The Fall 2019 edition of the Cato Journal, the Cato Institute’s interdisciplinary journal of public policy, is now available online. This latest issue’s contributors tackle a range of timely topics—from Modern Monetary Theory, to the Supreme Court’s shifting stance on executive authority, to the politicization of the Federal Reserve, to the myths surrounding the meaning of an “optimal” top tax rate. You’ll find summaries of the articles on monetary matters—and links to their full text—here. Below is a run-down of two of this issue’s other highlights, with links to their full articles as well.

“Restructuring the U.S. Postal Service”

Chris Edwards, the Cato Institute’s Director of Tax Policy Studies and editor of down​siz​ing​gov​ern​ment​.org, calls for an overhaul of our current postal system modeled after several recent European privatization initiatives. Now on the verge of collapse, the United States Postal Service (USPS’) asset revenues have dropped by 5% over the past nine years, while its liability costs have skyrocketed by 167%. This situation, Edwards explains, is not wholly unique to the USPS: postal services around the world are struggling to reinvent themselves in the face of technological innovation and declining letter volumes. As a result, countries like Sweden and Germany are opening their postal markets to private competition and operational flexibility—and seeing remarkable increases in efficiency, affordability, and overall quality. Recommending that the USPS follow their lead, Edwards outlines four incremental reforms that the USPS should implement in the short term while it prepares to shift its services to the private sector in the long term.

First, however, Edwards details the economic and operational challenges currently facing the USPS. Some of these are external: technological innovation is winnowing public demand for letter delivery—once a massive source of revenue for the USPS, which enjoys a “legal monopoly” in that market. At the same time, package delivery—a market in which the USPS faces private competitors—is becoming an increasingly lucrative industry for those competitors, thanks in no small part to the “e‑tail” boom. The USPS’ other challenges, however, stem from its hybrid business structure. As a government-owned industry, it “enjoys a range of other benefits” that private corporations do not (like tax exemptions, legal immunities, and even certain regulatory powers). At the same time, the government “ties the hands of the USPS in many ways that prevent it from operating like a private enterprise.” Branches lack the authority to close unnecessary offices, adjust prices, or modify operating schedules to reflect shifts in demand. The awkward combination of privileges and prohibitions ultimately raises costs and lowers value for taxpayers and USPS branches themselves. After discussing the successful privatization initiatives now underway across several European postal markets, Edwards prescribes a similar set of remedies for Congress to adopt in crafting its own reform agenda for the USPS: allow it to close low-volume post office locations and “move… toward private sector labor and compensation standards”; reduce the scope of the USPS’ Universal Service Obligation (USO); prohibit it from cross-subsidizing its competitive services with revenues from its monopoly ones; and eventually, promote greater competition by making the USPS one player within a much more diversified, and far more innovative, postal delivery market.

“How the Supreme Court Promotes Independent Presidential Power”

Finally, Louis Fisher, a Constitutional Scholar at the Project on Government Oversight and a Visiting Scholar at the William and Mary Law School, reviews the alarming reversal of Constitutional precedent that has characterized many of the Supreme Court’s “war powers”-related decisions from 1936 onward. The U.S. Constitution grants Congress “express and implied authority in matters of war and foreign commerce,” Fisher begins, and for the first 147 years of its existence, Supreme Court precedent reflected Constitutional intent. Beginning with the 1936 case of United States v. Curtiss-Wright, however, the Court began to incrementally and systematically chip away at Congress’ statutory powers to initiate war and regulate foreign and interstate commerce, relegating the primary authority for these actions to the executive branch instead. “This determination to elevate the president above Congress,” writes Fisher, “inflict[s] substantial damage to democratic principles, the system of separation of powers and checks and balances, and constitutional government.” His article explores the series of flawed premises, judicial errors, and misconceptions about Presidential authority—especially in military affairs—that for nearly a century have inflated the power of the presidency at the expense of our Constitutional principles.

After cataloguing a number of 19^th century Supreme Court decisions that preserved the primacy of legislative discretion in military and commercial affairs, Fisher turns to the inflection point that reversed this trend: Justice George Sutherland’s discovery of the “sole organ doctrine” (which, as it happens, was not really a “doctrine” at all). Writing for the Court in its 1936 ruling on United States v. Curtiss-Wright, Justice Sutherland misinterpreted a phrase lifted from a speech—not a judicial decision—that Chief Justice John Marshall had delivered more than a century earlier, and under completely different circumstances, wherein Marshall had called the president “the sole organ of the nation in external relations.” By invoking (or perhaps creating) the so-called sole organ doctrine, Justice Sutherland endorsed the dubious theory that the executive holds “‘plenary and exclusive’ authority over foreign affairs.” Despite the fact that “Sutherland’s sole-organ theory was patently false,” however, it rapidly became canon, to the extent that the U.S. v. Curtiss-Wright ruling has since been called “the birth of the imperial presidency.” Fisher traces the ever-lengthening shadow of Curtiss-Wright and its misappropriation of the “sole organ doctrine” to the Nazi saboteur case (1942); the Japanese internment cases (1943–44); the Jerusalem passport case (2002); and several others. He also documents the scattered history of deviations from this new norm, but notes that even after the Supreme Court finally “jettisoned the sole organ doctrine” in 2015, it “proceeded to create a close cousin,” whose effects have arguably been just as damaging.

