Policy Institutes

A reporter called the other day to ask what I thought about the National Endowment for the Arts (NEA) giving subsidies to the National Cowboy Poetry Gathering in Elko, Nevada. The government appears to have given the cowboy poets hundreds of thousands of taxpayer dollars over the years.

As the symbol of rugged individualism in the American West, I’m surprised cowboys aren’t embarrassed to take government hand-outs. The amount of money is not large, but when private groups get hooked on subsidies they become tools of the state. They lose their independence and may self-censor.

From the government’s perspective, subsidies placate dissent and encourage subservience. I’m not just talking about cowboys, but recipients of all the federal government’s more than 2,000 subsidy programs.

The NEA launched the poetry subsidies in 1985 to fix the negative image of cowboys as “strong, silent types.” Bikers and gun owners also have image problems, so we might expect the NEA to next sponsor poetry at the Sturgis Motorcycle Rally and the Crossroads of the West Gun Show.

I’m not receiving any NEA subsidies, but I nonetheless crafted a song sung to the tune of Rhinestone Cowboy:

“Welfare Cowboy”


I’ve been studyin’ the budget so long

Complainin’ about the wasteful mor-ons

I know every hand-out in the dirty hallways of Congress

Where money’s the name of the game

And our taxes get washed down the pork-barrel drain


There’s one program so surprisin’

On the road Elko, Nevada

That’s where NEA shines a light on its inanity


Like a welfare cowboy

Writing poetry for a subsidized gathering

Like a welfare cowboy

Getting hand-outs from people they don’t even know

And offers gained from a lobbying lasso

Note: the cowboy poets appear to have received about $35,000 every year or two from the NEA since the 1980s. They also receive support from the Nevada government and City of Elko.

Deregulation and profits are unpopular ideas in some quarters these days. In a major speech last summer, Senator Elizabeth Warren lashed out at the Trump administration’s deregulatory efforts:

Deregulation is code for ‘let the rich guys do whatever they want’ … The Trump administration and an army of lobbyists are determined to rig the game in their favor, to boost their own profit, the cost of the consumer be damned.

… Regulations are about setting the rules of the road, plain and simple. Done right strong fair regulations protect the freedom of every American.

Warren’s comments are internally inconsistent and divorced from the actual workings of politics and the economy. On politics, her latter comments assume that the government works in the public interest, yet her former comments suggest that the government gets hijacked by private interests.

In economics, deregulation is actually code for “undercut the rich guys and their lobbyists by opening the door to new competition.” Deregulation and competition channel the profit-seeking impulses of producers into providing more value to consumers.

The only good part of the recently enacted farm bill was the deregulation of hemp growing. The prospect of high profits is now drawing farmers into hemp and encouraging businesses to develop new consumer products in health, food, and textiles.

A Wall Street Journal story on hemp today illustrates the harmony between deregulation, profits, freedom, and consumer benefits:

Cultivation was largely banned from 1970 until December, when President Trump signed a new $867 billion farm bill that removed hemp from a list of federally controlled substances.

Hemp’s return to farm fields this spring coincides with a surge in demand for cannabidiol, a derivative of hemp or marijuana that has become a popular additive in drinks, foods and dietary supplements. Proponents say it relieves anxiety, inflammation and other maladies without the psychotropic ingredient that delivers a high to marijuana users.

Farmers and processors believe growing demand for cannabidiol will turn hemp into a lucrative cash crop.  

… Hemp flourishes in rocky soils inhospitable to other crops. It also represents a new potential revenue stream for tobacco farmers abandoning that crop. Other growers are eager to diversify away from mainstream crops after several years of low prices spurred by a production glut and trade tensions.

… Growers can earn $200 to $400 an acre growing hemp for use in textiles, plastics, insulation and construction materials, according to Rodale Institute, a farming research agency. Hemp grown for cannabidiol could earn farmers thousands of dollars an acre, according to the institute. Farmers earned net profits of around $11 per acre for soybeans and lost $62 for corn in 2017, federal figures show.

… Processors in the U.S. also are expanding. Folium Biosciences is building a $30 million, 110,000-square-foot hemp extraction facility in Colorado to increase its capacity 10-fold, said Chief Executive Kashif Shan. 

To recap. President Trump and Congress deregulated hemp. Farmers and corporations lured by potentially high profits are producing a range of new and beneficial products. Over the longer-term, high profits will be eroded by competition in markets and prices for the new products will be driven down. Farmers have new freedom to diversify. The nation’s income and output will be higher as investment increases and new jobs are created.

In her speech, Senator Warren said, “To hide what they’re doing big corporations and Republicans here in Washington often claim that regulations are bad for the economy. They go on and on about how big government restricts freedom and makes it harder for businesses to succeed. That is a big greasy baloney sandwich.”

Hemp regulations were bad for the economy, they did restrict freedom, and they made life harder for farm businesses. So Warren’s logic would only make sense to someone smoking a big, greasy cigarette of hemp’s sister species.

The Trump Administration’s trade warfare with China began in earnest last March 22nd (following steel and aluminum tariffs that primarily hit other countries). U.S. and Chinese tariffs on each other’s goods then escalated repeatedly through September 18 with threats of much more the same by May 1 of this year.

The effect so far has been quite different from what President Trump first promised and still keeps pretending.  In fact, U.S. goods exports to China (excluding services) fell by 26.3% from March through October, while U.S. imports from China rose by 36.5%.   

U.S./China trade data were supposed to be updated for November on January 8, but that potential embarrassment was mercifully postponed by President Trump’s government shutdown.  Yet Reuters, using Chinese data, estimates the U.S. trade deficit with China rose 17% last year.  The table makes that estimate look low. 

Meanwhile, the Trump shutdown is rationalized by his fanciful untruths about people and drugs “flooding across the border” on foot between checkpoints, rather than in planes, trains, ships, trucks, and cars (not to mention overstaying visas).  

Oddly enough, Mr. Trump waited until after Republicans had lost the House to demand more billions for “The Wall” (as though the Executive Branch wrote the laws). 

If the end result of political feuding over a border wall turns out to be half as big a fiasco as President Trump’s trade war, how could he hope to run for reelection on the blatant failure of his two noisiest campaign issues?  But it might not be too late for Trump to quietly discard his losing cards and pivot toward more promising games and issues.  

As the government shutdown drags on, it is starting to damage activities across the economy because federal tentacles are in everything. But we better get used to it because with rising deficits and growing partisan discord such disruptions will probably become more frequent and damaging.

Sadly, the expansion and centralization of government power in recent decades has made our $20 trillion economy dependent on a small group of self-interested and often ill-informed politicians. Centralization and dysfunction at the core is a toxic mix.

The shutdown is affecting activities that the government needlessly monopolizes—such as air traffic control. It is affecting activities that the government needlessly regulates and subsidizes—from Smuttynose’s beer labels in New Hampshire to Betty Gay’s home repairs in Kentucky.

And it is needlessly harming a large group of people that it has micromanaged for far too long—American Indians. “The shutdown has hit Native American tribes especially hard because so many of their basic services depend on federal funding,” notes the Washington Post. Education, health care, road maintenance, and other services on reservations are often run by the federal government or run by tribal employees paid by the federal government.

That dependency has long resulted in mismanaged and low-quality services for the million people who live on reservations. In the New York Times, one tribal leader spoke of federal support, “The federal government owes us this: We prepaid with millions of acres of land,” while another said the shutdown “adversely affects a population that is already adversely affected by the United States government.”

