In recent years, housing prices and rents have increased dramatically in the cities of the Northeast corridor and the West Coast. Leading Democratic presidential candidates have proposed plans to address this issue and, fortunately, most of these proposals recognize that public policy (i.e., local zoning and land use regulations) has limited the construction of new housing. As Edward Glaeser and Joseph Gyourko observed in a 2002 Regulation article, local and state laws have restrained housing supply from keeping pace with demand. While the willingness of Democrats to admit the importance of constraints on private supply is an important step away from an exclusive focus on public provision of housing or subsidies, a more direct and local option would be to establish a framework for developers to pay localities to alter their zoning constraints.

A recent New York Times editorial outlines Senator Cory Booker’s, Julian Castro’s, and Senator Elizabeth Warren’s plans to incentivize local governments to relax land-use laws and allow more housing development. Booker and Castro would require local governments to institute land-use reforms before they can obtain existing federal infrastructure subsidies while Warren would attach the land-use reform requirement to a new $10 billion spending program for governments that comply. Booker and Castro have additionally proposed increasing subsidies to tenants through tax credits or expanded housing vouchers. (Senator Kamala Harris also has proposed increasing tenant subsidies but without a parallel incentive to increase the housing supply.)

For the most part, Booker’s, Castro’s, and Warren’s plans eschew traditional, deleterious alternatives such as rent regulations and subsidies for developers. Last month I discussed how New York State’s recently tightened rent control regulations will decrease housing supply and harm both current and future renters. And, while not ideal, tenant-based assistance is more efficient and equitable than project-based assistance, such as housing tax credits.

It is encouraging that the proposals have managed to avoid those types of interventions and identified the harmful effects of zoning laws, but the proposals’ downside is that they tie land-use reform to federal subsidies for infrastructure. As a recent Regulation article argued, “although there are some reasons for higher-level governments to provide some local infrastructure projects … it is preferable for users to pay whenever that is feasible.”

In the current issue of Regulation, law professor Christopher Elmendorf proposes an alternative. Instead of incentivizing jurisdictions to relax zoning laws with federal money, state and local governments can independently create systems for developers to pay incumbent homeowners for the right to build more and denser housing. Fundamental to Elmendorf’s proposal is the recognition that zoning rules have become de facto property rights. Currently, local governments hold these rights and capture value from them by imposing impact fees, mandating that developers offer communities in-kind benefits (such as affordable housing requirements), or, most commonly, by zoning for less development than needed and extracting benefits including money, land for parks, and affordable housing from developers on a project-by-project basis (Roderick Hills and David Schleicher describe the negative consequences of this ad hoc exaction in their Fall 2015 Regulation article). The negotiations between developers and politicians are often behind the scenes and the benefits extracted do not always clearly go to incumbent homeowners.

Elmendorf’s alternative is for localities to transparently and directly sell developers the right to upzone. As he explains,

Development rights would be auctioned in the form of tradeable “development allowances” roughly analogous to the emissions allowances that are now bought and sold under cap-and-trade regimes for greenhouse gas emissions. Each allowance would permit its owner to build, say, 100 square feet of housing in excess of the baseline, up to a maximum defined by the new zoning map. To illustrate, imagine a parcel of 5,000 square feet that had been zoned for a floor-to-area ratio of 2:1, i.e., 2 square feet of housing for every square foot of lot size. After upzoning, the maximum floor-to-area ratio is 8:1. This means that the owner of the parcel, who previously could build no more than 10,000 square feet, may now construct as many as 40,000 square feet. But to obtain a permit to build 40,000 square feet, she would have to acquire and redeem 300 development allowances ([40,000 – 10,000] ÷ 100 = 300).

The local governments would be able to take the proceeds they receive and put them towards building new parks, infrastructure projects, tax reductions, or direct compensation of incumbent residents.

I have made similar proposals to resolve conflicts over Airbnb and conventional air pollution, which are rooted in economic theory developed by Nobel Laureate Ronald Coase. Allowing those with initial property rights to negotiate with entities who wish to purchase those property rights leads to trade and conflict resolution as long as transaction costs are low. In regard to the aforementioned examples and zoning rights, those who wish to offer their homes up for short-term rental, emit air pollutants, or develop new housing can purchase the right to do so and thus reimburse the initial property rights holders for any costs imposed.

Though the theory supporting Elmendorf’s idea is sound, there are pragmatic concerns. In a comment on Elmendorf’s article, economist William Fischel, one of the originators of the concept of exchanging zoning rights, notes that there will still be significant interests opposed to new development. The same incumbent homeowners that currently fight each building project and the unions and other interest groups that attempt to capture some of the producers’ surplus from development, will still attempt to influence the local politicians who will retain control of the zoning rights auctions. In fact, Fischel contends that because a zoning rights auction confers an abstract right to increase a plot’s floor-to-area ratio, as opposed to a tangible building plan that interests groups can directly address in zoning hearings, Elmendorf’s proposal actually may increase homeowners’ perceived risk of land-use change. 