There are so many tariff threats, tariff announcements, and tariff impositions being tossed around these days that it can be hard to keep them all straight. With that in mind, I thought it was worth explaining the headlines today about some new U.S. tariffs relating to World Trade Organization (WTO) litigation over aircraft subsidies. These tariffs have the same negative economic impact as all the other recent tariffs imposed by the Trump administration, but it is worth noting that they aren’t quite as bad as many of those other tariffs because they are — so far, anyway — being pursued in accordance with international law. So while they are not good, they are less bad (if that’s any consolation).

Before I get to these particular tariffs, let me start off with some general background. Despite centuries of evidence to the contrary, President Trump, the self-declared “tariff man,” seems to think the protection tariffs give to domestic producers, combined with the revenue tariffs bring in, makes the economy stronger. He also seems to think tariffs are helpful as a negotiating tool, as we can threaten our trading partners with tariffs in order to extract concessions from them. (So far, there isn’t much evidence that this is very effective.) In addition, the Trump administration has been using tariffs as an enforcement tool: Having made the unilateral determination that China is behaving unfairly on trade, the administration is trying to use tariffs to get China to change its behavior. No luck there yet either.


These are all particularly bad uses of tariffs. But there is another use of tariffs that, while it is far from ideal, is at least designed to support the rule of law and reduce trade barriers. At the WTO, if a government believes that another government is violating the rules, the first government can file a complaint and have a neutral adjudicator decide whether there is, in fact, a violation. If that adjudicator finds a violation, and the guilty party does not come into compliance, the complainant can then get authorization to impose tariffs, in order to induce the guilty party to come into compliance. These tariffs certainly aren’t great, but their objective is to help us get to a world of lower trade barriers through a neutral arbitration process governed by the rule of law.


It is this rule of law process that has been followed for the tariffs in the news today. As CNBC reports:

The World Trade Organization (WTO) has backed a U.S. request to impose tariffs on $7.5 billion of European goods, potentially sparking a new trade war across the Atlantic.

Arbitrators from the WTO have granted President Donald Trump’s administration the right to levy billions against imports of European goods for what they say are illegal subsidies granted to the planemaker Airbus by European governments.

It may take a week or two to go through one more formal WTO step before the tariffs can be imposed.

The ideal outcome here is that the EU removes those subsidies, with pressure from these tariffs acting as an incentive. In the meantime, though, American consumers and businesses will feel the costs of the tariffs, with a wide range of products, including cheese, wine, and aircraft parts, to be affected.


At the same time, keep in mind that the EU has also challenged U.S. government subsidies to Boeing, and some time in the coming months the EU will get authorization to impose its own retaliatory tariffs. (The EU may also make an argument that it can impose retaliatory tariffs sooner, based on an old U.S. violation of WTO rules).


The ideal outcome would be that both sides will remove, or at least rein in, their aircraft subsidies, and I hope that these tariff authorizations move us in that direction. But it will be a challenge. These cases (and their earlier iterations) have gone on for decades. The WTO has generally been helpful with resolving trade disputes, but some issues are very difficult to resolve. Nevertheless, with the threat of tariffs now becoming real here, it would be great if both sides would start taking seriously the task of working out how to limit subsidies to the aircraft industry.

The Fall 2019 edition of the Cato Journal, the Cato Institute’s interdisciplinary journal of public policy, is now available online. Readers of Alt‑M will find the articles on monetary and financial topics of special interest. Their topics range from financial inclusion, to macroprudential policy, to Modern Monetary Theory, to the politicization of the Federal Reserve, to European monetary policy. Here are links to the full-text articles–followed by a summary of each.

“Consumer Protection and Financial Inclusion”

Drawn from remarks he delivered at the Cato Institute’s Financial Inclusion Summit this past June, Brian Johnson’s article, “Consumer Protection and Financial Inclusion,” explores the relationship between financial inclusion, consumer protection, and free-market innovation. At the same time, Johnson–currently Deputy Director at the Consumer Financial Protection Bureau–draws a sharp contrast between promoting these ideals and “giving license to government actors to supplant consumer preferences with their own.” Too often, he writes, regulators conflate the two: intervening in private markets, corrupting the principles of competition and choice, and jeopardizing consumers’ interests. While these sorts of regulations are “market-replacing,” Johnson says, others can be market-enhancing. He identifies three approaches to consumer protection, the first two of which promote private choice and innovation, whereas the latter restricts them. The first, which Johnson calls the “disclosure-based” approach, favors regulations that prioritize transparency, facilitate the flow of information from businesses to consumers, promote trust between free-market participants, and grant individuals greater autonomy over their financial decisions. The second, which Johnson calls the “consumer welfare” approach, favors regulations that prevent businesses from obstructing consumer choice through unlawful exclusion, discrimination, or deception.