I agree with those views. In the long run, subsidies are not a good way to generate prosperity, but they are needed until Congress tackles basic problems of property rights and legal institutions on reservations that stymie growth.

In the meantime, funding should be converted to block grants to the tribes or vouchers to individuals on reservations. Tribes and individuals would use the benefits to contract for services such as schooling and health care from private firms or nearby local governments. That would further the goal of Indian self-determination and ensure that reservation life doesn’t get caught in the political crossfire.

At the end of January, someone at the National Shooting Sports Federation asked the Bureau of Alcohol, Tobacco, Firearms, and Explosives (ATF) about non-binary people purchasing firearms. The ATF responded that, despite gender non-binary licenses being acceptable identification, the individual must still select either “male” or “female” on the standard firearm transfer form 4473.

The ATF’s rigid, unreasoned response makes it clear there’s a huge disconnect between the purpose of the form, and the ATF’s interpretation. Form 4473, which everyone must fill out when they purchase a firearm from a federally licensed dealer, is intended to identify the purchaser of the firearm, have them confirm they are legally eligible to receive the firearm, and give enough identifying information to run a background check.

How can forcing a prospective gun owner to select “male” or “female” make any difference in identifying them when they have already provided a driver’s license, a home address, place of birth, full name, and even social security number? When a form has so much information, it’s clear that someone’s sex adds little to its ability to properly identify them. Even in the odd situation where completely filling out the form would still yield multiple results, the ATF offers the creation of Unique Personal Identification Numbers (UPIN’s). Still, even with all these avenues of precisely identifying a person, the ATF insists that dealers may not transfer a firearm to a purchaser who refuses to “check the box.”

Guns and LGBTQ rights might seem like strange bedfellows in today’s political climate, but the pairing makes sense. We’ve known for a long time that LGBTQ people are frequent targets of violent crime. Thus their need for an effective means for self-defense is best served by robust access to firearms. Putting an arbitrary and demeaning barrier between sexually nonbinary individuals and access to a firearm hampers—or even eliminates—their ability to provide for their own defense.

An individual’s sexual identity has absolutely no bearing on their ability to safely own and operate a firearm. Whether you care more about gun rights or LGBTQ rights, you shouldn’t avert your eyes from this injustice. The ATF, in their directive to bar gun dealers from transferring firearms to individuals who refuse to select “male” or “female,” are worsening the status of a class of people predisposed to victimization.

There is no excuse for the ATF’s rigid and unreasoned stated policy. As long as the transferee provides sufficient information to identify themselves and enable a background check to be performed, there is no reason to deny them their natural right to arms. The ATF should reverse course, and in the future take proper stock of the rights of people who might be affected by such judgment calls.

In a recent speech, Senator and presidential candidate Elizabeth Warren made this claim:

When I was a kid, a minimum-wage job in America would support a family of three …It would pay the mortgage, it would keep the utilities on; it would put food on the table. Today, a minimum-wage job in America will not keep a momma and a baby out of poverty. Think about that difference.

Warren’s factual claim is accurate: the federal minimum wage, times 52 weeks, times 40 hours, would have yielded an amount above the poverty line for a household with 1 adult and 1 child in the early 1960s, but not today.

But several factors suggest her larger point is exaggerated or wrong.

First, the official poverty level does not mean the same thing now as in the 1960s. In particular, the poverty level is indexed to the Consumer Price Index, which almost certainly overstates true inflation by about 0.5-1.5 percent per year.  This bias matters significantly when accumulated over 50 plus years.  Consider that people in poverty now often have indoor plumbing, modern medical care, cell phones, access to the internet, and so on. Being at the poverty level is much less bad than during Warren’s childhood.

Second, households at or below the poverty level are now eligible for two significant government transfers that did not exist in Warren’s early childhood: the Earned Income Tax Credit and, for children in all states and their parents in many (although not Warren’s childhood residence, Oklahoma), Medicaid.  Thus Warren’s calculation is incomplete.  Medicaid access, in particular, is a huge improvement for many poor households relative to the early 1960s.

This is Part 1 of a two-part series on the World Bank’s Doing Business Report. In this entry, I discuss the World Bank’s implicit embrace of occupational licensing restrictions. In the next entry, I will discuss the World Bank’s dim view of private, contractarian approaches to corporate governance. 


I. Introduction

The World Bank’s annual Doing Business Report represents an invaluable resource to researchers, policymakers, entrepreneurs and investors. It comprehensively ranks how well each country in the world has managed to achieve John Adam’s elusive aphorism:  “the rule of law, not of man”. Its findings are cited thousands of times each year by academics and are directly incorporated into regression models to form the basis of a substantial empirical literature spanning developmental economics to comparative political economy. It is subsequently relied on by other similar projects, such as the Fraser Institute’s Economic Freedom index as a part of its own ranking methodology.

Which is why its flaws matter. While the Report generally ranks relatively laissez-faire economies with an efficient and uncorrupt civil service ahead of kleptocratic kludgeocracies, it nonetheless incorporates several interventionist assumptions into its measure of the ease of doing business. I will explore several such examples below. For instance, the Report rewards countries with a higher score on their Dealing with Construction Permits index if they have a stringent, government-administered occupational licensing and permitting regime for architects and construction projects. In the “Protecting Minority Investors” category, the Report similarly punishes countries if they even allow for corporate governance structures other than the Platonic Form envisioned by the World Bank. In this instance, it privileges a mandatory, anticontractarian approach to corporate law over the enabling, contractarian approach.  How does preventing parties from Coasian bargaining around contractual defaults so as to achieve a Pareto-improving outcome increase the ease with which they do business?      

Before we examine these interventionist assumptions, let’s begin with how the Report measures ease of doing business. First, it creates a series of index variables (e.g. protecting minority shareholders, labor market regulations) comprising multiple indicia, and then aggregates these variables into a single Ease of Doing Business score for each country. Many of these are unobjectionable:

“The time necessary for the judge to issue a written final judgment once the evidence period has closed.” [Contract Enforcement]; “Whether unmarried men and unmarried women have equal ownership rights to property. A score of -1 is assigned if there are unequal ownership rights to property; 0 if there is equality.” [Registering Property].

II. Dealing with Construction Permits

Yet in several categories, the World Bank has decided that the more government requirements needed before a given transaction is authorized, the better. The main culprit here is the “Building Quality Control” subcategory of the “Dealing with Construction Permits” index, weighted as 25% of that index. The three separate sub-sub-categories of “Building Quality Control” are Quality Control Before/During/After Construction. Higher scores are awarded to countries that require either direct approval by a government entity, or approval from a “licensed” engineer and/or architect to review the plans/building, but only if that license is granted by “the national association of architects or engineers (or its equivalent)”. In other words, in a country with an unrestricted, competitive market for safety appraisals, allowing builders to contract with the top-rated such firm counts for naught unless that firm has been officially sanctioned by the occupational guild or by the government itself.

So as to remove any doubt about the entry-restricting credentialism embraced by this occupational licensing framework, it is given its own sub-index, the “Professional Certification Index.” The highest possible score is awarded if:

National or state regulations mandate that the professional must have a minimum number of years of practical experience, must have a university degree (a minimum of a bachelor’s) in architecture or engineering, and must also either be a registered member of the national order (association) of architects or engineers or pass a qualification exam.

Lower scores are meted out for less stringent (read: arbitrary and restrictive) requirements.

This week Mayor Bill de Blasio proposed mandating paid personal leave benefits for all employees in New York City. The policy, which applies to both full and part-time workers, would make New York City the first city to mandate personal leave in the country.