But if the compensation for change is high enough and directed specifically to incumbent homeowners, change occurs. For example, Northern Virginia was once dominated by single-family homes. Between the late 1980s and early 2000s, developers bought up neighborhoods for redevelopment, often paying homeowners more than double the listed price of their houses. The Ballston corridor now has 22-story apartment buildings.

Allowing local governments to convert the current in-kind, opaque, underground market for zoning change into an explicit legal exchange of cash for density would facilitate the development of housing and address affordable housing shortages.

Written with research assistance from David Kemp.

 

Facebook has pledged to remove misinformation about the Census from its platform. Inevitably this removal involves suppressing speech that would be protected by the First Amendment if uttered in a public forum. After all, there is no misinformation exception to the First Amendment. However, Facebook may remove the speech because as a private firm, it is not obligated to enforce the First Amendment. Nonetheless, we might ask: why speech about the Census? What’s different about misinformation about that project? I see four possibilities as to why speech about the Census might merit closer attention by content moderators.

Facebook might feel obligated to protect basic political institutions. For example, Facebook tries hard to combat misinformation around elections including the 2018 American midterms. The Census and elections are mentioned in the U.S. Constitution, with authority over the latter largely given to the states. But so are Congress, the presidency, the courts, and the Post Office. I doubt anyone expects Facebook to remove misinformation about all these institutions.

And the slope might be slippery. Facebook faces pressure to adopt an expansive, militant understanding of “democracy” in Europe. It has largely resisted doing so, relying on account authenticity, advertising transparency, and fact-checking to support election integrity. Facebook’s restraint makes sense. An expansive agenda of protecting institutions might lead to suppression of speech that should be seen.

The distinction between facts and opinion offers a second general justification for treating “Census speech” differently. “Misinformation” would contravene clear, not controversial, facts. This justification appeals to many. Consider an election example. Polls in a district are open for a set period that is public and easily confirmed. Spreading the wrong hours for voting is incorrect beyond doubt. In contrast, opinions about who should win and hold office cannot be confirmed by some external authority. Disagreements about that question are why we have elections.

Some questions about the Census are clearly not facts. One might believe that ours is a Constitution of No Authority, that the more efficient exercise of state power is deleterious of freedom, and that, as James C. Scott writes, to be made legible is to be governable. From this perspective, the census is a dangerous tool of control. Whatever you may think of this position, it is coherent, internally consistent and plausible even if ultimately wrong. Articulations of this belief ought not be thrown out with the bathwater of misinformation.

Some propositions look like facts but are really contestable claims (i.e. opinions). Consider the apparently factual claim that “the census will help the government deport illegal immigrants.” The government denies this. Some say that this is misinformation intended to depress census completion rates. Notice this is a “fact” about the future. Perhaps the past might inform our assessment of this “fact.” While census data may not be legally shared with law enforcement, this prohibition was lifted during the Second World War to allow the FBI to more efficiently apprehend Americans of Japanese ancestry. In other words, the past suggests a reasonable person might have doubts about future uses of census data. The government’s future use of census data is more a matter of trust than of hard facts. Facebook cannot use the “clear facts” criterion to side with the government here. 

Political science suggests one important difference between “census speech” and other social media talk. Organized groups and the Census Bureau are concerned about misinformation on Facebook about the Census. Misinformation that matters little to organized groups or the government may be overlooked by social media content moderators. But Facebook should avoid at all costs acting in response to specific demands of organized groups. The more Facebook is seen to cater to specific demands, the more demands will be made of it. And being responsive to interest group campaigns may delegitimate Facebook’s content moderation in general.

The Census Bureau seems to be different. Facebook generally enforces local laws criminalizing speech. The law requires responding to the Census which itself, as mentioned, is constitutionally required. But speech misinforming the public about the census is not illegal in the United States. The Bureau is asking Facebook to help facilitate law enforcement regarding the census. And the law requiring answers to the census is, in fact, a constitutional exercise of legislative power under the necessary and proper clause (John Marshall edition). The same can be said of laws criminalizing sodomy prior to Lawrence v. Texas. Would Facebook have facilitated enforcing Texas’s law prior to Lawrence? Something that might seem as simple as helping the Census Bureau turns out to require Facebook to take sides on controversial political questions.