Yet businesses aren’t the only parties capable of consumer exclusion or obstruction: the government can also impede product access and financial innovation by taking a “product restriction” approach to regulation. This third and final approach, Johnson explains, blocks consumers’ abilities to access products and business’ abilities to design them. By “den[ying] consumers the choice to which they should be entitled,” he writes, product restriction represents a “conscious policy of financial exclusion.” Debates surrounding which of these approaches will promote a free and prosperous society are not new, he adds. They are merely new iterations of “the age-old debate about liberty and security.” In identifying the optimal level and scope of financial regulation, agencies should choose those policies that promote consumer responsibility and provide individuals with the greatest opportunity “to make their own choices in free markets.”

“Macroprudential Policy, Leverage, and Bailouts”

Allan M. Malz, Adjunct Associate Professor at Columbia University and former Vice President at the Federal Reserve Bank of New York, explores a new trend in monetary policy that emerged in response to the 2007-09 global financial crisis. Called “macroprudential policy,” its advocates believe it can help prevent future crises by supplementing, and sometimes superseding, “microprudential” policies like inflation targeting and interest rate targeting. Malz begins by explaining the differences between the two. Microprudential policy, as its name suggests, applies to discrete measures of financial stability, like prices and economic growth. Macroprudential policy, on the other hand, attempts to measure and enhance overall financial stability. As a result, the range of macroprudential metrics and tools is broader, vaguer, and more likely “to vary over time, parametrically or at the discretion of regulators.” In other words, the success of any macroprudential policy requires regulators to accurately “recognize threats to [financial] stability and react quickly and correctly.” This concerns Malz, who considers regulatory discretion one of the chief causes of financial instability, rather than the cure. Too many regulatory policies shower undue favoritism on firms that are “too big to fail” and grant guaranteed bailouts to financial behemoths, he argues. Such policies only aid and abet the ongoing—and equally significant–problem of chronically undercapitalized banks. By increasing the scope of regulatory discretion—and the number of lopsided policies that often result–Malz argues that macroprudential policy “doesn’t fix this problem, but tries to ward off its consequences.”

Malz would rather tackle that problem head-on. Calling for “higher ratios of better-quality capital,” he discusses a series of proposed measures for enhancing banks’ capital requirements, removing guaranteed government bailouts, and improving the accuracy and transparency of bank asset risk assessments. Such measures can strengthen banks’ financial resilience without requiring regulators–or taxpayers–to foot the bill, although they also leave open the question of how (or whether) regulators should provide support to failed or failing banks. Malz warns that imposing any sort of immediate no-bailout policy could create market whiplash, and that as a result, “unwinding [bailout] guarantees cannot be done overnight, but only gradually.”

“Modern Monetary Theory: Cautionary Tales from Latin America”

This issue of the Cato Journal features two articles on Modern Monetary Theory (MMT), an increasingly popular monetary philosophy that, as Sebastian Edwards (Henry Ford II Distinguished Professor at the UCLA Anderson Graduate School of Management) explains, hinges on the belief that “it is possible to use expansive monetary policy–money creation by the central bank (i.e., the Federal Reserve)–to finance large fiscal deficits, and create a ‘jobs guarantee’ program that will ensure full employment.” Although MMT has garnered plenty of disciples and detractors in recent years, there is little empirical literature on how well its policies would work in vivo.

Edwards’ article takes the first step toward changing that. He begins by illuminating the parallels between MMT and another approach to political economy, called “macroeconomic populism.” Similar to MMT’s policy goals, macroeconomic populism’s “set of [expansive monetary] policies” are “aimed at redistributing income by running high fiscal deficits.” Macroeconomic populism also parallels MMT’s rejection of free market principles, distrust of competition, fear of economic globalization, and support for “price and exchange controls, high minimum wages, high import tariffs, and large subsidies.” Both approaches also favor “state-owned enterprises and… large multinationals (often associated to natural resources, such as oil and mining).”

