A few weeks ago, American Compass released Rebuilding American Capitalism, A Handbook for Conservative Policymakers. After I provided a very brief critique of the handbook’s “Financialization” chapter in a Forbes column (American Compass Points To Myths Not Facts), Oren Cass, American Compass’s Executive Director, released a response titled Yes, Financialization Is Real. (Cass’s response lists many reports and statistics, but it does not answer my critique of the “Financialization” chapter. I encourage everyone to read Cass’s response, or one of his Twitter threads, to better understand how Cass and his organization produce research.)

To provide a more thorough critique of the “Financialization” chapter, my colleague Jai Kedia and I will release a series of Cato at Liberty posts over the next few days. The present post is the first in the series, and it expands on the most basic of my criticisms: American Compass’s failure to define financialization, the most important term in the chapter.

Although the American Compass handbook does not provide a coherent definition of financialization, it still claims “financialization is a blight on capitalism” and that financialization diverts “resources away from capital intensive projects and toward financial assets.” (See page 59 of the “Financialization” chapter.) In the foreword, Cass warns that “Financialization shifted the economy’s center of gravity from Main Street to Wall Street, fueling an explosion in corporate profits alongside stagnating wages and declining investment.”

None of these scary-sounding phrases define the term financialization or explain precisely what is (supposedly) diverting resources away from other projects, much less why such diversions are suboptimal. A robust research report would not make such mistakes. It would immediately define the term as clearly as possible to avoid any confusion, a bare minimum requirement to provide well-supported policy prescriptions to policymakers.

It is true, of course, that effective political campaigns often employ such rhetorical tactics. But American Compass isn’t a political campaign. It claims to be a think tank engaged in serious analysis of economic problems. It is American Compass’s responsibility to clearly define terms and problems so that policymakers (and others) can understand and evaluate American Compass’s recommendations. On this score, American Compass fails miserably.

From the very beginning of the chapter, the financialization concept is so broad that it could be construed as almost anything. For instance, after the chapter introduction acknowledges that “Robust financial markets are vital to a productive economy,” it states:

In recent decades, American finance has metastasized, claiming a disproportionate share of the nation’s top business talent and the economy’s profits, even as actual investment has declined. Businesses, rather than invest their own profits in growth and innovation, increasingly disgorge capital back into the market, where it flows into speculative frenzies that drive the prices of existing assets higher rather than creating new ones. The private equity and hedge fund industries have captured hundreds of billions of dollars in fees while underperforming simple market indices. Strategies that load debt onto companies place workers and their communities at risk while transferring the profits far away. This “financialization” of the American economy weakens the nation and threatens our future prosperity.

Based on this introduction, whatever financialization is, it consists of at least six different concepts. And just in case these concepts aren’t broad enough, the chapter also warns that the “ideas and ideologies” inside of corporations, as opposed to merely financial incentives, “play a primary role in setting business investment decisions.” It then states, “In this sense, ‘financialization’ is also a useful shorthand for the predominance of financial considerations in business management.” (It would be difficult to argue this last version of financialization is some kind of new phenomenon, but I digress.) On Page 62, the “Financialization” chapter includes the following items under the financialization umbrella: “corporate profit strategies and compensation schemes, rival foreign subsidies and industrial policies, [and] cumbersome environmental and permitting regulations.”

Even more confusingly, the chapter also claims the aforementioned resource diversion is both “one definition” and “the most pernicious effect” of financialization.

Further, citing a publication released by Senator Marco Rubio (R‑FL), the “Financialization” chapter argues that “For most of modern American history,” corporations primarily raised capital from the “rest of the economy and spent it on non-financial assets.” Supposedly, though, “Financialization (whether as cause or effect) disorders this cycle.” The parentheses are included in the original text.

So, while it seems this idea – corporations should invest less in financial assets and more in non-financial assets – might be the core of American Compass’s argument, it is impossible to tell whether financialization is causing the disorder or whether some disorder is causing financialization. Identifying what is cause and what is effect is a primary responsibility of the authors of such a report.