Facebook might do better by distinguishing between misinformation about the Census that can be dealt with by “more speech” and misinformation that cannot. Most errors about the Census may be corrected by “more speech.” After all, unlike elections, the census does not take place on one day at determinate places. The government and its allies can make their case against misinformation, disinformation, and controversial claims. There is time for “more speech” to bring about the best outcome for the society.

Elections may be different. Let’s say it’s widely and wrongly reported that a candidate has dropped out of a race. That’s a hard fact though perhaps temporarily unclear. It matters a lot whether the report circulates two days or two weeks prior to election day. “More speech” can handle the latter; avoiding harm to the candidate might be much harder two days before the voting. Speech inciting violence may be criminalized because in limited situations there is no time for “more speech” to rebut the appeals to force.

But there’s an important difference between the two harms, violence and false beliefs about elections. I cannot avoid being punched in the nose as a result of incitement. I can avoid false beliefs by modest research regarding facts. Here’s a (hardly obscure) place to start. Our freedom of speech does require that citizens take some responsibility for their beliefs and the reasons for them. Facebook should not protect us from our sloth.

Senator Joe Manchin (D‑WV) and Mike Braun (R‑IN) are still trying to address the fentanyl and heroin overdose crisis—soon to be joined by a methamphetamine and cocaine overdose crisis—by denying chronic pain patients access to pain relief. They have just introduced a bill they call The FDA Opioid Labeling Accuracy Act, which would “prohibit the Food and Drug Administration (FDA) from allowing opioids to be labeled for intended use of ‘around-the-clock, long-term opioid treatment’ until a study can be completed on the long-term use of opioids.”

Set aside the fact that most pain specialists agree that, in some cases, long-term opioid therapy is all that works for some chronic pain patients. The 2016 guidelines on opioid prescribing put forth by the Centers for Disease Control and Prevention have already been misinterpreted and misapplied by legislators and regulators, leading to forced and rapid tapering off of opioids in many chronic pain patients, causing many to resume lives immobilized by pain, and in many cases, seek relief in the black market or by suicide. It has gotten so bad that the CDC recently issued a “clarification” in April, reminding regulators that the guidelines were only meant to be suggestive, not prescriptive, and did not in any way mean to encourage the rapid tapering of patients on chronic opioids for pain management. Johns Hopkins bioethicist Travis Rieder, PhD delves deeply into this subject and relates his own experiences in his book, In Pain.

What the senators fail to recognize is that patients are not one-size-fits-all. Different patients respond to pain and to pain management differently. Their proposed legislation, if passed, will only serve to exacerbate the unnecessary suffering of patients in pain that the CDC is trying to undue with its guideline clarification.

Meanwhile, they should take a look at the government’s own numbers. The data show there is no correlation between the number of prescriptions written and the incidence of non-medical use of prescription opioids or prescription pain reliever use disorder. And less than 10 percent of opioid-related overdose deaths in 2017 involved prescription pain relievers unaccompanied by other drugs such as cocaine, heroin, alcohol, or fentanyl.

The continued war on patients by politicians and regulators will not get one IV heroin user to take the needle out of their arm. Senators Manchin and Braun need to recognize that the overdose crisis has been on a steady, exponential increase since the 1970s and shows no signs of stopping—and that its ultimate cause is drug prohibition. 

If they want to get serious about addressing the problem, they should switch their focus to harm reduction. A good way to start would be to repeal the “Crack House” statutes that prevent cities and states from establishing overdose prevention sites called “safe injection facilities.”

Today, Sen. Rand Paul introduced the Backlog Elimination, Legal Immigration, and Employment Visa Enhancement (BELIEVE) Act (S. 2091). The BELIEVE Act would solve most of the major issues with skilled immigration in one piece of legislation. Altogether, the bill would increase green cards (which grant permanent residence) for employment-based immigrants by nearly fourfold, and it does so without making any changes that would injure other categories of legal immigration.

The long-term economic and fiscal benefits of this bill are difficult to overstate. The National Academy of Sciences (NAS) estimated in 2016 that the lifetime net present value of the average immigrant with a college degree to all levels of government was between $210,000 and $345,000 (Table 8–14). For those with more than a bachelor’s degree, the NAS estimate was between $427,000 and $654,000.

The BELIEVE Act would do more to move the United States toward a merit-based system than any other legislation introduced this congress. No legislation since the 2013 immigration reform bill that passed the Senate would increase skilled immigration more than this bill. A fourfold increase in employment-based permanent immigration would bring the United States more in line with the Canadian system, though Canada would still allow about twice as much economic legal immigration per capita than the United States and a higher rate of legal immigration overall.