Edwards then outlines what he and other economists call “the four phases of [macroeconomic] populism,” which he uses as a framework for comparing three Latin American monetary regimes: Chile under Salvador Allende; Peru under Alan García; and Venezuela under Hugo Chavez and Nicolás Maduro. All three implemented policies and deployed rhetoric characteristic of MMT, and all experienced an eerily similar progression of events. In the very short term, the new regimes’ expansionist monetary policies produced a fleeting patina of economic prosperity. Inevitably, however, runaway inflation followed and grew higher with every effort made to conceal it. Both Modern Monetary Theorists and macroeconomic populists support financing fiscal deficits by printing more money, Edwards explains. But in the absence of true market growth, all that this means is that the velocity of money skyrockets, while its overall value plummets. The final inflation and unemployment data that Edwards presents from each of these countries show that “all these cases ended up in major macroeconomic disasters”–worse off, in fact, than they were under the depressed economic conditions that precipitated the populist uprising.

“Modern Monetary Theory: A Critique”

Warren Coats (currently a Fellow at the Institute for Applied Economics, Global Health, and the Study of Business Enterprise at The Johns Hopkins Krieger School of Arts and Sciences) takes aim at two of MMT’s core tenets: that countries with sovereign currencies can–and should–print unlimited amounts of that currency in order to fund unlimited government expenditures (partly as a means of employing jobless citizens); and that doing so will neither impede private investment nor spike inflation, since the government can always “drain” the markets of excess reserves through a combination of monetary and fiscal policy tools. As Coats points out, this last idea–that elected lawmakers should use fiscal policy measures, like taxation, to conduct monetary policy–would completely erode the principle of a politically independent central bank.

The article begins by juxtaposing the conventional, “money multiplier” narrative about the relationship between government-issued “base money” and market-generated “broad money” with the MMT narrative. According to the money multiplier theory, which informs the conventional approach to monetary policy, an increase in base money (i.e., currency held by the public plus bank reserves held at the Fed) will lead to a multiple increase in the money stock (i.e., currency plus demand deposits) as banks extend credit in a fractional-reserve system. According to MMT, however, market transactions are essentially closed systems. Quoting directly from three MMT-sympathetic economists, Coats explains that in the MMT worldview, “‘loans create deposits’ and ‘repayment of loans destroys deposits.’” He then reviews–and refutes–MMT’s claims that the U.S. government can “spend more without taxing more… because it can borrow in its own currency”; that after “borrowing” what it needs from either the public or the central bank, it can once again “spend more–by printing more money [or rather, by forcing the central bank to do so]–without crowding out private sector activity”; and that fiscal policy tools should also be used to manage the money supply.

Coats’ critique of MMT is both economic and normative. Before “shifting our limited resources from the private to the public sector,” he writes, we must ask ourselves “whether society is made better off by such shifts.” As his article shows, it is not. Any promise that MMT reveals an untapped source of extra “fiscal space”–one in which the government can spend more money without contributing to either deficits or inflation–rings hollow. What’s more, any proposal that would merge monetary with fiscal policy neglects a century’s worth of painful lessons about the perils of centralizing—and politicizing—both the means and the ends of production.

“Myopic Monetary Policy and Presidential Power: Why Rules Matter”

James A. Dorn, Vice President for Monetary Studies and a Senior Fellow at the Cato Institute, makes an especially timely case for a rules-based monetary policy in his new article. From President Trump’s recent insistence that the Fed buoy up his reelection prospects by lowering interest rates, to former New York Federal Reserve president William Dudley’s demand that the Fed tighten policy in order to thwart Trump’s shot at a second term, both maneuvers are stark reminders that, as Dorn puts it, “in the absence of a monetary rule, a central bank is vulnerable to politicization.”

The Fed’s “political independence,” Dorn explains, is meant to insulate it from partisan interference and help it fulfill its “triple mandate” of promoting stable prices, maintaining moderate interest rates, and achieving maximum employment. But that mandate is far too vague a substitute for a rule–especially since, in our fiat currency regime, the Fed already has considerable discretion in setting and adjusting monetary policy. And policy discretion is hardly political independence: Dorn reviews over half a century’s worth of partisan attempts to interfere in central bank policy in order to show that the Fed’s discretion is frequently the plaything of political whims–making it neither politically independent nor politically accountable. Notwithstanding a few exceptions, he writes, Fed policy tends to be politically “accommodative,” promoting an economy immediately favorable to the party in power.

Yet the short-term benefits of accommodative policies–high growth, easy money, and low interest rates–often give way to extreme long-term costs: high rates of inflation, skyrocketing national debt, and greater vulnerability to financial crises that, when they do occur, help justify further increases to the Fed’s discretionary powers. That cycle will likely worsen unless the Fed adopts and adheres to a monetary policy rule–or a series of them–about how to measure the health of our economy and when to intervene if that health begins to fail. Before that, Dorn urges Congress to establish a monetary commission to evaluate the Fed’s performance and “consider alternatives to the present discretionary government fiat money regime.” Until then, monetary policy tools will continue to double as tools for partisan meddling–and that, of course, will jeopardize the independence of more than just the Fed.

“Will Paying Interest on Reserves Endanger the Fed’s Independence?”

