The U.S. economy continues to do well, but many fear that economic expansion only benefits a few Americans, while leaving most households behind. As political analyst Juan Williams opined in The Hill earlier this year, “The rich got their Trump tax cut. GDP looks good. And the stock market is doing great for people with money to invest. But it is only the rich who get the big rewards in Trump’s economy. What about the middle class?”

The middle class, it turns out, is shrinking. But not because they are falling into poverty, as some might have you believe. Rather, it is shrinking because more people are “moving on up,” ascending into a higher income bracket — and living the American dream.

Since 2016, the United States has had more wealthy households than middle-class households and the share of low-income households has reached a historic low.

This is hardly a new trend. As I wrote in 2016, the middle class is shrinking due to growth in rich households. When I last wrote on that topic, though, there were still more middle-class households than rich households.

According to the most recent data from the U.S. Census Bureau, in 2018, over 30 percent of U.S. households earned over $100,000 (i.e., the upper class). Fewer than 30 percent of households earned between $50,000 and $100,000 (i.e., the middle class). The share of U.S. households making at least $100,000 has more than tripled since 1967, when just 9 percent of all U.S. households earned that much (all figures are adjusted for inflation).

In 2018, the share of households earning less than $50,000 (i.e., the lower class) dropped below 40 percent for the first time since the U.S. Census data on this metric started to be collected in 1967. Back then, 54 percent of households earned less than $50,000.

So the next time you hear someone allege that the economy is leaving an increasing share of American households behind or see a pundit bemoan the “shrinking middle class,” take a closer look at the data and keep in mind that a “shrinking middle class” may actually be a sign of growing prosperity.

In the late 19th century, dozens of states enacted amendments banning government aid to churches, religious schools, and other “sectarian” organizations. These “Blaine Amendments,” named after Senator James G. Blaine of Maine, who failed to secure the passage of a similar amendment to the U.S. Constitution, remain in force in many parts of the country.

At the time these amendments were passed, it was widely understood that public schools followed a curriculum sympathetic to Protestantism to the exclusion of other religious traditions. “Sectarian” was a euphemism for “Catholic” and the Blaine amendments were widely recognized as an effort to bar funding to Catholic schools. While their anti-Catholic motivations are now a matter of history, Blaine amendments, such as Article X, Section 6 of the Montana Constitution, are still in effect and often serve as a pretext for discrimination against religious groups.

Kendra Espinoza is a single mother who works two jobs to afford her daughters’ private-school tuition. When her youngest daughter struggled in public school and her older daughter was bullied, Kendra decided to enroll them both in Stillwater Christian School in Kalispell, Montana, where they have since flourished. At Stillwater, Kendra feels that her faith is supported by the school’s Christian character. Kendra benefited from a Montana program that provides tax-credit incentives for donations to scholarship funds that have lessened the burden of her daughters’ tuition. When the Montana Department of Revenue issued a rule excluding Stillwater Christian from the tax-credit program, her children’s educational future was put in jeopardy.

While the Revenue Department defended its distinction between secular and parochial schools, the Montana Supreme Court ruled more broadly, holding that the tax-credit program as a whole violated the state constitution by authorizing aid to religion.

But under the First Amendment, states may not impair the free exercise of religion or pass any laws regarding the establishment of religion. This case thus raises the question: can a state strike down a neutral, generally available educational program simply because some of the program’s beneficiaries have directed their (not state) dollars to religious organizations? If the Department of Revenue prevails, states will have greater power to reduce school choice and single out religious organizations for unfair treatment.

Fortunately, the U.S. Supreme Court agreed to review the case, after Cato supported Ms. Espinoza’s petition for review. Cato has now filed a Supreme Court brief on the merits. We argue that the Free Exercise Clause does not allow Montana to exclude religious organizations from public benefits solely because of their religious association. Not only does the Establishment Clause allow these kinds of incentives, but there is no room in Supreme Court precedent to exclude religious schools from programs structured around private choice (as opposed to, say, direct taxpayer funding of devotional education). The Montana court’s decision does not change the discriminatory nature of the state’s Blaine Amendment.

The Supreme Court will hear argument in Espinoza v. Montana Department of Revenue in early 2020.

Democrats are proposing to raise capital gains taxes. Ranking member on the Senate Finance Committee, Ron Wyden, wants to tax capital gains on an annual basis, not the current realization basis. He also wants to hike the top capital gains tax rate for high earners to match the top rate on ordinary income. CNBC reports “Almost every major Democratic presidential candidate supports taxing capital gains as ordinary income …Sen. Elizabeth Warren on Thursday outlined an even more aggressive planthat would impose a new 14.8 percent tax on investment income to help finance Social Security.”