Here are the specific elements of the bill:

• Ends the per-country limits on green cards for employment-based immigrants (p. 2). This is the same change as the Fairness for High-Skilled Immigrants Act, which passed the House yesterday (H.R. 1040). Right now, the law states that nationals of no single country can use more than 7 percent of the green cards unless the green cards would go unused. If the cap is reached, nationals of other countries get to bypass them in line and receive a green card ahead of those who applied earlier. This change would make every foreign worker wait in the same line and so face the same wait times​.As a result of the country limits, Indian employees of U.S. businesses receiving green cards under the EB2 or EB3 categories in 2018 waited a decade while everyone other than Chinese applicants waited less than a year. If the country caps remain, Indians who are applying today for an EB2 or EB3 green card face about a half century wait and roughly 50,000 will die without seeing a green card. The per-country limits also inadvertently force immigrants with the highest wage offers (Indians, again) to wait much longer than others.
• Increases the limit on green cards for employment-based immigrants from 140,000 to 270,000 (pp. 1–3). This increase would double the caps for the first through third preference categories (mainly employees of U.S. businesses) as well as the fifth preference category for major investors in U.S. enterprises. The worldwide limits have not increased since 1990 when the U.S. economy was half the size that it is today, and most of the major tech companies did not exist or were in their infancy. About three quarters of the Fortune 500’s largest companies in 1990 have been replaced. This update reflects the changes in the economy since 1990.
• Exempts spouses and minor children of employment-based immgirants from the limit (p. 3). This change accords with the actual statute as it exists today, but this legislation would explicitly require the government not to count them against the quotas. About half of all green cards issued under the employment-based categories are actually used by spouses and minor children. It makes no sense to reduce the quota on workers simply because the worker is married or has a child. In other words, this would further double the employment-based cap. As a result, these two changes would end wait times for all immigrants in a very short period of time.
• Exempts “shortage occupations” (currently nurses) from the limit (pp. 3–4). If the Department of Labor (DOL) currently lists an occupation as a shortage occupation, employers may hire foreign workers on green cards without the normal burdensome labor certification process. So far, DOL has listed only two occupations as shortage occupations: nurses and physical therapists. The BELIEVE Act would exempt shortage occupations from the green card limit entirely. This change is important because nurses are currently ineligible for H‑1B high-skilled visas, which means that the only way for them to get a foot in the door of a U.S. business is a green card. There are not precise statistics from the government on the number of foreign nurses, but it is likely about 7,000. While this would immediately benefit nurses and physical therapists, this change would also allow DOL to exempt occupations in future years if it updated its regulations.
• Creates uncapped green card category for children of legal temporary workers (pp. 4–5). Under current law, skilled workers who enter on temporary worker visas can bring with them their spouses and minor children, but when their children turn 21, they “age out” of eligiblity and either have to leave the country or find a new visa for themselves. They are in a very similar situation to the Dreamers in DACA who grew up in the United States from a young age but whose temporary status can expire.Section 4 of the legislation would grant a green card to any foreign graduate of a U.S. unviersity who ever entered as a child of an E, H, or L temporary worker and lived in the United States for an aggregate period of at least 10 years. This language would even include some children who have already been forced to self-deport. I have previously written about the huge fiscal benefits that these children would provide to the United States but also about how the Dream Act excludes them by requiring applicants to be in the country illegally.
• Provides employment authorization to spouses and minor children of temporary workers (pp. 5–6). As mentioned above, the law allows temporary workers to bring with them their spouses and minor children, but it doesn’t explicitly authorize them to work. The BELIEVE Act would specifically require the government to issue an employment authorization document to the spouses and children of E, H, or L temporary workers. This would provide huge economic benefits to the United States by incorporating a large and talented group of workers into the economy.
• Provides employment authorization and legal status while waiting for a green card (pp. 7–8). Under current law, it can be very difficult for skilled workers waiting for a green card to change jobs without risking one’s status. This bill would grant employment and travel authorization “incident to status,” meaning that they wouldn’t need to apply for a new set of documents and that the authorizations would remain valid until a visa becomes available. Given the other fixes in this bill, this change is not as consequential as it would otherwise be because this bill would eliminate the backlog for green cards entirely. As a result, no employment-based immigrant would need to wait due to the quotas and be forced to take advantage of this provision. Nonetheless, it is a safeguard against workers being stuck with a single employer during their waiting periods.

I have written about nearly all of these changes in my posts: Why the Legal Immigration System Is Broken: A Short List of Problems, Ten Irrational and Infuriating Aspects of U.S. Legal Immigration, and elsewhere. There are a couple of problems with skilled immigration that the bill doesn’t address—including the outdated H‑1B limit and the burdensome and nonsensical labor certification process for employers—but overall, the legislation would make the United States far more competitive for foreign talent than current law and prevent the removal of hundreds of thousands of skilled workers. This legislation would benefit the U.S. economy enormously.