The policy is billed as benefiting the 500,000 workers in New York City that currently have no personal days off. Although the idea may sound fresh and New Yorkers no doubt like the sound of paid time off, they may be less enthused if they understood the economics of mandated benefits.

Currently, the Bureau of Labor Statistics estimates that 32 percent of an average U.S. employee’s compensation is in employee benefits, while 68 percent of an average U.S. employee’s total compensation is in salary or wages. So, although most employees don’t realize it, around one-third of employee compensation is already devoted to paying for paid leave and other benefits.

When policymakers mandate benefits for employees, employers typically pay for them through a reduction in salary and wages or other employee benefits. This is because employers are interested in limiting total costs –and therefore total compensation– for a given productivity level. If a reduction in existing salary, wages, or benefits is not possible (due to minimum wage laws, for example) then employers may try to avoid hiring the type of workers they can’t afford.

In a related example, Illinois, New York, and New Jersey each mandated employers provide maternity benefits to women. As a result, women’s wages were reduced to reflect the cost of mandated maternity benefits. The estimated reduction in wages was around 100 percent of the cost of benefits.

Some employees may willingly accept a reduction in wages or benefits for paid personal time. However, not all employees would. For example, part-time workers that already have flexible schedules may prefer higher wages or other benefits instead of paid personal leave. Counterintuitively, when policymakers like de Blasio mandate benefits, the policy reduces employee choice.

Many advanced democracies face slowing growth of GDP because their birth rates are low, implying aging populations.

For example:

Because demographics are supposed to be destiny, Japan was long ago consigned to stagnation with its aging population and rock-bottom birthrate.

But in recent years Japan has defied destiny. Since 2012, its working-age population has shrunk by 4.7 million, yet the number of people working has surged by 4.4. million, the critical ingredient in what is now Japan’s second-longest economic expansion since World War II. The proportion of the population in the labor force has risen sharply since 2012, by more than in any other major advanced economy.

Japan is refreshing its labor force from three often-neglected pools: the elderly, women and foreigners.   As the article notes, Japan’s experience  offers important lessons for the many other countries that now, or will soon, face similar demographic pressures. A population’s size can still impose limits on long-term growth, but they may be further away than long assumed by economists and policy makers. Assuming, of course, policy does not disincentivze labor force participation by the elderly and women, or unduly restrict immigration.

Democrats are making waves in tax policy by promising to reverse some of the 2017 Republican reforms. Rep. Alexandria Ocasio-Cortez called for raising the top federal individual income tax rate to 70 percent, which was the rate before Ronald Reagan came to office. I noted that the global economy has dramatically changed in recent decades, and such a high rate would be even more damaging today.

Democrats are also calling for a higher federal corporate tax rate, partly reversing the GOP’s cut from 35 percent to 21 percent. Democratic House Budget chair John Yarmuth, for example, is proposing to raise the rate to 28 percent. The problem, again, is that the global economy has changed and U.S. businesses face a more intense competitive climate than ever.

The chart shows the average federal-state corporate tax rate in the OECD industrial countries since 1980. The United States led a global wave of corporate tax rate cuts in the 1980s, but then federal policymakers sat on their hands for three decades as other countries continued cutting.

President Trump pushed hard and convinced Congress to reduce the federal corporate rate to 21 percent. But state taxes are piled on top of that for a combined U.S. federal-state rate of 27 percent. That is still higher than the 24 percent average of the OECD countries in 2018, according to KPMG. The global average rate per KPMG is also 24 percent.

On corporate taxes, America is still a high-rate country.

The data is sourced from OECD and KPMG.

Last Friday, President Trump threatened to declare a national emergency and build his border wall using “the military version of eminent domain.” By Tuesday, Trump seemed to have climbed down somewhat, declining to repeat the threat in his televised Oval Office address. But the week’s end found the president declaring it would be “very surprising” if he didn’t pull the trigger.

So is the emergency-powers gambit a live option or—like the executive order revoking birthright citizenship Trump floated before the midterms—another pump-fake designed to thrill the base and rile the media? Either way, it’s a noxious, thuggish proposal. Using the army to do an end-run around Congress is not how constitutional government is supposed to work. Imagine believing that Latin American immigration so threatens our free institutions that only banana republic tactics can protect us. 

About the best one can say for the idea is that it has the accidental virtue of concentrating the mind wonderfully about the powers we’ve concentrated in the executive branch. 

Our Constitution cedes vanishingly few emergency powers to the president. He commands “the Militia of the several States, when called into the actual Service of the United States,” and has the power, via Article II, section 3, to convene Congress on “extraordinary Occasions,” such as a national emergency. “That is about as far as his crisis authorities go,” notes the University of Virginia’s Saikrishna Prakash: “the convening authority would have been unnecessary if the chief executive could take all actions necessary to manage ‘extraordinary occasions.’” 

In Youngstown, the 1952 “steel seizure” case, the Supreme Court rebuffed the Truman administration’s claim of a general presidential emergency power divorced from specific statutory or constitutional authority. Justice Jackson, in his influential concurrence, suggested that the Framers neglected to provide such authority for fear “that emergency powers would tend to kindle emergencies.” 

Surely, then, the president can’t just gin up a bogus crisis and use the military to get what he wants when Congress won’t give it to him—can he? It would be nice to be able to answer that question with a confident “no.” Unfortunately, in this case, at least two provisions of the U.S. Code passed during the 1980s, 33 USC § 2293  and 10 USC § 2808, give Trump a non-frivolous rationale for his claim that “I can do it if I want.” 

Overbroad delegations of emergency authority to the executive are a longstanding problem. During the Watergate-era congressional resurgence, a 1974 Senate special committee investigation (co-chaired by Frank Church of Church Committee fame) identified 470 provisions of federal law delegating emergency powers to the president and four proclamations of national emergency, dating as far back as 1933, then still in effect. That investigation led to the National Emergencies Act of 1976, which repealed existing emergency declarations, required the president to formally declare any claimed national emergency and specify the statutory authority invoked, and subjected new declarations to a one-year sunset unless renewed.  

Despite those efforts, the U.S. Code today remains honeycombed with overbroad delegations of emergency power to the executive branch. A Brennan Center report released last month identifies 136 statutory powers the president can invoke in a declared national emergency. Few of these provisions require anything more than the president’s signature on the emergency declaration to trigger his new powers—“stroke of the pen, law of the land—kinda cool,” in the Clinton-era phrase. 

Most of these emergency powers have never been invoked, many of them are innocuous, and some—like the provision that allows suspension of the Davis-Bacon Act in a natural disaster—are even sensible. But other long-dormant powers are extraordinarily dangerous.

Writing in the Atlantic, the Brennan Center’s Elizabeth Goitein highlights a WWII-era amendment to the Communications Act of 1934 empowering the president to close or take over “‘any facility or station for wire communication’ upon his proclamation ‘that there exists a state or threat of war involving the United States.’” She sketches a nightmare scenario in which Trump puts the country on a war footing with Iran; invokes § 706 of the Communications Act to assume control of U.S. internet traffic, deploys federal troops to put down the resulting unrest, and scares people away from the polling stations with a menacing Presidential Alert text message. Goitein grants that “this scenario might sound extreme,” and I admit I found it a bit overcooked. Even if the administration wanted to do something like this, I’m confident it would go bust, thanks to the sort of spectacular ineptitude that botched the initial rollout of the Travel Ban. 