These are radical and misguided ideas. This 2012 study discusses why capital gains taxes should be low or even zero. The study found that the United States already has high tax rates compared to other countries. The U.S. federal-state rate on individual long-term gains of 28 percent compared at the time to an average across 34 OECD countries of just 16 percent.

A 2018 study by OECD economists provides newer data for 33 countries. One finding is that “all countries tax capital gains on realization,” that is, when assets such corporate shares are sold. Not one of the 33 countries taxes gains on an annual or accrual basis, as Wyden proposes.

The OECD study calculates the combined federal-state capital gains tax rates on investments in corporations in 2016, which are shown in the chart below. The calculation includes the corporate-level income tax and the tax on individual long-term gains.

The study found that the United States had the highest capital gains tax rate of all 33 countries at 56.2 percent. That rate is the combo of a 38.9 percent federal-state corporate tax and an individual federal-state capital gains tax of 28.3 percent (which is applied to the after-tax corporate income).

Numerous countries in the OECD study do not tax individual long-term capital gains at all, including Belgium, Chile, Costa Rica, Czech Republic, Hungary, Luxembourg, New Zealand, Singapore, Slovenia, Switzerland, Turkey. The individual capital gains tax rate on long-term investments in those countries is zero.

Since the study, the U.S. has dropped its federal corporate tax rate from 35 percent to 21 percent, so I’ve added a bar in the chart to show the U.S. rate in 2019. The new lower U.S. rate of 46.2 percent is still the 8th highest among the 33 countries.

The Democrats would repeal most or all of the GOP corporate tax cut and push the individual capital gains tax rate higher. What they are proposing is extreme. Other advanced economies have low capital gains taxes for sound reasons, as discussed here. Raising the federal corporate and individual capital gains tax rates would be a lose-lose-lose proposition of harming businesses and start-ups, undermining worker opportunities, and likely reducing government revenues.

Thank you to Naomi Riley for including me in her Wall Street Journal piece earlier this month on a New York scheme to empower birthparents whose parental rights have been terminated to petition nonetheless for court-ordered visitation. The quotes from me:

In many cases adoptive parents do arrange with birthparents for some kind of contact after an adoption is completed. “Some adoptive parents are glad to agree to those conditions, and that’s fine for them. Where they have not, it is a very bad idea to adopt a presumption of enforcing such a long-term obligation on unwilling adopters,” notes Walter Olson, an adoptive parent and a senior fellow at the Cato Institute.

The legislation presents serious logistical concerns as well. What if an adoptive family wants to move across the country? Would the courts be able to prevent them? “Adoptive families are real families and deserve the full rights of other such families unless they have agreed to some other arrangement,” says Mr. Olson.

And more:

In a letter to Gov. Cuomo opposing the bill, the group New York Attorneys for Adoption and Family Formation explained that the law may also violate the due-process rights of adoptive parents. In 2000, they point out, the U.S. Supreme Court struck down a similar Washington state law.

Both houses of the New York legislature have now passed the bill, which is supported by legal services groups like the Legal Aid Society of New York City but opposed by the Adoptive and Foster Family Coalition of New York (AFFCNY), the Council of Family and Child Caring Agencies (COFCCA), “which represents nonprofit foster care agencies statewide, and the New York Public Welfare Association (NYPWA), which represents county government child welfare directors,” as Michael Fitzgerald notes at the Chronicle of Social Change. AFFCNY has more on its opposition here, and notes: “Adoptive families would have no choice but to hire and pay for legal representation for themselves.”

[cross-posted from Overlawyered]

Today Facebook released a Charter for its Oversight Board. This institution may well face insuperable difficulties and come to nothing. But it is possible, perhaps likely, that the Facebook board will significantly influence the future of speech on the internet. The charter announced today offers a kind of constitution for the Oversight Board. What does the Charter mean for free expression?

First, some context. Facebook maintains Community Standards that users agree to abide by when joining the platform. Facebook censures or removes users who violate those standards. Such “content moderation” goes back almost to the founding of Facebook. Facebook may suppress speech in this way because the First Amendment does not apply to privately-owned forums like social media.

Facebook officials often say content moderation involves a tradeoff or as the Charter notes, “Free expression is paramount, but there are times when speech can be at odds with authenticity, safety, privacy, and dignity.” This statement is both ominous and reassuring. It suggests ominously that free expression will frequently give way to other values. It is reassuring because free expression is “paramount” which means “more important than anything else.”