Government data for the month of June show a substantial decrease in the number of immigrants apprehended along the Southwest border. Much of this decline is probably due to extra Mexican immigration enforcement prompted by President Trump’s threat of imposing tariffs on Mexican imports if they don’t reduce the surge of Central Americans from the Northern Triangle.


Lost in all of this debate over the Northern Triangle migrants arriving at the border is that fact that Mexican arrivals have collapsed in recent years. If we understand what caused the collapse in Mexican arrivals, then the government should apply that lesson to halt the flow of Northern Triangle illegal immigrants and asylum seekers. The vast increase in the number of H‑2 guest worker visas issued to Mexicans can explain a large percentage of the decrease in Mexican illegal immigrants. Increasing the numbers for Northern Triangle migrants will likely have a similar negative effect on their arrivals.


Figure 1 shows the tradeoff between the number of Mexicans apprehended on the Southwest border and the number of H‑2 visas issued to Mexicans from 2000–2018. There is a clear negative relationship between the two variables. 


Figure 1
Apprehensions of Mexicans on the Southwest Border and H‑2 Visas Issued to Mexicans

Source: U.S. Department of State and U.S. Border Patrol. 

Figure 2 is similar, but instead shows the number of Mexican apprehensions per Border Patrol agent and the number of H‑2 visas issued to Mexicans. Figures 1 and 2 are very similar, but the drop off in Mexican apprehensions is a little faster when the number of Border Patrol agents is controlled for in Figure 2.


Figure 2
Apprehensions of Mexicans Per Border Patrol Agent on the Southwest Border and H‑2 Visas Issued to Mexicans

Source: U.S. Department of State and U.S. Border Patrol. 


Figures 3 and 4 show the strong negative relationship between the number of Mexican apprehensions and the number of H‑2 visas issued to Mexicans, where the latter figure controls for the number of Border Patrol agents and the former does not.


 Figure 3
Apprehensions of Mexicans on the Southwest Border and H‑2 Visas Issued to Mexicans

Source: U.S. Department of State and U.S. Border Patrol. 


Figure 4
Apprehensions of Mexicans Per Border Patrol Agent on the Southwest Border and H‑2 Visas Issued to Mexicans

Source: U.S. Department of State and U.S. Border Patrol.


Table 1 are the results of a regression where the dependent variable is the number of Mexicans apprehended on the Southwest border and the independent variables are the number of H‑2 visas issued to Mexicans and the number of Border Patrol agents per year, all logged. Independent variables are those that seek to explain variation in the dependent variable, so we are trying to see if changes in the number of apprehensions is correlated with changes in the number of H‑2 visas and Border Patrol agents. Since we expect serial correlation to be an issue in these time series, we ran Breusch-Godfrey tests for serial correlation for each model. In both cases we find evidence for serial correlation in the regression residuals, therefore we compute Newey-West standard errors as a correction. 


From 2000–2018, a 1 percent increase in the number of H‑2 visas for Mexicans is associated with a 1.04 percent decline in the number of Mexicans apprehended on average. At the same time, a 1 percent increase in the number of Border Patrol agents is correlated with a 1.4 percent decline in the number of Mexicans apprehensions. If there is a causal relationship between the increase in the number of Border Patrol agents and decline in apprehensions, it is due to deterrence. Both findings are significant at the 1 percent level. These are both consistent with other findings, but it’s important to note that the median starting salary for a Border Patrol agent is $55,863, they take about a year to train, and private firms are having a difficult time hiring more when the unemployment rate is so low. 


If the goal is to get control of the border by cutting illegal immigration, it is much simpler and cheaper to issue more H‑2 visas than to hire more Border Patrol agents. Since H‑2 visas increase economic production in the United States and Border Patrol agents decrease it by consuming taxpayer resources that would otherwise be used by the private sector, H‑2 visas have been a much more cost-effective way to cut Mexican illegal immigration than hiring more Border Patrol agents.


These results imply that, for the year 2018, an additional 2,426 H‑2 visas issued to Mexicans would have cut the number of illegal Mexican immigrants apprehended by 1,584 – on average. The total cost to taxpayers of that would be zero, with an increase in total tax payments because the H‑2 workers would provide taxable goods and services in the United States. On the other hand, for the year 2018, these findings imply that hiring an additional 166 Border Patrol agents would have cut the number of Mexican apprehensions by 2,132 that year – at a total additional salary cost of $9,277,727 that year. American taxpayers can either pay $4,353 per additional Mexican apprehension in extra Border Patrol wages – which doesn’t include any of the other large costs of immigration enforcement – or decrease the numbers by issuing more H‑2 visas with a net-positive fiscal impact. 