Yes, American Compass could be arguing that it is both cause and effect, but the question of precisely what financialization is remains a mystery. This critique – that American Compass fails to provide a coherent definition of financialization – is more than a technical matter. This failure is a major research flaw because it is impossible to analyze a problem without identifying the variables that would be affected by it, let alone the cause of the supposed problem.

American Compass uses the term so broadly that it can point to virtually any economic phenomenon or statistic, even a socially beneficial one, as “evidence” of how harmful “financialization” has been. (In this interview, Cass defines the term even more broadly than the “Financialization” chapter.) It allows critics of financial markets to engage in circular arguments, such as: financialization makes corporate profits explode, so public corporations are buying back shares, so investment is declining, which itself is also financialization.

Under such broad terms, anyone could easily associate “financialization” with any number of facts. For instance, financialization may have caused the female labor force participation rate to be almost 30 percentage points higher in 2022 than it was in 1950. Perhaps it caused the percentage of American households with a computer to increase from 8 percent in 1984 to 92 percent in 2018, or real median household income to rise from $50,000 in 1967 to $67,521 in 2020. Maybe it even caused workers with an associate degree to earn $157 more in median weekly earnings in 2020 than those with just a high school diploma.

The problem, of course, is that these kinds of statements amount to little more than opinions because the term “financialization” is used so broadly. And when critics provide evidence against these alleged effects (or causes?) of financialization, American Compass can easily push back by focusing on a different alleged effect or using a different piece of evidence. When critics point out that, for example, investment has not declined, American Compass can easily point to a different investment metric, thus changing the debate.

Obviously, this elusiveness is a great political strategy.

It becomes very easy, for example, to pit “Main Street” against “Wall Street” with what appears to be empirical evidence. It becomes easy to vilify the “speculators” who profit by “trading piles of assets in circles” instead of financing the “real” economic activity that provides jobs to typical Americans. American Compass can simply point out that someone earned high profits or that someone’s income declined. But neither these slogans, nor these simplistic data points, amount to evidence.

This kind of populist attack on finance is hardly new, and it’s one that lawmakers such as Senator Elizabeth Warren (D‑MA) use to vilify “Wall Street” for “looting” businesses. It is eerily reminiscent of the way government officials blamed Wall Street for the Great Depression, ultimately winning support for the Glass-Stegall Act. It also has some of the populist themes (the common man versus the banks) William Jennings Bryan used in his “Cross of Gold” speech at the 1896 Democratic National Convention, though Bryan failed, three times, to win the U.S. presidency. In fact, many aspects of American Compass’s concept of financialization are virtually indistinguishable from Karl Marx’s concept of fictitious capital versus real capital in Volume 3 of Capital.

With this Cato at Liberty series, we will not try to cover all the different versions and descriptions of financialization that American Compass uses. Instead, we will focus on the specific claims discussed in the original critique along with a few that didn’t make the cut in that Forbes piece. In the next post, we will discuss claims involving the nation’s top business talent leaving for the financial industry.

The Food and Drug Administration announced this morning that it has granted marketing approval for the over-the-counter sale of one type of birth control pill, a progestin-only pill (also called the “minipill”). As explained here, the minipill is not as easy to use as combination oral contraceptives. Dublin-based Perrigo, the maker of the pill that will have the brand name Opill, states it hopes to have the pill on the market by 2024.

As Josh Bloom and I wrote in May, enabling women to access this one brand of minipill is a ministep in the right direction. But the FDA should allow all women to access all forms of hormonal contraception over-the-counter.

Below are other articles I have written on the topic:

• FDA Might Approve Over‐​the‐​Counter Sales of One Birth Control Pill. Now It’s Time To Approve All the Rest
• Hey FDA, Free the Birth Control Pill!
• OTC Birth Control Pills–Just What The Doctor Ordered
• LA Times: Birth control should be available over the counter. How Congress can make that happen
• NY Daily News: Over-the-counter birth control? Bring it on
• Time: Women Should Not Have to Visit a Doctor for Birth Control

From the moment the Fed announced its decision last month to hold target rates steady, it seemed a future rate hike was inevitable. Minutes from that FOMC meeting already showed some disagreement, with a few voices such as Dallas Fed President Lorie Logan publicly calling for further rate increases. Additionally, Fed Chair Powell’s description of June’s rate pause as a “skip” (he immediately walked it back) indicated that future FOMC meetings would conclude with rate hikes.