If you read a lot about Facebook’s statements about this tradeoff, you might at times get the impression that free speech is just another value on par with safety and the other values mentioned above. But this statement (and others) indicates free expression has a higher standing for the company than the other values though it does not trump them in every instance. The Charter itself begins by saying free expression is a “fundamental human right.”

Mark Zuckerberg’s letter accompanying the Charter reinforces this view. The first paragraph states:

Facebook is built to give people a voice. Free expression is fundamental to who we are as a company, just as it is to a free, inclusive and democratic society. We believe the more people who have the power to express themselves, the more progress our society makes together. We want to make sure our products and policies support this.

Free expression comes first in the letter, and the CEO later says free expression is “paramount,” the same word that appears at the start of the Charter. Of course, the second paragraph of the letter deals with the values that limit free expression. But those values do not come first in the Charter or the letter.

Consider also that the Charter itself says “the purpose of the [Oversight] board is to protect free expression by making principled, independent decisions about important pieces of content and by issuing policy advisory opinions on Facebook’s content policies.” That’s different from saying the Board seeks to attain the best tradeoff between free expression and other important values. This mention of free expression in the preamble to the Charter matters. What is not mentioned about the purpose of the Board – values to be balanced against free speech – also informs our understanding of Facebook and its Board project.

One hundred Facebook employees have been working on this Charter for many months. The rhetorical priority given free expression is unlikely to be an accident. And it need not just be empty rhetoric. Saying free expression is paramount for the Facebook community should matter to the interpretations that issue from the Facebook Board.

In the United States, two institutions matter most to free speech: the Constitution and the Court that interprets it. We have Facebook’s Community Standards. What does the Charter tell us about the makeup of its “court”?

Here are the qualifications to be a Board member according to the Charter:

Members must not have actual or perceived conflicts of interest that could compromise their independent judgment and decision-making. Members must have demonstrated experience at deliberating thoughtfully and as an open-minded contributor on a team; be skilled at making and explaining decisions based on a set of policies or standards; and have familiarity with matters relating to digital content and governance, including free expression, civic discourse, safety, privacy and technology. (emphasis added)

The last phrase is disappointing. Free expression is one “matter” among others. It would have been more consistent with the “paramount” status of free speech to say members “should have a strong commitment to free expression and familiarity with matters relating to digital content and governance, including civic discourse, safety, privacy and technology.”

But the disappointment does not last. Four sections later, the Charter states: “members will contribute towards building a board that, as an institution, upholds and advances free expression.” Since Facebook says elsewhere they are seeking Board members dedicated to this institution, a commitment to free expression is a qualification for its members.

The Charter documents are not always wholly coherent. The Charter states, “When reviewing decisions, the board will pay particular attention to the impact of removing content in light of human rights norms protecting free expression.” This evokes international law on behalf of free speech. On the other hand, Zuckerberg’s letter states that the values that constrain speech are “guided by international human rights standards.” Indeed, Facebook’s documents reflect a tension in international law itself which both protects and limits free expression. Perhaps Facebook’s secondary values should be rooted in the company’s culture rather than international law.

The Facebook Board’s impact on free speech will be determined over time, decision by concrete decision. Free expression could have been treated as just another competing value in this Charter and related documents. It is more than that. Free expression is paramount. Now will the Facebook Board live up to its Charter?

This morning, President Trump announced via Twitter that he had directed Treasury Secretary Mnuchin to “substantially increase Sanctions on the country of Iran!”

I issued the following statement in response:

The problem with the Trump administration’s maximum pressure campaign isn’t the pressure. No one doubts that U.S. policy is imposing considerable pain on the Iranian people. Additional U.S. sanctions will likely increase this suffering, as my Cato colleague John Glaser predicted here.

But to no good end. The Iranians will never give in to U.S. demands; to do so would amount to utter capitulation, the complete surrender of Iranian sovereignty, and the de facto end of the Iranian government. This has been a fervent hope among certain hawks for decades, but hope is not a strategy. Additional pressure and pain cannot resolve the fundamental contradiction at the heart of the Trump administration’s strategy toward Tehran.

More broadly, if President Trump is serious about resetting U.S. foreign policy, he must revisit his expectations – and his administration’s policies. He may claim to want to end our endless wars, but his actions are leading in the opposite direction. A combination of bluster, threats, and intransigence will not produce a diplomatic breakthrough. On the contrary, it is likely only to exacerbate the many ongoing conflicts in the Middle East, and increase the chances that Americans are drawn more deeply into them.