A few of the Fed’s new policy tools, however, might pose a threat to the Fed’s political “independence” in and of themselves. That’s the case that Robert Heller, a former member of the Federal Reserve Board of Governors and former President and CEO of VISA, makes in his article. Heller begins with a brief history of the Fed’s policy of paying interest on excess reserves, or IOER. As the “bank’s bank,” the Fed lends to and stores deposits from other U.S. financial institutions. In 2008, it began paying interest on those deposits, not only for banks’ required reserves (the amount banks need to meet the minimum legal threshold for solvency) but for their “excess” reserves as well. This radically altered the Fed’s relationship with the private market: whereas the Fed could once only “target” the rate at which banks borrow and lend among one another, its IOER policy now allows it to influence those rates directly. The Fed’s IOER rate, which it sets and adjusts at its discretion, creates an interest rate “floor” that private banks have little reason to borrow above or lend below. Taken alongside a second Fed policy tool, called Quantitative Easing (or QE), Heller explains that IOER also significantly blurs the lines between monetary and fiscal policy. Initially a strategy for injecting further reserves into the economy (not to mention adding to the Fed’s own capital surplus), QE involves the Fed purchasing large, high-risk (and therefore high-return) assets from large, private sector “dealer” banks, directly crediting those dealers’ Fed accounts as payment. As those dealers’ Fed accounts increase, so do their IOER returns. The Fed, in turn, profits from the interest paid on its new assets. Both QE and IOER simultaneously complement, and supplement, one another.

In some ways, this strategy worked too well: the Fed’s large-scale asset returns proved so profitable that lawmakers began leeching from its newfound surplus to finance their own pet projects–everything from government programs to entirely new bureaucratic agencies. (Ironically, Heller notes, this now makes the Fed “one of the least well-capitalized banks in the country”). Things soured, however, once the Fed decided to combat inflation by tightening monetary policy in 2015. This meant raising market interest rates–which the Fed could only do if it, too, increased its own interest payments to its members’ accounts. The more money it shunted to depositors, the less it had to delegate to lavish spending programs. As a result, every time the Fed raises interest rates, it also raises the level of tension between itself and our elected officials. This explains why we now see politicians across the aisle “blam[ing] the Fed for making excessive payments to the banks and for growing Treasury deficits.”

Heller concludes by urging the Fed to change course on both policies. Whatever costs may come from doing so, he argues, are benign compared to the potentially irreversible damage that will befall to our economy–not to mention our political institutions–if the Fed stays on its current path. Unless the Fed winds down its balance sheet expansion and reduces its market footprint, he writes, “increased political pressures may well… threaten the position of the Fed as a separate and independent government agency.”

“The 1948 German Currency and Economic Reform: Lessons for European Monetary Policy”

Gunther Schnabl, Professor for Economic Policy and Director of the Institute for Economic Policy at Leipzig University, lends some historical perspective to present-day debates about what the European Monetary Union (EMU) should do to mend an increasingly fragile and uncertain European economy. Schnabl suggests that the EMU revisit the monetary policies and economic philosophy of ordoliberalism, which many scholars today credit for Germany’s remarkable post-World War II socioeconomic recovery. Ordoliberalism, Schnabl explains, is a “concept for a market economy” in which the state does little more than provide the regulatory foundation most conducive to private competition and innovation. Its core principles are monetary and currency stability; free prices; open markets; individual ownership of the outcomes of their financial decisions; and a “constant and forward-looking” economic policy that defends “market principles against interest groups.”

Schnabl presents data supporting his claim that ordoliberalism fueled Germany’s postwar growth and facilitated the rapid increase in prosperity and economic integration that spread throughout Europe at the same time. He then chronicles the dramatic shift in European monetary policy that followed the creation of the European Central Bank (ECB). Particularly in the aftermath of the 90’s dotcom boom, the ECB concentrated its economic stabilization efforts on lowering interest rates, raising inflation, expanding government asset purchases, and increasing government spending. These policies had detrimental and far-reaching consequences the German economy and for Europe as a whole. Schnabl even traces Europe’s current climate of political unrest and factional extremism to the ECB’s post-2000 policy stance. The first step toward mitigating that political and economic unrest, he says, is for the ECB to wind back its dangerously loose monetary policy. Beyond that, however, the EMU should undertake further reforms to restore the legacy of ordoliberalism. “Just as the stable German mark was the backbone of the German economic miracle,” he writes, “a stability-oriented European monetary policy is today the prerequisite for economic and political stability in Europe.”