In a post last month, we credited the Fed for its decision to keep target rates unchanged, an improvement from its earlier Covid-era policymaking. The available evidence from macro indicators such as inflation and unemployment simply did not warrant a rate hike. With the Fed seemingly set to increase rates again, we reiterate our recommendation that the Fed should keep its target unchanged.

Our previous post detailed the flattening of average month-to-month inflation (as measured via the Consumer Price Index). The inflation numbers released today continue along the same trend. The CPI increased only 0.2% from May to June – an annualized rate of 2.4% — keeping it within range of the Fed’s 2% inflation target. As we have pointed out before, the correct measure of inflation is short-term indicators like month-to-month, not year-over-year price changes (which is currently at 3%). This is because the annual rate may remain elevated, especially when keeping last year’s extreme inflation in mind, even though the monthly changes stay flat.

The newest CPI numbers do not indicate any need for a rate hike. The Taylor rule, an approximate relation between Fed policy and its dual mandate macro indicators – inflation and unemployment, would not advise a rate increase either. Here is a simple version of the Taylor rule:

FFR_t = 0.8 x FFR_t‑1 + ( 1 — 0.8 ) x [ 1.5 x Inflation_t -
0.5 x ( Unemployment Rate_t — NAIRU_t ) ]

In June, the realized federal funds rate (FFR) was 5.08%. Latest month-to-month CPI inflation was 0.2% – annualized to 2.4%. Using June’s unemployment rate of 3.6% and a 4.42% natural rate (NAIRU), the implied FFR for July should be:

FFR_{July 2023} = 0.8 x ( 5.08% ) + 0.2 x [ 1.5 x ( 2.4% ) -
0.5 x ( 3.6% — 4.42% ) ] = 4.866%

So, the Fed’s target range of 5.0 to 5.25% is already above the rule implied rate. The standard policy rule does not indicate any reason to keep raising rates; if anything it suggests a slight lowering of the target to a 4.75 to 5% range.

To reiterate, there are dangers to the Fed raising its rate target by too much, or too quickly. It may worsen credit market conditions and reduce economic activity, triggering a recession.

We restate the recommendation from our prior article:

The recent inflation figures appear to be on the right track, with annualized rates getting closer to the Fed’s regular 2 percent target. Given the stakes, holding steady makes perfect sense.

On July 7, the Washington Post ran a story by Anthony Faiola and Catarina Fernandes Martins with the headline, “Once Hailed for Decriminalizing Drugs, Portugal is Now Having Doubts.” The authors report that Portuguese policymakers are beginning to doubt the country’s landmark drug decriminalization program that began in 2001. Glenn Greenwald profiled Portugal’s reform in a 2009 Cato Institute white paper.

The reporters note that drug use, overdoses, and drug-related crime have increased from 2019–2023. They report that the percentage of adults reported to have used illicit drugs was 12.8 percent in 2022, compared to 7.8 percent in 2001. Yet, as they point out, Portugal’s adult drug use still remains lower than the European average.

In my letter to the editor, I argue that the article’s tone suggests the expectation that decriminalization would lead to a drop in illicit drug use. While it did, that was always a secondary goal. The primary goal was to reduce drug overdose deaths by redirecting resources from incarceration to harm reduction. I pointed out that Portugal’s harm reduction efforts have greatly succeeded.

I also pointed out that while overdose deaths increased between 2019 and 2023, for most of those years anxiety, despair, and isolation resulting from pandemic-related policies caused a worldwide increase in drug use—including alcohol consumption—and sparked overdose deaths. The authors of the Post article didn’t take this into account in their reporting.

Pundits and policymakers seek simple explanations for the rise in drug use and drug overdoses. For the past several years, they have blamed it mostly on doctors prescribing opioids too liberally to their patients in pain. But the evidence shows no correlation between prescription volume and the nonmedical use or addiction to opioids. And the National Survey on Drug Use and Health shows that the addiction rate of adults aged 18 or over to prescription opioids has remained at or below 0.7 percent since the survey began in 2002. Besides, doctors prescribing opioids can’t explain the surge in the use of and overdose deaths related to cocaine, methamphetamine, and other stimulants.