Table 1
Apprehensions of Mexicans on the Southwest Border and H‑2 Visas Issued to Mexicans

Table 2 is the same regression as described above, except the dependent variable is the logged number of Mexican apprehensions per Border Patrol agent and the only independent variable is the logged number of H‑2 visas for Mexicans. A 1 percent increase in the number of H‑2 visas for Mexicans cuts the number of apprehensions per border patrol agent by 2.2 percent. These regressions are all significant at the 1 percent level. We also ran the regressions for Tables 1 and 2 that included the U.S. unemployment rate as a control variable, but it didn’t have much of an effect.


Table 2
Apprehensions of Mexicans Per Border Patrol Agent on the Southwest Border and H‑2 Visas Issued to Mexicans

For those who think that the Northern Triangle migrants apprehended on the Southwest border are asylum seekers, these findings will be largely irrelevant. If people are coming because their lives are threatened, then an expansion of H‑2 visas for them won’t have much of an effect on the number of asylum seekers arriving at the border. If, on the other hand, you believe that the flow of people from the Northern Triangle is largely driven by economics, then you should support a vast increase in the number of H‑2 visas for workers from the Northern Triangle – just like David North from the Center for Immigration Studies does.


Importantly though, the government should not increase the number of H‑2 visas for those from the Northern Triangle by decreasing those available to Mexicans. That would only increase Mexican illegal immigration.


More H‑2 visas for Mexicans cheaply and effectively cut the number of illegal Mexican immigrants coming over the border without the large and recurring taxpayer cost of hiring more Border Patrol agents. The government should at least try to expand the number of H‑2 visas to workers from the Northern Triangle, perhaps by exempting them from the H‑2B numerical cap, before taking further costly actions to increase border security. 

In medicine, “zebra” describes an instance when the doctor diagnoses an unlikely but eye-catching condition instead of a less noteworthy but more probable one that also fits the symptoms. Professor Theodore Woodward of Maryland University coined the expression when he admonished his students “When you hear hoofbeats, think of horses not zebras.”

As the zebra phenomenon illustrates, even experts tend to judge more memorable events as more likely – a bias known as availability – and to remember unusual events more clearly than more mundane ones. Uncorrected, such predispositions can lead to bad prescriptions, whether in medicine or further afield.

Woodward’s rule-of-thumb came to mind as policymakers around the world reacted to the announcement of Libra, the Facebook-led digital currency that is to launch in the first half of 2020. To say that their responses struck a note of caution is an understatement. Representative Maxine Waters called on Facebook to halt the project. Her Senate ally Sherrod Brown warned that “we cannot allow Facebook to run a risky new cryptocurrency out of a Swiss bank account.” The international reactions were perhaps less shrill but not much warmer, with French Finance Minister Bruno Le Maire openly worrying that Libra might dispute states’ currency monopolies.

Hearings before the House Financial Services Committee, which Rep. Waters chairs, and the Senate Banking Committee, of which Sen. Brown is the Ranking Member, are due to take place on July 17 and 16, respectively. Policymakers here and elsewhere, however, appear to already have made up their minds about Libra.

In so doing, I fear that the gatekeepers of the global financial system are mistaking horses for zebras: focusing on improbable risks and discounting the tangible but less headline-grabbing benefits of a global low-cost payments application such as Libra’s founders envisage. Because Facebook is leading the effort and marketing Libra as a cryptocurrency, the official responses are informed more by connotation (risk, monopoly, market power, data abuses), than by any actual knowledge concerning what Libra will do.

Ironically, the fears being expressed about Libra reflect the implicit belief that it may prove to be an extremely important and popular innovation. The new venture will take advantage of an existing user base among the partner organizations of easily more than three billion. Thanks to network effects, the prospects for Libra’s further growth should it become popular at all appear great. Those potential users include tens of millions of people who do not currently hold bank accounts, but who are increasingly likely to own smartphones. To condemn Libra, simply because it appears capable of capturing a wide network of users, before it even has a chance of proving its worth would foreclose better provision of banking and payment services to millions of lower-income consumers.

Are there in fact sufficient grounds for intervening to put a stop to or otherwise limit the spread of Libra? In this and a forthcoming post, I examine four types of risk that Libra skeptics have warned against: systemic risk, monopoly risk, security risk, and discrimination risk. My purpose is not to defend, which is as yet untested. I only wish to show that a close look at the alleged risks of Libra makes them appear more remote than the fears expressed by certain high-profile officials suggest. They’re zebras, not horses.