“Optimal Top Tax Rates: A Review and Critique”

With the 2020 elections heating up, so are debates about what an “optimal” tax rate for the wealthiest Americans would be. But as Cato Institute Senior Fellow Alan Reynolds explains, the terms of that question are themselves open to debate. Before we settle on what an “optimal” top tax rate is, we have first to determine what the word “optimal” even means. Is an “optimal top tax rate” one that maximizes economic efficiency, innovation, and productivity? Or is it one that maximizes tax revenue itself? As Reynolds notes: “what is optimal from the point of economic efficiency… is not necessarily optimal if the government’s priority… is to maximize tax revenue collected from high incomes, ostensibly for the purpose of redistributing that extra revenue to the poor.” Nor is it clear, even if the goal is to increase the amount of tax revenue the government collects, that raising taxes on the very wealthy will do the trick. This is because the sheer act of raising or lowering income tax rates changes the way in which individuals report that income. The metric that most economists use to measure that change–the Elasticity of Taxable Income (ETI)–calculates the difference in individuals’ income tax returns before and after major tax adjustments. This is why Reynolds calls it “treacherous” to “derive optimal tax rates from tax return data,” since “when marginal tax rates go up, reported top incomes go down.”

Even within the economic literature, the specific rate of ETI is fungible, and Edwards’ article refutes several of the most extreme claims that ETI is, or can become, virtually nonexistent. One reason for this is called “tax avoidance,” which has less to do with outright fraud and more to do with the fact that high earners can shift portions their income to things like stock options, capital gains, and employer benefits. Indeed, Reynolds shows that after top tax rates increased in 1993, so did stock-based executive compensation–although he also provides plenty of data to disprove what proponents of higher tax rates call the “CEO rent-extraction hypothesis,” whereby executives relocate massive amounts of their income to stock options following a tax hike. At the same time, Reynolds shows that when marginal tax rates go down, reported income levels rise. In addition to “tax avoidance,” ETI accounts for the effect that tax adjustments have on “incentives for productive activity such as work effort, research, new business start-ups, and investment in physical and human capital.” These, of course, are far more difficult to measure, as are their resulting downstream effects. Yet a number of empirical studies reveal a strong inverse correlation between marginal tax rates, GDP, and “long-term real activity.” In sum: ETI is higher than what most proponents of high marginal tax rates would suggest, and this is worth taking into account when we calculate “optimality” from any objective standpoint. Regardless of whether the aim of taxation is to heighten productivity or to raise government revenue, Reynolds concludes, the latter requires the former. “Income that is not created is not taxed,” he writes, and the “growth of real government revenues ultimately depends on growth of taxable income and wealth.”

[Cross-posted from Alt‑M.org]

The Cato 2019 Welfare, Work, and Wealth National Survey finds that a majority, 55%, of Americans favor “recategorizing drug offenses from felonies to civil offenses” such that they “would be treated like minor traffic violations rather than crimes.” Forty-four percent (44%) oppose treating drug offenses like traffic tickets.

Full survey results and report found here.

Majorities of Democrats (69%) and independents (54%) support decriminalizing drug offenses. However, most Republicans (59%) oppose this change while 40% favor.

This partisan gap is consistent with Gallup polling that has found Democrats and independents are more supportive than Republicans of legalizing certain types of drugs. For instance, Gallup found Democrats (75%) and independents (71%) are about 20 points more likely than Republicans (53%) to support legalizing marijuana.

Read more of the survey report here.

The Cato Institute 2019 Welfare, Work, and Wealth Survey was designed and conducted by the Cato Institute in collaboration with YouGov. YouGov collected responses online March 7 to 13, 2019 from a representative national sample of 1,700 Americans 18 years of age and older. The margin of error for the survey is +/- 2.2 percentage points at the 95% level of confidence.

Sign up here to receive forthcoming Cato Institute survey reports.

Since the 2016 election, the Trump administration has intended to freeze or repeal vehicle fuel economy and emissions standards. Last summer, the administration announced a plan to freeze Corporate Average Fuel Economy (CAFE) standards and to revoke a waiver that allows California to set its own vehicle emissions standards. While there has apparently not been much headway in the efforts to freeze CAFE standards, President Trump recently tweeted his intention to officially revoke the California waiver.

As I discussed in a blog last year, CAFE standards are a costly and imperfect remedy to limit vehicle emissions. They were originally enacted to address an entirely different problem: the oil shocks of the 1970s and soaring oil prices. The rules have since been repurposed to address greenhouse gas emissions, but they are an inefficient and clumsy tool.

But while the flaws of CAFE standards are straightforward, the costs and benefits of the California waiver are more ambiguous. The waiver, which was originally granted because of unique weather and geographic conditions around Los Angeles that make it particularly susceptible to smog, has also been repurposed to address vehicle greenhouse gas emissions. California is allowed to set vehicle emissions standards that are stricter than the federal government, and states are able to pick whether they follow the federal standards or California’s.