The evidence shows that a growing number of people are engaging in illicit drug use. Many might be self-medicating to treat psychogenic pain. Researchers at the University of Pittsburgh showed that overdose deaths in the U.S. have been increasing exponentially since at least the late 1970s. And Cicero et al. found that the percentage of heroin addicts who initiated drug use with heroin—heroin was their gateway drug—went from 8.9 percent in 2005 to 33.3 percent in 2015. The worldwide increase in drug use has psychosocial and sociocultural origins. The pandemic and pandemic policies only served to accelerate drug use.

The Post article features Portuguese police venting their frustration that many drug users they encounter on the streets turn down offers to enter rehab. But not every recreational drug user has an addiction problem, so no one should be surprised if not all users accept offers to enter rehab.

The reporters describe people in Portugal openly using drugs on the streets, with congregations of drug users in residential neighborhoods disturbing residents. In the interest of brevity, I did not address this in my letter to the editor. But libertarian philosophy professor Daniel Shapiro made the following valid point in an email correspondence we had about this:

The illicit drug users are clearly causing significant externality/​nuisance problems, and that is something it is legitimate to use the law to combat (not jail except in extreme cases, but certain fines and some kind of sanctions) Consider alcohol as a comparison: if a group of people are intoxicated and vomiting on public streets, are rowdy, and littering the street with bottles, it is legitimate to call the cops or some kind of enforcement authority to combat it. There is a quote in the article where someone said (correctly) that it was a human right to use–yes but not everywhere and anytime in public.

The worldwide trend suggests that non-medical drug use will continue to increase. Portugal’s policymakers were right in 2001 when they shifted the emphasis from punishment and incarceration to harm reduction. The ultimate form of harm reduction would be to end prohibition—as we did in 1933 with the drug alcohol—which will make drug users safer because the drugs they use will be legal and regulated.

You can read my letter to the editor here.

For the millions of consumers who enjoy the benefits of their Amazon Prime membership, Amazon’s annual Prime Day has effectively become a new Black Friday in July. But while Prime Day may be a chance to grab a great deal, Amazon’s popular Prime program has, at times, drawn attention from regulators.

A new FTC case alleges that these consumers are not willing members of Prime, but instead are trapped or misled into their membership. In June, the FTC filed a complaint against Amazon for their usage of “dark patterns” to manipulate consumers into enrolling in the company’s Prime subscription and overcomplicating the process to cancel. The agency alleges design features, such as the location of the subscribe button on the online checkout screen and the multiple webpages required to click through to initiate a cancellation of Prime, are “tricking and trapping” consumers into their subscription.

Amazon rejected the “concerning” claims of the complaint in a statement, maintaining that they “make it clear and simple” for consumers to subscribe and unsubscribe from its Prime service. As many have pointed out, unlike some services, cancelling Amazon Prime takes a mere six clicks and not the more cumbersome processes many consumers experience with gyms, newspapers, or cable, where they can click to subscribe but must call or go in person to cancel.

As Prime Day’s popularity shows, Prime members remain members because they find the service valuable. In fact, following the popularity of Prime, other large retailers like Walmart have launched their own similar services. Many retailers, including Target and Macys, will also have July deal weeks to counter Amazon’s Prime Week. Shoppers continue to have an abundance of choices when it comes to retail — both online and offline — and feel that consumers have many options.

Customers continue to choose Amazon, Prime, and Prime Day over other options not because they are trapped, but because they find value in it. Amazon declares “customers love Prime,” and there is much polling to support the company’s claim.

According to the American Customer Satisfaction Index (ACSI), Amazon had a 2023 overall satisfaction rating of 84%, an increase of 8% from 2022. Among online retailers, this is higher than Walmart, Target, and Costco.

One facet of the Prime service, Amazon Prime Video, has the highest satisfaction rating in the ACSI at 80% for streaming services. In the first quarter of 2021, the one-year renewal retention rate for Prime was 93% and 98% for two-year renewals. Even in the wake of new entrants to the retailer subscription market, like Walmart+ last year, consumers retain their ties to Amazon Prime, likely in part due to their overall satisfaction with the service.