However, she’s absolutely right to call on Congress to “shore up the guardrails of liberal democracy” with comprehensive reform of emergency powers. “Committees in the House could begin this process now,” she writes, “by undertaking a thorough review of existing emergency powers and declarations,” laying out a roadmap for repealing unnecessary delegations, and providing “stronger protections for abuse.” The sooner, the better: you never know when a competent authoritarian is going to come along. 

According to Paul Krugman, the government shutdown amounts to a potentially big libertarian experiment.

With nine departments and multiple agencies closed, maybe for months, the New York Times columnist and Nobel laureate envisages a coming test of whether the country can live without the Food and Drug Administration, the Small Business Administration and farm subsidies.

So are those of us at Cato who believe in the abolition of these programs celebrating? Not quite.

As the vast majority of the U.S. population go about their daily lives, barely noticing that 25 percent of federal discretionary spending has been paused, it’s certainly possible many will wonder why debt is being racked up for programs that have no noticeable effect on their well-being. Who knows, many employees, businesses and farms may also reconsider the wisdom of placing their livelihoods at the whims of the political process.

Better still, the shutdown may bring attention to these otherwise rarely-scrutinized programs. If major columnists continue identifying Cato as proponents of scrapping things such as farm subsidies and small business cronyism, linking to our research on the damaging economic, political, and social consequences of existing provisions, the shutdown could serve a useful public education role too!

But, the truth is, most libertarians aren’t cheering current events because shutdowns appear not to change much in regards the size and scope of government in the long term, yet bring chaos, ill-feeling and uncertainty in the short.

Markets are powerful precisely because they allow people to interact in voluntary ways to fulfil wants and needs. Necessity, as they say, is the mother of invention.

Libertarians are indeed confident that, as in countries such as New Zealand, scrapping agricultural subsidies would deliver a more efficient industry, taxpayer savings, and a bigger economy.

But it’s obvious, as Krugman acknowledges, that temporary suspension of promised support is not an environment conducive to farmers making long-term crop or farm ownership decisions, private companies banding to form market-based food safety certification agencies, or small businesses sourcing new finance.

Yes, economic actors will take steps to mitigate the effects of disruption. But knowing government will eventually reopen, there is little to no incentive for the new institutions to develop or businesses and farms to undertake the structural change we would see if government absented from these roles. Instead, businesses and individuals are temporarily crippled in their forward planning and paralyzed by the uncertainty promises made to them being broken.

The natural priority for those farms, businesses and federal employees right now is to lobby successfully for the government to reopen and their payments to start flowing again. Hence the newspaper stories we see already about their difficulties, indicating precisely the diffuse costs yet concentrated benefits associated with much government spending.

That doesn’t mean libertarians are any less supportive of removing government from these activities. In fact, as Chris Edwards shows, a host of other areas likely to be noticeably affected by a sustained shutdown – security screening at airports, air traffic control, and the management of national parks – are better managed in other countries with more private sector involvement. If the shutdown brings attention to this, then great.

Overall though, libertarians are fully aware that for the real policy experiments we desire, the public and/or politicians must be convinced of the necessity or desirability for permanent policy change in a market-based direction. The best chance for success with that is in an environment where those affected can adjust in an orderly manner, and replacement private-sector institutions have time to develop.

Krugman knows it is disingenuous to suggest that the current chaos is some libertarian policy experiment. But as some Republicans do make the case that the programs above are vital for the health of the economy, and libertarians continue to make the case for their abolition, perhaps he will finally cease lumping Republicans and libertarians together in his columns.

President Trump’s proposed border wall would cut across nearly a thousand miles of privately owned land, so to build this project, the administration would need to use eminent domain to seize the land—something that the president is eager to do. Aside from the unpleasantness of taking people’s property without their consent, federal eminent domain use comes with it a particularly obnoxious component: the government can take the land but not provide just compensation until years later. New legislation would stop this practice.

As I wrote in 2017:

Right now, when Border Patrol wants to take someone’s land, they send them a letter offering them a nominal low sum of money for their land and threatening to file condemnation proceedings against them if they don’t accept it… . [But] under the eminent domain statute, the federal government can seize property almost as soon as it files a condemnation proceeding—as soon as the legal authority for the taking is established—then they can haggle over just compensation later.

It’s called “quick take.” Quick take eminent domain creates multiple perverse incentives for the government. 1) It can quickly take land, even when it doesn’t really need it, and 2) it has no real incentive to compromise or work with the land owner on compensation. The owner’s bargaining power is significantly diminished. The federal government already possesses the property. This means that for years, people who are subject to a border wall taking go without just compensation.

An NPR analysis of fence cases found that the resolved cases took more than 3 years to resolve. In many other cases, the process took more than a decade for a court to determine just compensation, and some cases are still pending more than 12 years later. Unfortunately, the Supreme Court has determined that this “quick take” eminent domain does not violate the 5th amendment requirement that no “private property be taken for public use, without just compensation.” The reasoning is that as long as the person will eventually get compensation, the taking is constitutional.

The awful component of this process is that, in order to challenge the taking, the property owner must not accept the offered payment. But the border wall will go up on their land just the same. Meanwhile, they have to fight in court without getting the compensation that they deserve. Many people cannot even afford to challenge the taking for this reason alone.

Today, Rep. Justin Amash (R-MI) introduced the Eminent Domain Just Compensation Act to deal with just this issue. “It is unjust for the government to seize someone’s property with a lowball offer and then put the burden on them to fight for what they’re still owed,” Rep. Amash said in a statement. “My bill will stop this practice by requiring that a property’s fair value be finalized before DHS takes ownership.”

It makes this reform by amending Section 103 of the Immigration and Nationality Act (8 U.S.C. 1103), which details the powers of the Secretary of Homeland Security.  Current law provides that:

The [Secretary of Homeland Security] may contract for or buy any interest in land, including temporary use rights, adjacent to or in the vicinity of an international land border when the [Secretary] deems the land essential to control and guard the boundaries and borders of the United States against any violation… When the [Secretary] and the lawful owner of an interest identified pursuant to paragraph (1) are unable to agree upon a reasonable price, the [Secretary] may commence condemnation proceedings pursuant to section 3113 of title 40.

The Eminent Domain Just Compensation Act would amend this provision by adding that: “the Government may not take any land prior to the issuance of a final judgment pursuant to the proceedings under section 3113 of such title.’’ This language forecloses the opportunity for the Trump administration to seize land quickly for the president’s unnecessary, ineffective, and costly border wall without first fully compensating the owners. 

The Wall Street Journal reports that Facebook has consulted with conservative individuals and groups about its content moderation. Recently I suggested that social media managers would be inclined to give stakeholders a voice (though not a veto) on content moderation policies. Some on the left were well ahead in this game, proposing that the tech companies essentially turn over content moderation of “hate speech” to them. Giving voice to the right represents a kind of rebalancing of the play of political forces. 

argued earlier that looking to stakeholders had a flaw. These groups would be highly organized representatives of their members but not of most users of a platform. The infamous “special interests” of regular politics would thus come to dominate social media content moderation which in turn would have trouble generating legitimacy with users and the larger world outside of the internet.  

But another possibility exists which might be called “pluralism.” Both left and right are organized and thus are stakeholders. Social media managers recognize and seek advice from both sides about content moderation. But the managers retain the right of deciding the “content” part of content moderation. The groups are not happy, but we settle into a stable equilibrium that over time becomes a de facto speech regime for social media.  