In today’s essay I consider Libra’s potential to present a systemic risk to the banking system. In the follow-up post, I will discuss the likelihood that Libra will create significant monopoly, discrimination, and national security risks.

Systemic risk

Mark Carney, Governor of the Bank of England, has said that “Libra, if it achieves its ambitions, would be systemically important.” A cryptocurrency commentator has suggested that Libra “wants to be too big to regulate.” Matt Stoller, one of Big Tech’s loudest critics, recently asked in the New York Times: “What happens if all users want to sell their Libra currency at once, causing the Libra Reserve to hold a fire sale of assets?”

So fresh is the memory of the last crisis in regulators’ minds, and so large looms the size of the technology giants, that many unquestioningly accept claims such as the ones cited above. But a different picture emerges if we attempt to answer Stoller’s question by reference to what we know so far about Libra.

For every unit of Libra that it issues, the Libra Association will hold a combination of bank deposits and “short-term government securities in currencies from stable and reputable central banks.” These assets will form the Libra Reserve, which by its promise of redemption will, Libra’s backers hope, lend the digital currency credibility and thus stability of purchasing power.

My colleague Larry White recently explained the Libra white paper’s ambiguity regarding the convertibility of Libra into the Reserve’s component assets. He concludes that Libra will resemble a government-bond money-market fund, which is liquid and relatively stable (and often treated by holders and regulators as a cash equivalent) but whose net asset value does fluctuate.

Despite being backed by various national currencies, relative to the value of any one national currency (whether or not that currency forms part of the Libra Reserve), Libra’s exchange rate will be free-floating rather than fixed. That fact may hinder adoption, because users may be wary of holding an unstable medium of exchange. But it also casts doubt on the claim that Libra poses systemic concerns. Would a simultaneous decision by users to sell their Libra holdings pose a systemic risk?

Larry, in his piece, suggests not. Systemic problems in banking typically arise when people realize the bank has less in liquid assets than in demandable liabilities such as deposits. Every depositor then has reason to rush to cash out before others have done so. The bank has promised to satisfy all depositor claims one-for-one, and it does so until the money runs out. Hence the incentive to “run” on the bank.

As Larry explains, such an incentive is absent in the case of a mutual fund such as the Libra Reserve, because any loss in net asset value is proportionately distributed among Libra holders, whether they cash out soon after the depreciation or not. Libra holders will therefore lack any incentive to “run” on the Libra Reserve.

Given that a drop in Libra’s value, however large, would be unlikely to cause a massive redemption by Libra holders, could a large-scale redemption (whatever the reason for it) endanger financial stability anyway? After all, users’ exchanging Libras for cash would mean banks’ having to pay out on the deposits that formed part of the Libra Reserve. It would also mean proportionate declines in the price of the government securities included in the Reserve, if the new supply was not met by offsetting demand.

I believe a rapid and massive sell-off of Libra could not, on its own, set off a systemic crisis. Consider a scenario in which there is $100,000,000 worth of Libras in circulation, of which holders in the U.S. suddenly wish to exchange $20,000,000 worth for U.S. dollars. Assume that 10 percent of the Libra Reserve is made up of bank deposits denominated in U.S. dollars, euros, yen, and pound sterling; and that the remaining 90 percent consists of (comparably) safe bonds issued by rich-country governments.[1] The specific share of each currency and country bond matters little for our purposes.

The $20,000,000 redemption would cause the Libra Association to shrink its Libra Reserve by 20 percent, selling Libra’s component assets (presumably) in proportion to their share in the Reserve (and not in proportion to the currencies into which holders wanted to exchange it). So, as holders sought to sell Libra, the authorized resellers managing the Reserve would sell deposits and bonds in equal proportion for every unit of Libra that was redeemed.

Could that process cause a liquidity crisis among the banks who held Libra Reserve deposits? Further, could that liquidity crunch turn into a full-fledged solvency crisis if the Libra redemption was large and fast enough? There are reasons to think either of those crises unlikely. First, deposits will not be held by one bank in one country but by many banks in many countries. They would thus form a small liability on any individual bank’s balance sheet. Second, Libra users are unlikely to hold the redeemed amount in cash and will instead re-deposit it at a bank, statistically returning a significant proportion of deposits to the banks affected.[2] Because banks, unlike what Libra has promised to do, keep only a fraction of their deposits in reserves, it may well be the case that the total amount of bank deposits grows following a large Libra redemption.

Third, bank deposits are typically government-insured up to very generous limits – $250,000 in the United States. While deposit insurance presents moral hazard and there is evidence that more generous insurance schemes encourage greater risk-taking, for our purposes deposit insurance would largely eliminate the incentive by both Libra holders and non-holders to run on their banks following a large-scale Libra redemption.

