq

3

8.6%

2

11.1%

3

Pakistan

3

8.6%

2

11.1%

4

Uzbekistan

3

8.6%

2

11.1%

5

Sudan

2

5.7%

1

5.6%

6

Albania

1

2.9%

1

5.6%

7

Bangladesh

1

2.9%

1

5.6%

8

Jordan

1

2.9%

1

5.6%

9

Kuwait

1

2.9%

1

5.6%

10

Lebanon

1

2.9%

1

5.6%

11

Nigeria

1

2.9%

1

5.6%

12

Saudi Arabia

1

2.9%

1

5.6%

13

United Kingdom

1

2.9%

1

5.6%

14

Kyrgyzstan

2

5.7%

0

0.0%

15

Mexico

2

5.7%

0

0.0%

16

Cuba

1

2.9%

0

0.0%

17

Ethiopia

1

2.9%

0

0.0%

18

India

1

2.9%

0

0.0%

19

Iran

1

2.9%

0

0.0%

20

Kenya

1

2.9%

0

0.0%

21

Kazakhstan

1

2.9%

0

0.0%

22

Nicaragua

1

2.9%

0

0.0%

23

Philippines

1

2.9%

0

0.0%

24

Libya

0

0.0%

0

0.0%

25

Syria

0

0.0%

0

0.0%

26

Chad

0

0.0%

0

0.0%

27

North Korea

0

0.0%

0

0.0%

28

Venezuela

0

0.0%

0

0.0%

  Total

35

100%

18

100%

Sources: Author’s Calculations Based on Global Terrorism Database; Department of Justice National Security Division; Department of Justice; New America Foundation; George Washington University Project on Extremism

Here are the five terrorism offenders from the two nationalities that entered through the U.S. immigration system since 9/11:

Not vetting failures

  • Ahmed Nasir Taalil Mohamud, 2004 entry, was a Somali national who, at the age of 28, won a green card through the diversity visa lottery. He lived in the United States for seven years before he committed his terrorism offense in 2011. He played what prosecutors described as a “minimal role” in a scheme to send money to a terrorist organization overseas. He deposited money into an account for the conspirators. The federal judge described him as a “law-abiding and productive” member of U.S. society before falling in with the conspirators who he only met years after his entry.
  • Adnan Fazeli, 2009 entry, was an Iranian national who, at the age of 31, entered the United States as a refugee. After his entry, he converted from Shia Islam to radical Wahhabism. Government investigators established that he radicalized after his entry to the United States. He was killed in 2015 in Lebanon as part of an Islamic State attack on the Lebanese army.

Possible Vetting Failures

  • Abdinasir Ibrahim, 2008 entry, committed immigration fraud by claiming that he was a member of a persecuted minority clan in Somalia in order to obtain refugee status in fiscal year 2008. In fact, he was a member of a clan persecuting other clans. He attempted to send material support to the al-Shabaab terrorist organization in Somalia in 2014.
  • Amina Esse, 2009 entry, entered the United States as a refugee from Somalia. She played a small role in sending $850 to al-Shabaab in 2011 and 2012. Her abusive husband who she married in the U.S. was an al-Shabaab supporter gave her the money to send, and her conspirators in Somalia initially told her that the money was for war orphans. She voluntarily cut off support soon after she discovered the truth. She chose to testify against her co-conspirators, and prosecutors asked for no jail time for her. It seems likely that she was not a vetting failure, but the government did not make a determination one way or another.
  • Adul Razak Artan, 2014 entry, came to the United States as a refugee in 2014. In 2016, he attempted to run over students at Ohio State University with his car and then stab them. He failed to kill any and was killed himself. While investigators never discovered any evidence of pre-entry radicalization, the timing of the attack after just two years in the United States suggests that he may have been radicalized at the time of his entry.

Only one of the five terrorism offenders attempted to carry out an attack in the United States. None of the refugees on the list above would have been stopped by this proclamation, which targets only people traveling on visas (refugees receive special status to enter without a visa). Thus, only Ahmed Mohamud who won his immigrant visa in the diversity visa lottery would have been subject to the ban, and he did not attempt an attack against the United States.

President Trump has now issued three different orders targeting terrorist travel, each replacing the prior order. The first singled out Iraq, Iran, Somalia, Sudan, Syria, Libya, and Yemen. The second removed Iraq, and the third removed Sudan and added North Korea, Chad, and Venezuela. Table 2 compares the three executive orders. As it shows, each successive order has actually become less targeted toward nationalities that have a history of evading screening procedures in order to commit acts of terrorism. The share of targeted nationalities which have, at least in one case, evaded screening and committed terrorism offenses since 9/11 has shrunk as well—from 38 percent (3/8) to just 13 percent (1/8).

Table 2
Executive Orders Targeting Terrorist Travel

  Targeted Nationalities Targeted Nationalities With Offenders Entering Since 9/11 Targeted Nationalities With a Post-9/11 Vetting Failure Share of All Vetting Failures First

7

4

3

33.4%

Second

6

3

2

27.8%

Third

8

2

1

16.7%

Sources: Author’s Calculations Based on Global Terrorism Database; Department of Justice National Security Division; Department of Justice; New America Foundation; George Washington University Project on Extremism

This exercise shows the inherent difficulty with blanket discrimination based on national origin. Even if the executive order was perfectly aligned with past incidents, the fact that it is dealing with such rare, low probability, and low-risk events inevitably means that the past will be a poor predictor of the future. But the administration has consistently relied on past events as justification for the restrictions, and yet it fails to match its policies with these events.

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