A successful pluralism is possible. A lot will depend on the managers rapidly developing the political skills necessary to the task. They may be honing such skills. Facebook’s efforts with conservatives are far from hiring the usual suspects to get out of a jam. Twitter apparently followed conservative advice and verified a pro-gun Parkland survivor, an issue of considerable importance to conservative web pundits, given the extent of institutional support for the March for Our Lives movement. Note I am not saying the Right will win out but rather the companies may be able to manage a balanced system of oversight.  

But there will be challenges for this model.  

Spending decisions by Congress are often seen as a case of pluralist bargaining. Better organized or more skillful groups get more from the appropriations process; those who lose out can be placated with “side payments” to make legislation possible. Overall you get spending bills that no one completely likes, but everyone can live with until the next appropriations cycle. (I know that libertarians reject this sort of pluralism, but I not discussing what should be but rather what is as a way of understanding private content moderation). 

Here’s the challenge. The groups trying to affect social media content moderation are not bargaining over money. The left believes much of the rhetoric of the right has no place on any platform. The right notes that most social media employees lean left and wonder if their effort to cleanse the platforms begins with Alex Jones and ends with Charles Murray (i.e. everyone on the right). The right is thus tempted to call in a fourth player in the pluralist game of content moderation: the federal government. Managing pluralist competition and bargaining is a lot harder in a time of culture wars, as Facebook and Google have discovered.  

Transparency will not help matters. The Journal article mentioned earlier states: 

For users frustrated by the lack of clarity around how these companies make decisions, the added voices have made matters even murkier. Meetings between companies and their unofficial advisers are rarely publicized, and some outside groups and individuals have to sign nondisclosure agreements. 

Murkiness has its value! In this case, it allows candid discussions between the tech companies and various representatives of the left and the right. Those conversations might build trust between the companies and the groups from the left and the right and maybe even, among the groups. The left might stop thinking democracy is threatened online, and the right might conclude they are not eventually going to be pushed off the platforms. We might end up with rules for online speech that no one completely likes and yet are better than all realistic alternatives.  

Now imagine that everything about private content moderation is made public. For some, allowing speech on a platform will become compromising with “hate.” (Even if a group’s leaders don’t actually believe that, they would be required to say it for political reasons). Suppressing harassment or threats will frighten others and foster calls for government intervention to protect speech online. Our culture wars will endlessly inform the politics of content moderation. That outcome is unlikely to be the best we can hope for in an era when most speech will be online. 


Welcome to the Defense Download! This new round-up is intended to highlight what we at the Cato Institute are keeping tabs on in the world of defense politics every week. The three-to-five trending stories will vary depending on the news cycle, what policymakers are talking about, and will pull from all sides of the political spectrum. If you would like to recieve more frequent updates on what I’m reading, writing, and listening to—you can follow me on Twitter via @CDDorminey.  

  1. Trump, Heading to the Border, Suggests He Will Declare and Emergency to Fund Wall,” Michael Tackett. The most pressing story of this week is undoubtedly the continued government shutdown, and President Trump’s threat to declare a state of emergency. This would allow the president to bypass Congress and the process of authorization and appropriation to instead use military funds to begin construction on a southern border wall. The money would draw from accounts that have already been earmarked for other urgent needs, like military construction. 
  2. A Shut Down Government Actually Costs More Than an Open One,” Jim Tankersley. Every day that this government shut down continues, it costs taxpayers more money in the long run. A government shut down is not like when a household goes on a self-imposed temporary spending ban. The government still needs to pay contractors and furloughed workers once they return to work—in some instances with the accrual of interest or fees on outstanding payments.
  3. Shutdown’s economic damage: $1.2 billion a week,” Victoria Guida. The government shut down is also a drag on the economy because 800,000 federal workers don’t get paid, they restrict individual spending that would otherwise be contributing to the economy. President Trump’s Chief Economist estimates the cost to be as much as $1.2 billion every week that the government remains closed and workers remain furloughed. Private contractors that won’t recieve payment on contract work and other lost business contributes to this figure. 
  4. Depending on how long it lasts, this shut down could also impact those on food stamps, leave new parents in the lurch, and have an outsized impact on veterans who make up to 25 percent of the workforce in some government agencies. 

Each year thousands of small and large businesses, non-profits, and organizations are hit with drive-by ADA claims, typically batch-produced affairs in which a complainant out of the blue claims to have found something not fully accessible to disabled users about the target’s operations and goes on to negotiate a settlement that includes ample attorneys’ fees. Because ADA requirements are both obscure and voluminous and even compliance experts do not agree among themselves how much accommodation counts as enough, potential violations can be found at most businesses. While the ADA is a national law, much of the mass filing of accessibility complaints goes on under state laws that piggyback or expand on the federal version, often with added features enhancing damages or attorney’s fee entitlements. 

It has been hard to get state-level relief from the depredations of the filing mills, since lawyers and disabled-rights activists can make for a formidable lobbying combination. But a piece of legislation just signed by Gov. John Kasich in Ohio, and an unrelated ruling in the California state courts, at least offer tiny rays of hope. 

Ohio’s HB 271 provides that in order to collect automatic attorneys’ fees under state accessibility law, a complainant must notify the business concerned, which then has 15 business days to respond and 60 days to remedy the violation.” The law, which goes into effect in March, is itself a bit of a compromise: it excludes housing discrimination claims, and provides that even a complaint filed without notice or opportunity to correct can still collect fees if a judge finds such payment appropriate. A similar bill on a national scale passed the U.S. House of Representatives last February but went nowhere in the U.S. Senate, and is likely to muster less support in the new House. 

In California, meanwhile, a state court has ruled that the distinctively harsh Unruh Act, which awards automatic damages in the thousands of dollars each to prevailing civil rights complainants whether or not they can prove any injury to themselves, does not apply as a matter of law to complaints against websites. Because of ongoing uncertainty about whether the ADA applies to websites, defendants across the country have been deluged with web accessibility lawsuits in recent years; if the ruling sticks, they will at least be spared the extra-high damages of the California version.  

Earlier today, Cato sued the Securities and Exchange Commission in federal court challenging the SEC’s policy of imposing perpetual gag orders on settling defendants in civil enforcement actions. The clear point of that policy is to prevent people with the best understanding of how the SEC uses its vast enforcement powers from sharing that knowledge with others. But silencing potential critics is not an appropriate use of government power and, as explained in Cato’s complaint, it plainly violates the First Amendment’s protections of free speech and a free press.

The case began when a well-known law professor introduced us to a former businessman who wanted to publish a memoir he had written about his experience being sued by the SEC and prosecuted by DOJ in connection with a business he created and ran for several years before the 2008 financial crisis. The memoir explains in compelling detail how both agencies fundamentally misconceived the author’s business model—absurdly accusing him of operating a Ponzi scheme and sticking with that theory even after it fell to pieces as the investigation unfolded—and ultimately coerced him into settling the SEC’s meritless civil suit and pleading guilty in DOJ’s baseless criminal prosecution after being threatened with life in prison if he refused.

The author now wants to tell his side of the story, and Cato wants to publish it as a book—but both are prevented from doing so by a provision in the SEC settlement agreement that forbids the author from “mak[ing] any public statement denying, directly or indirectly, any allegation in the [SEC’s] complaint or creating the impression that the complaint is without factual basis.” This provision appears to be standard not only in SEC settlements, but with the CFTC, the CFPB, and possibly other regulatory agencies as well. Thus, when the federal government unleashes its immense financial regulatory power in a civil enforcement action, the price of settling—as the vast majority of cases do—is a perpetual gag order that prohibits the defendant from ever telling his or her side of the story.