Sparked by a Chinese extradition bill that would have made it possible for people in Hong Kong to be tried in the mainland’s justice system, protesters in Hong Kong have demonstrated against Beijing for 100 days as of this week. Since starting, the protests have grown to include a broader critique of the Chinese communist government’s policies in Hong Kong. In anticipation of a potential government crackdown, no doubt influenced by fear of a repeat of the massacre at Tiananmen Square 30 years ago, the option for protesters and their families to leave seems increasingly important.

One of the potential downsides of a universal “exit option” is that many Hongkongers would just leave the city permanently rather than trying to convince the government there to be more respectful of individual rights. My colleague Christopher Preble and I discussed this on a recent Cato podcast. That is a small concern compared to the potential humanitarian downsides of a deadly crackdown in Hong Kong where people do not have the option to leave, but such a universal exit policy from authoritarian regimes could undermine protest movements around the world and slow the advancement of individual liberty.

On the other hand, emigrants could help support pro-freedom protest movements in their home countries from relative safety in the United States or elsewhere. Protesters might also be more bold and people might be more likely to join the protest movement if they know that they can leave if the government responds in a more tyrannical fashion. A last potential outcome is that the possibility of a mass exit will induce governments to be less authoritarian. On this last point, Anne Robert Jacques Turgot went so far as to argue that American open borders in the 18^th century would “oblige the European governments to be just and enlightened.”

Fortunately, there is a large and robust academic literature on how emigration affects institutions in home countries. Michelangelo Landgrave and I even co-authored a short literature survey on this topic a few years ago to accompany other good surveys.

Unfortunately, only a small portion of that literature is relevant to the situation faced by Hongkongers. Much of that literature examines how return migrants affect institutions in their home countries, which wouldn’t be relevant to the potential effects for Hongkongers as they would likely never be able to return. Another large portion of that literature investigates how monetary remittances affect institutional development, which isn’t relevant for a rich place like Hong Kong. This post focuses on a handful of case studies on how emigrant communities affect political developments in their home countries.

The most relevant paper on this topic is by Toman Barsbai, Hillel Rapoport, Andreas Steinmayr, and Christoph Trebesch. It found that Moldovans who emigrated to Western Europe had a strong and positive impact on the opinions of those left behind through both return migration and by maintaining communication. The lines of communication with emigrants allowed Moldovans living in Western Europe, especially Italy, to influence voters in Moldova to turn against the Communist Party and to embrace more liberal norms, values, and information from outside of the country.

Another paper by José Itzigsohn and Daniela Villacrés found that Salvadorans in the United States worked with hometown associations in El Salvador to support political projects that promote economic development. They also found that emigrants from the Dominican Republic did much lobbying from a distance to maintain émigré voting rights and political participation back in their home countries.

A more recent paper by Mounir Karadja and Erik Prawitz looked at how 19th-century Swedish emigration affected voting, labor union membership, strikes, and political institutions in Sweden. Using an instrumental variable method that uses the interaction between harsh winters in Sweden in the late 1860s and the distance to a port, they find that the emigration option improved their bargaining position vis-à-vis local elites. In 19^th and early 20^th century Sweden, that meant fewer landlord privileges, stronger labor unions, and more progressive welfare and government policies. An increase in immigration by 10 percent increased voter turnout by 0.8 percent and the labor membership rate by 2.3 percent.

On the other side, emigration from Italy during the Great Recession slowed down political reform and reduced political change in that country according to work by Massimo Anelli and Giovanni Peri. Using an instrumental variable approach, they uncovered these results:

First, greater emigration rates had a negative impact on indicators of political change such as the average age of local politicians, the share of highly educated, and the share of women among them. Second, greater emigration rates also increase the probability of very negative local political outcomes, as captured by the dismissal of a city council.

Political reform in Italy is not as dire nor as important as the protest movement for individual rights in Hong Kong, but it’s important to include results that push in the opposite direction to get a full range of the possibilities. 

Those short case studies are only somewhat analogous to the current situation in Hong Kong or what would happen to the freedom movement there if the United States government or other governments opened their borders to the protesters. Ultimately, allowing Hongkongers to leave will provide an important humanitarian safety valve for people who share American values even if it has an adverse effect on the protest movement. American policymakers shouldn’t second guess the actions of those on the ground protesting China’s totalitarian policies, whether those actions are to stay and continue to protest or to emigrate to the United States. Ideally, the United States government should make it clear that any Hongkonger who wants to leave can come to the United States and be granted asylum with a minimum of restriction.