I argued in my blog last summer that, while CAFE standards should be repealed, the California waiver does serve a purpose, though its use as a tool to combat greenhouse gas emissions is ineffective:

Regulation of pollutants that affect local air quality should be decentralized because both the costs and benefits are local. But reduction of CO₂ emissions is a global public good. Any benefits accrue to the world’s climate even though the costs are local. This mismatch between the geographic incidence of costs and benefits imply that a waiver that exempts one state makes no sense in the context of CO₂ emissions and has the potential to unduly increase compliance costs for automakers.

In a recent blog post, James Sallee, an economist at UC Berkeley and the Energy Institute at Haas, makes the point that not only are the benefits of California’s higher vehicle emissions standards diffuse while costs are concentrated on Californians, but the benefits themselves are undermined by the fact that the state’s higher standards allow car companies to sell less efficient cars elsewhere. Sallee argues,

The federal greenhouse gas rule for automobiles, called Corporate Average Fuel Economy (CAFE) standards, require automakers to sell vehicles that, on average, have fuel economy above a certain threshold. If California has its own, stricter greenhouse gas rule, the cars sold in California still count as part of the federal fleet under CAFE. This means that every Leaf, Prius and Tesla sold in California improves the industry’s federal average. That enables automakers to sell more Mustangs and Suburbans in the rest of the country, which means that much, if not all, of the greenhouse gas mitigation that takes place in California will be offset by increased emissions throughout the nation.

The application of this so called “waterbed effect” to California fuel economy standards was described elegantly in a paper by Larry Goulder, Mark Jacobsen and Arthur van Benthem back in 2012. They studied the implementation of a California-specific fuel economy rule and concluded that between two-thirds and three-quarters of emissions reductions in California would be offset by increases in other states. In the meantime, the burden of complying with strong regulations would fall on Golden State consumers.

Sallee’s point reinforces the argument that the California waiver has, just like CAFE standards, been ineffectively repurposed as a tool to limit greenhouse gas emissions. But despite its flaws, California and 22 other states filed a lawsuit challenging the Trump administration’s revocation of the waiver. Perhaps they’d be less willing to fight for the waiver if they realized their higher emissions standards burden Californians with increased costs but only provide minimal benefits.

Written with research assistance from David Kemp.

Four years ago today the United States suffered a horrible maritime tragedy with the sinking of the Jones Act-qualified containership El Faro. Caught in the midst of Hurricane Joaquin during its voyage from Jacksonville, Florida to San Juan, Puerto Rico, the ship was lost with all hands. Although investigations performed by the Coast Guard and National Transportation Safety Board largely assigned blame for the disaster to the ship’s captain for his failure to divert away from the storm, the El Faro’s advanced age also garnered considerable attention. Built in 1975, the ship was 40 years old when it slipped beneath the heaving waves.

For an oceangoing ship that is ancient. A ship’s useful life is commonly estimated to be anywhere from 20 to 30 years, and some observers place that figure even lower. U.S. Maritime Administrator Mark H. Buzby has testified before Congress that “in the commercial world it’s rare to see a ship beyond about 15 or 20 years.”

But ships long past their normal useful lifespan remain abundant within the Jones Act fleet. Just last week the Lihue, the world’s second-oldest containership at 48 years of age, was placed back in service by carrier Matson after being laid up for 11 months. And that’s not even the oldest Jones Act ship. The Chemical Pioneer, a vessel partially made from the charred hulk of a wrecked containership, was built in 1968. A general cargo ship, the Coastal Trader, was built in 1963.

The evidence goes beyond anecdotes. According to the Maritime Administration’s latest statistics, 30 of the 99 Jones Act ships in existence were built in 1994 or earlier. The Jones Act fleet’s nine general cargo ships average 35 years of age while its two dry bulk ships average 38. Jones Act containerships may seem like spring chickens at 24 years of age, but their youth is very much a Jones Act-specific context; their international counterparts average a mere 12.

Fortunately, a handful of new ships are on the way. Matson’s ships Lihue and the 1973-built Matsonia are set to be replaced by the Lurline, slated for delivery later this month, and another ship also named the Matsonia next year. Carrier Pasha Hawaii, meanwhile, will take delivery of two containerships next year. Even after removal of these elderly ships and the addition of new ones the Jones Act fleet’s containerships will still average at least 20 years of age.

And then the fleet will once again start to advance in age. No additional orders for new ships are on the books and, as maritime publication Marine Log reported in June, “nobody is seeing much of a market developing for further replacement oceangoing Jones Act containerships or tankers.” In other words, after 2020 it will likely be years until the next new Jones Act ship arrives. 

This reluctance to purchase new ships despite the fleet’s relative decrepitude is easily explained by the Jones Act’s prohibition on the use of dramatically cheaper foreign-built ships. Matson’s latest two ships have a reported price tag of $511 million for the pair. The construction of similar vessels abroad likely would have cost one-fifth as much. These high prices serve as a barrier to market entry, raise the cost of transportation, and result in U.S. mariners plying their trade aboard ships that should have been retired long ago.

Reform, if not outright repeal, is urgently needed.