This is a wildly inappropriate use of government power, and it is directly contrary to the spirit of accountability and transparency that permeates our founding documents. Indeed, the Sixth Amendment guarantees the right to a speedy and public trial precisely to ensure that when the government accuses people of wrongdoing it must place its cards faceup on the table for all to see. Today, however, 97 percent of federal criminal convictions are obtained through plea bargains, and a similar percentage of SEC civil enforcement actions are settled instead of adjudicated. This means that, contrary to the constitutional prescription for a public airing of the government’s case, most enforcement actions—both civil and criminal—unfold behind closed doors and under the radar. And it is increasingly clear that the process by which the government extracts confessions, plea deals, and settlement agreements from defendants in those cases can be incredibly (and even unconstitutionally) coercive. It is at this coercive dynamic that a significant portion of Cato’s criminal justice work takes aim, in order to restore the system envisioned by the founders and enshrined in the Constitution.

Thus, the more adamant the government is about preventing us from knowing what tools and techniques are being brought to bear against those whom it accuses of misconduct, the more important it is for us to find out. Perpetual gag orders like the ones routinely imposed by the SEC, CFTC, and CFPB as a condition of settlement are utterly antithetical to principles of good government and, not coincidentally, to the First Amendment’s protections of free speech and a free press as well.

Accordingly, we at Cato have teamed up with our friends at the Institute for Justice, which represents Cato in its challenge to the SEC’s unconstitutional policy of demanding perpetual gag orders as a condition of settlement in civil enforcement actions. Together, we aim to strike down not only the specific gag order at issue in this case, but all perpetual gag orders in all existing civil settlements with federal agencies—and to terminate the government’s policy of silencing those whom it accuses of wrongdoing.

It is often said that sunlight is the best disinfectant. The SEC and its cohorts are about to get a healthy dose of each.

Some prominent economists have begun to analyze formally the market for a privately issued outside money that they associate with Bitcoin. Rodney Garratt and Neil Wallace (2018) (ungated version here) model the relative values of (exchange rates between) “Bitcoin 1” and other hypothetical cryptoassets (“Bitcoin 2,” etc.). Linda Schilling and Harald Uhlig (2018) take a related approach to the exchange rate between “Bitcoin” and “the US dollar.” I use quotation marks here to indicate that the authors’ subjects are modeling entities, named after but not the real things. Their correspondence to the real things should not be taken for granted.

Both pairs of authors draw on a well-known theoretical result by Kareken and Wallace (1981): when two fiat currencies are perfect substitutes, the equilibrium exchange rate between them is indeterminate. To get the intuition, imagine that any payment made in US dollars can equally be made in Canadian dollars valued according to the going exchange rate. Nobody then has a reason to swap one currency for an equivalent amount of the other. No matter the level of the exchange rate, there is no pressure for it to change. Only the combined real money supply and demand matter, and any exchange rate is consistent with combined real combined real supply equaling combined real money demand. The combined real money stock could be 99% US dollars (at an exchange rate making one USD worth many CAD) or 99% Canadian dollars. Either rate is compatible with monetary equilibrium.

It easy to see, of course, that in the real-world fiat currencies are not perfect substitutes in all uses. Most obviously, legal tender laws and tax-payment restrictions imposed by nation-states make any two fiat currencies non-interchangeable. Canadians cannot pay their Canadian-dollar-denominated debts or taxes with equivalent amounts of US dollars; they need Canadian dollars. Garratt and Wallace (p. 1887) are aware of this objection to the relevance of the Kareken-Wallace (hereafter KW) result. But, they assert, no such objection can be made in the case of Bitcoin and coins that are identical to Bitcoin in all respects but brand name:

Bitcoin and its actual and potential rivals — in the title intentionally mislabeled bitcoin 1, bitcoin 2, … in order to indicate that there could be many of them — do seem to satisfy all the assumptions that Kareken and Wallace made to get exchange-rate indeterminacy.

Consequently, they write (p. 1896):

Much of the uncertainty in the value of bitcoin comes from the ease of creating perfect substitutes. It is easy to clone bitcoin and the creation of very close substitutes makes the value of bitcoin rest on beliefs that may be hard to pin down.

Without questioning the Garratt-Wallace analysis given their assumptions, I want to point out that a key assumption – that perfect substitutes are easy to create – is factually false with respect to real-world cryptoassets. Bitcoin and its actual and potential rivals are in fact not perfect substitutes and thus do not satisfy the KW assumptions. The reason does not come from legal tender or tax laws, but primarily from network economies in monetary systems that apply to cryptocurrency systems. The size of the Bitcoin network matters, and is not easy or cheap to replicate.

The concern that newer cryptoassets will be close to perfect substitutes for Bitcoin, and that because very cheap to produce they will drive Bitcoin’s value toward zero, has also been expressed less formally in blog posts by John Cochrane and much earlier by Brad DeLong. DeLong wisely included the caveat that Bitcoin could retain its value if it could remain differentiated from its rivals, but he doubted that it can do so, wrongly suggesting that its differentiation is tenuous because it rests on nothing but its being the oldest cryptoasset.

To grasp the relevance of network effects, it is important to note the basic fact that each coin has its own blockchain. New cryptocurrencies do not provide access to the established Bitcoin system, only to their own much smaller systems. Bitcoin’s thousands of validation nodes are not their validation nodes, which number many fewer. Newer coins are not as widely accepted in payments. They do not offer an equivalent ecosystem of wallets, retail payment processors like Bitpay, and other ancillary service providers. They are not traded on as many exchanges, or in similar volumes, and consequently have larger bid-ask spreads. Given the network advantages of a larger system with wider acceptance and established robustness, new coins that merely clone the Bitcoin code are not in fact close substitutes for Bitcoin.

Economic theory predicts that the marginal me-too coin, with a near-zero cost of production, will have a market cap of close to zero. Such me-too coins will not bring down the market cap of Bitcoin (or other established cryptoassets) when potential investors and users have no reason to prefer them. In general, to attract users and thereby attain a positive market cap, a new coin has to offer improvements over the Bitcoin system. The cost of making significant technical improvements is of course not negligible, so new cryptoassets providing them will never be easy to create or superabundant.

The cryptoassets that have gained positive value competing against Bitcoin have done so not by cloning it but by offering new-and-better features.  The most prominent improvements have been in four areas: greater speed in payment validation (e.g. Ripple, Stellar, Bitcoin Cash, Litecoin), greater privacy (Monero, Dash, Zcash), greater security against 51 percent attacks (NEO, Peercoin, Decred), and better infrastructure for smart contracts and applications (Ethereum, EOS).  Stability of value may be considered a fifth area, or so-called stablecoin projects may alternatively be considered an entirely different proposition.

New-and-improved coin projects continue to be launched. The publicity for new coin projects characteristically emphasizes how their technology differs from and improves on the Bitcoin protocol. It never says: we are merely a clone of Bitcoin. For a recent example, on the 3rd of January 2019, the same day as the tenth anniversary of Bitcoin’s launch, a new coin called Beam was launched.[1] Beam implements a next-generation blockchain technology (“Mimblewimble”) that enables greater privacy (less information about transactions is publicly revealed on its blockchain) and faster validation.