Fourth, bankers who were asked to pay out on Libra Reserve-related deposits would have ample access to short-term emergency liquidity from their central banks. As in other instances when they act as lenders of last resort, central banks would run the risk of mistaking insolvent for illiquid institutions. But that distinction would not depend on Libra. Rather, it would depend on individual banks’ (and the financial regulators’) prudential management. Unless banks had solvency problems of their own, a mass Libra deposit redemption would not cause a systemic crisis.

What about the redemption’s impact on bond markets? Could Libra holders rushing to cash out cause a sovereign debt crisis? Again, it is doubtful that they could, absent other reasons to “run” on a country’s bonds.

According to the Libra Association’s white paper, the Libra Reserve will consist of a diversified portfolio of historically (relatively) stable bonds. When Libra holders redeem, the capital outflow will not be concentrated on one country’s bonds. Rather, Libra will sell government securities from a number of jurisdictions in proportion to their share in the Reserve. Moreover, it is unclear that there would be an outflow at all, since the jurisdictions whose securities are likely to be chosen also serve as safe havens for investors in times of uncertainty. As with bank deposits, the very issuers of the bonds affected by a large Libra redemption would probably see those funds return as direct bond purchases.

In other words, a massive redemption caused by factors unique to Libra would not seem enough to cause a wider systemic crisis. Things might turn out differently if the Libra Association went back on its commitment to purchase stable assets on a one-for-one basis for every unit of Libra it issued. However, the prospect of a rapid loss of confidence in Libra as a result of such a turnabout, and the potential for customer lawsuits, provide strong disincentives against the Libra Association’s reneging on its promise of full backing. Still, given the commitments that the Libra Association has made so far, the grounds for expecting Libra to present a new systemic risk are lacking.

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[1] I assume the share of bonds in the Reserve to be much greater than that of bank deposits, because deposits typically pay lower interest rates, resulting in an opportunity cost for the Libra Association.

[2] I assume, I hope realistically, that the Libra Association will hold deposits at large and reputable banks across jurisdictions with comparably stable and reliable financial markets. These are the same institutions at which Libra holders who cashed out would bank. [I suspect they might prefer to keep deposits at TBTF banks.]

[Cross-posted from Alt‑M.org]

The United States is more socialistic than other advanced economies in numerous ways. Federal and state governments attempt to run businesses that have been privatized in other countries, such as electric utilities, airports, air traffic control, postal services, and passenger rail.

The federal government took over passenger rail after it helped ruin private passenger rail with taxes, regulations, and unions in the post-WWII years. Remaining passenger rail routes were assembled into Amtrak in the 1970s, which was supposed to become self-supporting but has consumed billions of dollars in subsidies.

Today, Amtrak operates 44 routes on 21,000 miles of track in 46 states. The few routes that earn returns are in the Northeast and the biggest money losers are the long-distance routes.

The Wall Street Journal reports on Amtrak head Richard Anderson’s efforts to improve efficiency and stem the losses:

Mr. Anderson, 64 years old, didn’t shrink from many fights in his years running Delta and Northwest Airlines. And after two years of a sometimes uncomfortable overhaul, he is unapologetic about his efforts to force Amtrak to change. Among the most contentious proposals is altering or eliminating some of the network’s venerable long-distance train routes in favor of more frequent service where the population is growing.

… Amtrak, Mr. Anderson says, is now on the verge of doing something once thought impossible: breaking even on running its trains. Its annual adjusted operating loss, which excludes capital expenditures and some other costs, will fall to zero over the next year, which would be a first in its nearly 50-year history. The railroad projects a 900,000-person increase in ridership this year, to more than 32.6 million trips.

Amtrak says it is profitable on the Northeast Corridor between Washington and Boston, where adjusted earnings were $524.1 million in fiscal 2018, including $318.8 million from the Acela express train. But the company lost more than $540 million on its 15 long-distance trains, which cover routes of 750 miles or more.

Congress, however, is enamored with storied old train routes Mr. Anderson wants to break up and wary of some of his other methods. And there are plenty of signs lawmakers want to curb his ambitions.

As Anderson is discovering, congressional resistance to change is a big obstacle to running a business within the government. The solution is to privatize Amtrak and let the restructured company build on Anderson’s reforms with further cost-cutting and quality improvements. A private rail company could make operating and investment decisions based on market demands not pork-barrel politics. It would be able to close the routes losing the most money and shift resources to routes that service the most customers.

Passenger rail competes against automobiles and airlines. Congress should unleash rail’s potential by selling off Amtrak and giving it the flexibility it needs to cut costs and innovate.