Despite this consumer satisfaction and competition, the FTC continues to spend resources pursuing Amazon. If it is successful, it could ruin Prime and many other subscription-based discount services in the process, resulting in higher prices overall for consumers. The alleged “dark patterns” described are far from fraudulent or misleading, and much more user-friendly than many other services.

The FTC should be concerned about fraud, but its definition of “dark patterns” in the Amazon case would expansively include many common marketing practices and could even result in the agency dictating the design choices. If the agency is successful in its case, it could result in government bureaucrats dictating how subscription interfaces must look, rather than those designing the products, thus deterring providers from offering these services.

But Prime and Prime Day don’t just benefit consumers: they also benefit millions of small businesses that use Amazon’s platform to sell and connect with consumers. 2022’s Prime Day saw over $3 billion spent on more than 100 million items purchased from small and medium-sized businesses. The Amazon Prime “badge” that sellers can display comes with a certainty for customers that can increase comfort with small businesses or new products in expecting a specific level of service.

Prime Day has become a new, hotly-anticipated sale over the last nine years. The FTC case against Amazon’s Prime subscription is one of several challenges based in antitrust that could make it difficult to offer the Prime program that customers love. So much like that air fryer you’re eyeing up on Prime, let’s hope this isn’t the last year consumers get to take advantage of the generous deal Prime offers.

Congress will consider a new farm bill this year, which will likely be a logrolling extravaganza costing $1.5 trillion or more over the coming decade. Just as Lollapalooza had a diverse lineup of bands, the farm bill will include a diverse lineup of subsidies for farms, food programs, energy, rural programs, forestry, trade, environmental activities, and many other things. Hemp production used to be illegal but now gets subsidized in the farm bill.

In his book on government dysfunction, MSNBC host and former congressman Joe Scarborough described the logrolling frenzy leading to the passage of the 2002 farm bill, which he called the “largest corporate welfare scam in history.” He discussed how dairy subsidies were demanded by members from Maine, Pennsylvania, and Vermont, peanut subsidies were demanded by members from Virginia, Alabama, and Georgia, and sugar subsidies were demanded by members from Florida. The logrolling continued for cotton, wheat, wool, mohair, and many other products.

Scarborough concluded, “Standing alone, not one of these corporate welfare measures could survive the bright light of public scrutiny.” That is the key point about logrolling. Unfortunately, logrolling is central to the modern legislative process because the government has grown too large to consider individual provisions on their own merits.

Logrolling means that bills jammed full of special-interest provisions can gain majority support even if none of the provisions could gain majorities by themselves. Logrolling involves committee chairs or party leaders bundling together narrow subsidies benefiting particular states and interest groups. If democracy means majority support for specific policies, then logrolling undermines democracy.

The problem with logrolling has been observed since at least the mid-19th century when omnibus bills bundled dozens of Army Corps of Engineers projects across many states. At the time, people objected that these bills included low-value projects that did not have broad support. The federal government is much larger today, and so the logrolling problem is worse, as I discuss here and here.

Here is a June 2023 Congressional Research Service (CRS) report on the upcoming farm bill: “The omnibus nature of the farm bill can create broad coalitions of support among sometimes conflicting interests for policies that individually might have greater difficulty achieving majority support in the legislative process.” That is a polite way of saying that if you bundle a bunch of loser provisions together you can end up with a legislative winner.

Farm bill logrolling is becoming more extensive says the CRS:

In recent years, more stakeholders have become involved in the debate on farm bills, including national farm groups; commodity associations; state organizations; nutrition and public health officials; and advocacy groups representing conservation, recreation, rural development, faith-based interests, local food systems, and organic production. These factors can contribute to increased interest in the allocation of funds provided in a farm bill.

What can we do about it? The official baseline for the farm bill this year is $1.5 trillion over 10 years. Farm bill leaders in Congress think of the baseline as the minimum pot of money they can carve up and handout to dozens of special-interest groups in coming months. But the federal government is hurtling toward a debt crisis, and business as usual is not acceptable. The bipartisan debt-ceiling deal passed in May reflected a new priority of controlling red ink. We need belt-tightening all around and a much lower price tag than $1.5 trillion for any farm legislation.