Peter Greene, an affable defender of public schooling and critic of most things “reformy,” is nonplussed: How could libertarians argue that religious freedom requires school choice? Writes Greene about “Libby folks”—presumably libertarians and not fans of canned fruit—“you have, of course, always been free to send your child to a religious school. What’s new here is the argument that the government should pay for it.” He goes on, “Libbys are saying that citizens should be taxed so that their children can practice their religion,” which doesn’t seem like a very libertarian thing to do.

I agree. It isn’t. Except for one thing with which Greene never seriously grapples: this is in a status quo in which everyone is taxed to support government schools, schools that, by law, must be secular. In other words, a system in which religious people are inherently second-class citizens. When Greene writes that he is “puzzled” because right-wingers “didn’t want to pay for anyone’s health care, why would they want to pay for their education,” the answer is that we are already paying for their education, only right now via one-size-fits all government schooling.

Of course, public schools cannot be explicitly religious for a good reason: we absolutely do not want government elevating one religion over another. We don’t want an explicitly Methodist government, because that renders all other people unequal to Methodists under the law. But by exactly the same token, when government elevates secularism—especially in shaping minds—over religion, it renders religious people unequal under the law.

At the risk of trivializing how important religion is to many people, it is not hard to understand the inescapable problems that public schooling has with diversity and equality. Perhaps a direct Libby metaphor will help: Suppose government forces everyone to pay for canned peaches, because nutrition is crucial for the body politic and everyone has to be treated equally. That’s great for people who love canned peaches above all other foods, but what about people who prefer canned grapes, or fruit salad, or filet mignon, or naan? Tough–only the canned peach crowd is going to be fully satisfied, making them more equal than others. And that’s just the start of the problem. Much more to the religious point, what about people who are allergic to peaches–people whom peaches actually hurt. Tough for them, too. They must pay for what hurts them, and if they need something else they’ll just have to buy it themselves.

Grappling with this problem, by the way, is not “new,” as Greene asserts. It goes at least as far back as Roman Catholics in the 1840s, who often rightly saw the de facto Protestant public schools as hostile to them, and argued that money should follow Catholic children to Catholic schools (alas, Greene is not the only one to forget that).

Greene, at one point, kind of even acknowledges the problem of public schools being unable to treat religious people equally, though it is ensconced in a dig at vouchers. He concedes that public schools do not always meet the ideal of religious neutrality, but argues that a voucher system doesn’t even try, all but ensuring that some amount of your taxes will end up in a school that teaches things you don’t like.

The problem here is largely one of scale. For one thing, public schools do not just occasionally fail at religious neutrality, they cannot be neutral. Neutrality itself precludes offering religious explanations as true for anything, while non-religious explanations are never legally off limits. For another thing, when everyone must pay for one system of government schools, all of their money goes to it, no matter how many things it does—bathroom policies, sex education, valedictory speech rules—they find unacceptable. Of course, some people will agree with what a district does more than others—some will even be among the rulers of the system—and they will be more equal. For religious people whose beliefs are excluded, the odds of equal satisfaction are especially long (though where religious groups are politically powerful they may still end up imposing their will).

With choice, all of these decisions are dispersed. Yes, some of a taxpayer’s money might go to schools with policies they dislike, but those dollars will be directed by the individual decisions of myriad families, and go to highly diverse educators and options. That means far more people will be able to get education consistent with their beliefs and values than in public schooling.

That said, as at least a few Libbys have long argued, while vouchers are far more just than government taking your money and deciding what will be put into all kids’ heads with it, they do compel taxpayers to fund beliefs and values they may not share. Which is why, along with a desire to minimize government interference in religion and schools, about which Green rightly warns, Cato education folks have long favored tax credits over vouchers, both for personal use, and for donations to groups that give scholarship to students. And Cato folks have not just championed tax credits, but systems in which donors are free to choose among scholarship-granting organizations that may uphold specific values, including religious, or may focus on non-religious education such as Montessori schooling, or science instruction, or myriad other things. Indeed, much of our focus has been on religion, but that is largely because religion gets special legal protection in the Constitution, and special legal exclusion from public schools. But our work has ultimately been about all people having the freedom to choose for countless reasons. In service of this, Cato’s Public Schooling Battle Map catalogues thousands of values- and identity-based conflicts to illustrate the inherently conflictual, zero-sum nature of public schooling, and most of these are not about religion but other forms of diversity. Want more Mexican-American history? No, unity. Want to wear clothes that express yourself? Sorry, inappropriate. Want to read about what you see as systemic injustice? What about views of police?

All things equal, most “Libbys” probably do not want taxpayer money going to religion. But all things are not equal: taxpayers are forced to pay for government schools, which by their monolithic nature cannot serve everyone equally. In light of that reality, school choice is a huge step toward the basic freedom and equality that libertarians champion.