To say that a particular cryptoasset is distinct, and not a perfect substitute for Bitcoin, is not to claim that its market value in Bitcoins or in dollars is stable or readily predictable. Nor is it to deny that its value can go to zero, if the market completely abandons it as no longer a plausible contender. But it is to claim that news that raises or lowers the odds of the coin’s wider future adoption will drive changes in its relative value. Thus measured price correlations between other cryptoassets and Bitcoin are significantly less than one, and as low as 0.2 in the case of Ripple.[2] If two coins with predetermined quantity paths were perfect substitutes, by contrast, it would be hard to explain why any news should affect their relative values. That news does affect the relative values of real-world cryptoassets is evidence that they do not fit the assumptions of the KW indeterminacy result.

Philosophers distinguish a merely valid argument – the conclusion follows from the premises – from a sound argument, which is both valid and has true premises. Arguments that assume perfect substitutability among cryptoassets may be valid, but they are not sound.

[1] I am an advisor to Beam.

[2] Charles Bovaird writes of Bitcoin and Ripple (XRP) in an article for Coindesk: “The two currencies are quite distinct, a situation noted by cryptocurrency fund manager Jacob Eliosoff, and this situation might help explain their weak price relationship. Bitcoin and litecoin have differing value propositions and target separate audiences from XRP.”

[Cross-posted from Alt-M.org]

Alexandria Ocasio-Cortez hit headlines last week for advocating marginal income tax rates “as high as 60% or 70%” on those earning $10 million plus per year. Under her plan, revenues from such a policy would be put towards funding a “Green New Deal.”

Matt Yglesias, Paul Krugman and Noah Smith were quick out of the blocks to defend the idea of massive marginal tax hikes on high earners as simply sensible, mainstream economics. They appealed to the work of economists Peter Diamond, Emmanuel Saez, Thomas Piketty and others, who have set out the case for very high marginal tax rates on top incomes in academic journals over the last two decades.

These economists have indeed recommended the optimal marginal tax rate for the top 1% of income earners in the U.S. should be a combined (federal, state and local taxes) rate of 73 percent or higher – designed with the aim of maximizing revenue from top taxpayers.

But their recommendation is not analogous to jacking up marginal federal income tax rates on very high earners in our current code. Furthermore, their result depends on highly contentious philosophical positions and economic assumptions.

A question of philosophy, not economics

Where does their type of result come from? The most important driver is your view on the role of government and redistribution.

Diamond, Saez and others think government can assess the utility that different income groups obtain from keeping more of their own money. They think the government can then aggregate the usefulness of income for different groups to develop an overall “social welfare function,” aiming to allocate our incomes to maximize the welfare of society.

Assuming the very rich do not find additional income very useful, they argue we should attach zero weight to the welfare of the rich when setting tax policy. The only thing that matters is setting a rate to maximize revenues from the wealthy to redistribute to those further down the income scale.

Now, one could challenge this on practical grounds (would a Green New Deal really transfer resources to the poor? Are the rich only useful for their tax dollars?) But more on that later.

The key point is that the redistributive tastes of the economists overwhelmingly drive their result. Given the actual current tax system is nothing like their ideal, such tastes do not seem to reflect the preferences of the public.

Don’t take my word for it. Emmanuel Saez himself, in an older paper on this issue co-authored with Jonathan Gruber, set out different redistributive tastes governments might hold. These included:

  1. A Rawlsian view – where the government cares only about the poorest members of society (a policy of maximizing total revenue to redistribute)
  2. A Progressive Liberal view – where the government assumes the social weight we put on individuals declines as income rises, right down to zero for those at the top (a policy of maximizing revenue from the very rich)
  3. A Conservative utilitarian view – treating the rich and middle-classes with equal social weight, but those with very low incomes as in need of extra assistance (a policy of more limited redistribution)
  4. No redistribution at all (a policy designed to raise revenue to maximize efficiency with no concern for equity).

Gruber and Saez calculated the optimal marginal tax rates for each of these agendas presuming government could design a new tax code to raise the average level of revenue collected in the 1980s, given their own calculations about the responsiveness to taxes of different income groups.

The result for the optimal marginal tax rate on the rich (those earning $100k and above) was indeed 73 percent for the Rawlsian and Progressive Liberal outlook. But for a Conservative utilitarian approach, it was just 30 percent. And for a government that did not want to redistribute at all, the optimal rate would be just 3 percent.

What does the 73 percent optimal tax rate result really mean?

Thinking a top 73 percent marginal tax rate optimal then is overwhelmingly driven by your philosophical priors. As Greg Mankiw has previously intimated, it’s not clear that ordinary people share the view of the rich held by progressive liberals.

But, importantly, it is also a bait and switch for Krugman and Smith to use this result as implicit support for 73 percent marginal income tax rates being added to today’s tax code as proposed by Ocasio-Cortez.

Jonathan Gruber and Emmanuel Saez’s paper used data from the 1980s tax reform to estimate the responsiveness of different broad income groups to changes in tax rates. These calculated elasticity figures (which showed the rich more responsive than others to changes in tax rates) were then plugged into the social welfare functions described above to estimate what optimal tax rates should be according to a government’s redistributive objective.

But the results represent the optimal marginal tax rate if we had just a single tax on all income to replace existing taxes. This is very different from adding a top new rate of 73 percent rate for the federal income tax, as Ocasio-Cortez appeared to endorse. The 73 percent result assumes that in the new tax system “the social planner is free to reshape the tax system and remove all the deductions and exemptions embodied in the current law.” This would make it more difficult for people to tax plan or avoid high rates by changing the timing of charitable donations and realized capital gains, for example.

Helpfully, Gruber and Saez set out what the optimal total tax rate would be if all existing deductions and exemptions were assumed sacrosanct because they were politically difficult to abolish. In that case, the revenue maximizing, optimal marginal total tax rate (even under a progressive worldview) would be just 49 percent. This is only slightly above the 45 percent combined top marginal rate they observed the US tax system actually delivered at that time.

In fact, Saez and Gruber’s calculations, finding that the rich (and particularly high-income itemizers) are much more responsive to tax changes than the middle-class or the poor, imply that marginal tax rates on the highest income groups should be lower than those faced further down the income scale. The main policy implication of the Saez-Gruber work is that tax rates on all groups earning gross income below $100,000 should be jacked up to fund more redistribution to the poorest, if you’re a good progressive. Good luck to Miss Ocasio-Cortez making that argument!

What about the more recent paper by Peter Diamond and Emmanuel Saez cited by Krugman? Here, the 73 percent optimal marginal tax figure for top earners (those earning over $300,000) comes as part of a recommended package where marginal tax rates rise with income and peak for highest earners.

This result is again driven by a progressive social welfare function, but the optimal rising marginal rates result comes from the economists assuming a much weaker responsiveness of taxable income to changes in the tax rate than Saez’s earlier work. AEI economists have previously shown that the assumption used by Diamond and Saez of an elasticity of just 0.25 is far too low relative to other literature. But Diamond and Saez wave this concern away by saying that, ideally, governments can reform the tax code to minimize tax avoidance.

Making this heroic assumption, again, makes a big difference to the results. Diamond and Saez acknowledge that if they took the current tax system as given, with all its deductions and exemptions and assuming that state, local and payroll taxes were fixed, then the revenue-maximizing total marginal tax rate would be 54 percent (were top taxpayers as responsive as Saez previously believed).

This would mean something like a 48 percent top federal marginal income tax rate – certainly higher than the 37 percent top income tax rate we see for 2019, but way, way lower than the idea of tacking on a 73 percent rate for earners of $10 million plus proposed by Ocasio-Cortez.