I look at logrolling in detail here and here and farm subsidies here.

Last May, the U.S. House of Representatives passed the HALT Fentanyl Act, a futile attempt to address the overdose crisis by classifying as Schedule 1 drugs any new analogs of fentanyl (called “fentanyl-related substances” or “FRSs”) that the drug cartels synthesize in clandestine labs, and increasing mandatory minimum sentences for people found to possess them. As I told the House Judiciary Subcommittee on Crime and Government Surveillance when I testified in March,

Fentanyl is just the latest manifestation of what drug policy analysts call “the iron law of prohibition.” A variant of what economists call the Alchian‐​Allen Effect, the shorthand version of the iron law states, “the harder the law enforcement, the harder the drug.” Enforcing prohibition incentivizes those who market prohibited substances to develop more potent forms that are easier to smuggle in smaller sizes and can be subdivided into more units to sell… The iron law of prohibition cannot be repealed. Already we have been getting troubling reports of the veterinary tranquilizer xylazine—drug users call it “tranq”—becoming an additive to fentanyl and other illicit narcotics. This tranquilizer greatly potentiates opioids’ effects, producing more powerful “highs.” Adding this potentiator again enables illicit opioids to be smuggled in smaller sizes and subdivided into more units to sell. (Emphasis added)

Today the White House Office of National Drug Control Policy released a “response plan to address the emerging threat of fentanyl combined with xylazine.” The White House press release revealed that deaths from fentanyl mixed with xylazine—what users call tranq—increased 276 percent between January 2019 and June 2022. By then, roughly 11 percent of all fentanyl-related overdoses contained xylazine.

The ONDCP plan includes worthy harm reduction recommendations, such as making it easier for users to test their drugs for xylazine. The makers of fentanyl test strips have already developed xylazine test strips, but, unfortunately, many states still outlaw drug testing equipment or devices as drug paraphernalia. While many states have recently removed fentanyl test strips from their list of illegal paraphernalia, their lawmakers would need next to remove xylazine test strips from that list. It would be wiser for states to remove all testing equipment and devices from their lists of banned paraphernalia. Even better, as Minnesota recently did, they should repeal their paraphernalia laws altogether.

The ONDCP plan, however, makes the same mistake that the members of the House of Representatives made when they passed the HALT Fentanyl Act. Their plan proposes to “explore scheduling and other regulatory actions.” From page 9 of the plan:

Progress toward decisions on possible regulatory actions under the Controlled Substances Act, including scheduling of xylazine while simultaneously maintaining the legitimate supply of xylazine in veterinary medicine, and prioritizing facilitation of access to xylazine for research purposes. The government will also consider other potential avenues for prosecuting those who manufacture, import, export, sell, or distribute xylazine in order to support fentanyl trafficking.

Discuss whether any potential regulatory actions should be xylazine-specific or for a broader class of drugs or pharmacologically similar substances that could replace xylazine as a fentanyl adulterant.

Placing xylazine on the Drug Enforcement Administration’s controlled substances schedule will do nothing to deter its use in the drug trade—any more than designating marijuana, heroin, psychedelics, or FRSs as Schedule 1 has deterred buyers and sellers.

The ONDCP plan also calls for greater efforts to “support interdiction.” The U.S. has been waging war on drugs with greater interdiction efforts for over half a century, and drugs are cheaper, more potent, and more available than ever before. Doing the same thing repeatedly and expecting a different result is incompatible with reality.

Drug prohibition and the dangerous and lucrative black market it creates cause the overdose crisis.

Today’s report on the worsening xylazine crisis validates my admonition to lawmakers last March. The House’s passing of the HALT Fentanyl Act was another example of fighting the last battle. The lawmakers hoped to reduce overdose deaths by designating analogs of fentanyl as Schedule 1 when the drug cartels had already moved on to xylazine. As long as policymakers continue enforcing prohibition, another drug crisis from another drug will be in the queue.