It’s true that some other work – particularly that of Piketty, Saez and Stantcheva – have similarly recommended top marginal tax rates of between 71 percent and 83 percent. But their results use elasticities of tax responsiveness for the whole population, not just higher earners. Their “optimal” results depend on the U.S. government essentially eliminating the ability to tax plan through fundamental reform, including simultaneous huge hikes to capital gains and taxes on corporations too.  And they postulate that top pay for the very rich essentially just arises through socially-wasteful rent-seeking, meaning it doesn’t matter if the activity is discouraged.

Strangely, none of Krugman, Yglesias or Smith highlight that these economists’ calculated optimal rates assume that fundamental tax reform would eliminate almost all deductions and exemptions. This is one of the reasons why using Diamond-Saez’s work to back up Ocasio-Cortez’s idea while also comparing her proposed rate to tax rates in 1950s is so misleading (deductions were numerous back then, making the gap between statutory and effective rates huge.)

The U.K.: a case study

As an aside on the elasticity point, the U.K. has in recent years undertaken an experiment on first hiking its top rate of income tax from 40 percent to 50 percent, and then lowering it from 50 percent to 45 percent. The government’s rationale for the latter move, in the face of strong pressure, was that the elasticity of taxable income to the net-of-tax rate was somewhere between 0.4 and 0.7. This is substantially higher than Diamond and Saez’s 0.25. As such, the U.K. government believed that cutting the rate would barely lose revenue, but would be good for the rich themselves, and for broader economic health.

What happened? As I wrote in January 2014:

Cutting the 50p rate to 45p, as implemented by George Osborne, was only estimated to reduce the exchequer revenues by around £100 million after behavioral effects, including steps to avoid the tax, had been considered. Early indications after the tax was implemented suggested that the behavioral effects might be more significant still. In pure revenue terms, HMRC figures show that in 2011/12 and 2012/13 the amount collected from top income taxpayers was £41.3 billion and £41.6 billion respectively under the 50p rate before jumping to £49.4 billion in 2013/14, when the top rate was cut to 45p.

Of course, much of this may have been due to forestalling of income and other activities based on knowledge of the planned rate changes – but at the very least the ease with which those top rate taxpayers were able to rearrange their tax affairs should put significant doubt in the minds of those who believe that a permanent rate would lead to significant extra revenues.

What are the rich good for?

Perhaps the biggest problem with the analysis of Krugman and others though is that it views the responses of the rich to tax rates in a very static sense. Results are largely driven by how useful we consider current, existing income to different groups. Little thought is put into the long-term incentives to earn income in the first place. Yet tax rates could, on the margin, affect people’s decisions to invest in human capital or undertake the development of new ideas.

After all, income later in life is one “reward” or payoff for hard work or taking risks through entrepreneurial activity. It stands to reason that hiking top tax rates reduces the financial payoff to such activity and so may deter it. We know that superstar inventors are very responsive to tax rates in terms of their location decisions, as are star scientists. Diamond and Saez themselves acknowledge too that the long-term elasticity of income to net-of-tax rates could well be higher than they envisage because of deterring human capital accumulation.

Yet in Paul Krugman’s column, he implies that the usefulness of the rich to the poor is purely the tax revenue the former provide to be redistributed through government. As John Cochrane notes, this completely ignores the question of how people get rich in a market economy: by providing goods and services people want and need, and hence generating consumer surplus. If on the margin high tax rates deter a potential entrepreneur from deciding to set up the next Amazon, the loss to social welfare would be huge.

Krugman and Piketty seek to diminish this potential effect by looking at broad economy-wide growth rates historically under different tax rate regimes. Growth was good in the 1950s, they say, so high tax rates are evidently not that damaging. Sure, taxes are not the be-all and end-all. But, as noted by Magness, there was a huge difference between statutory tax rates and effective tax rates in the 1950s. Again, one cannot on the one hand claim that the 1950s shows high tax rates were fine for growth while also appealing to Diamond-Saez’s work which recommends eliminating the deductions which existed in the 50s.

Besides, there is another body of work – not least papers by Karel Mertens – that finds top marginal income tax rates *do* matter for GDP growth. And as Charles Jones has noted, if we accept new ideas drive economic growth and acknowledge after-tax income is a financial reward for innovation, then the optimal tax rate would be much, much lower than Saez suggests (Jones estimates 28 percent), precisely because we all benefit from the better products and higher GDP that result.   


As I hope this piece has demonstrated then, the results of Diamond-Saez’s work:

a)   Are dependent on a progressive worldview that is seemingly rejected through the revealed preference of voters

b)   Are predicated on a wholesale tax reform including the elimination of deductions, exemptions and opportunities for avoidance (unlike when the U.S. previously had high marginal rates)

c)   Are dependent on the assumption of less responsiveness of high-income individuals to tax rates than found in most studies

d)   Ignore the potential impact that high tax rates might have on future human capital accumulation or entrepreneurial activity

Krugman, Yglesias and Smith could use the Diamond-Saez work to say “there’s a progressive case for major tax reform, including high tax rates across the distribution, eliminating all deduction and very high rates on top earners.” Alternatively, they could say “there’s a progressive case for modestly higher top tax rates within the current code.” But they cannot claim simultaneously Ocasio-Cortez’s ideas merely echo the 1950s *and* reflect the work of Diamond-Saez.

Perhaps more importantly, they cannot claim those of us with different philosophical views, and hence different preferences for redistribution, are somehow ignorant of economics.

Crime along the border and national security will be major themes in President Trump’s upcoming address where he will likely make the case for declaring a national emergency to build his wall.  Shocking images and anecdotes of crime along the border fuel this narrative, but rarely are facts deployed to make the case.  We’ve addressed the terrorism and crime arguments frequently, but only rarely touch on border crime.  Border counties have far less crime per capita than American counties that are not along the border. 

If the entire United States in 2017 had crime rates identical to those in counties along the U.S.-Mexico border, there would have been 5,720 fewer homicides, 159,036 fewer property crimes, and 99,205 fewer violent crimes across the entire country.  If the entire United States had crime rates as low as those along the border in 2017, then the number of homicides would have been 33.8 percent lower, property crimes would have been 2.1 percent lower, and violent crimes would have dropped 8 percent. 


Table 1

Crime Rates by Counties in 2017, per 100,000

  Violent Crime Rate Property Crime Rate Homicide Rate Border counties 347.8 2,207.1 3.4 Non-border counties 378.6 2,256.4 5.2 United States 377.8 2,255.2 5.1

Source: FBI Uniform Crime Reports 2017.

The numbers in Table 1 come from the FBI’s Uniform Crime Reports for 2017 that we obtained via a special request from the FBI.  The crime rates are organized by county, with all crimes reported to sub-county agencies added up using county codes from the FBI’s 2012 Law Enforcement Agency Identifiers Crosswalk.  The population figures also come from the FBI and are based on the intercensal reports obtained by the FBI from the Census Bureau.  The 23 border counties are lumped together as one and compared to the non-border counties. The numbers for the entire United States are in the last row. 

Sheriff Ronny Dodson of Brewster County Texas said, “A lot of politicians are running on securing the border.  One’s got a six point plan, one’s got a nine point plan. They’re throwing tons of money at this border. I wish they’d just shut up about it.”  Dodson went on to say, “I think they’re [politicians] just throwing money at the border for nothing. I think people on the interior see all these shows about the border where there’s violence.” 

Although Dodson’s comment is just rhetoric, there is a lot more empirical support for his claims than there is for those who claim that there is a border crime crisis.