Two items of note today from prominent inside-the-Beltway publications regarding the ongoing fight over whether Congress should reauthorize the serially abused Foreign Intelligence Surveillance Act (FISA) Section 702 electronic mass surveillance authority. The first from Punchbowl News:

The bill in question can be viewed here.

The second item is from POLITICO from late last night:

And whether you prefer the term “surveillance capitalism” or “corporate welfare,” the data broker industry is working hard to keep its 702-related contracts viable. Also from POLITICO yesterday:

Data collection on Americans has become a giant business over the last 30 years, one that law enforcement agencies benefit from enormously as it allows them to effectively circumvent the Fourth Amendment, outside of circumstances requiring the most intrusive surveillance techniques. For the corporate data brokers, it’s easy money from government agencies. It’s a toxic mix that FISA reformers are trying to end. Before spring 2024 ends, we’ll know whether or not they’ve succeeded.

I am honored to have written the first-ever cover story for Free Society, Cato’s new quarterly magazine. Titled “Through Progress and Peril: The Precarious State of Human Freedom,” the article addresses the subject that keeps lovers of liberty awake right now: The worrying decline of freedom, the rise of illiberalism at home and authoritarianism abroad, and what we can do to turn the tide. 

I document the disheartening trends in personal and economic freedom in the last few years and suggest several reasons that explain why this has happened, including COVID-19 and the heavy-handed state actions that accompanied it. Emergencies, as F. A. Hayek argued, “have always been the pretext on which the safeguards of individual liberty have been eroded.” 

The Human Freedom Index 2023, published by the Cato Institute and the Fraser Institute, concluded that almost 90 percent of the world’s population has seen its liberties circumscribed in recent years. In terms of economic freedom, a decade of global progress was erased in the year 2020 alone. 

But the picture is mixed. Throughout this time, individuals, entrepreneurs, and activists have adapted to difficulties and threats, and have crafted innovations and creative solutions to problems caused by increased government interference. The result is that indicators of human living standards are still improving at a rapid pace. 

This is where we find hope: Free men and women accomplish great things. Open societies fail only when we don’t believe in our ideals, defend them, and apply them. Authoritarians and statists have a more serious weakness: they fail when they manage to implement their ideas. Look around the world! Dictators, authoritarians, and populists are making such a huge mess out of things that they’re already writing the best arguments against their own policies—we hardly have to do it for them. 

I think people are willing to listen to our case. Contrary to some commentators’ suggestions, most people have not joined the dark side; they are just exhausted with our increasingly tribal and ill-tempered parties and tune out. Only four percent of Americans say they experience excitement when they think of politics. 

So, the key message is that we should not despair. These kinds of backlashes against liberty have occurred regularly throughout history, but most of the time they haven’t prevailed. And they won’t this time if friends of liberty step up to the challenge and fight back. Nothing is hopeless—unless we assume that it’s hopeless and decide to give up. I know that Cato won’t and I trust that others will join us in this crucial intellectual battle for human liberty and dignity. 

With entitlement spending growth driving a worsening fiscal picture, the US could enter a new period of fiscal dominance where monetary policy serves fiscal ends, threatening central bank independence and America’s economic future. Following aggressive fiscal and monetary stimulus during the pandemic, legislators should avoid the siren’s call of elevated deficit spending or risk higher inflation.

During the COVID-19 pandemic, Congress unleashed a deluge of emergency spending—roughly $6 trillion, according to the Committee for a Responsible Federal Budget (CRFB)—bringing deficits to new heights. For context, the deficit in 2020 was nearly 15 percent of Gross Domestic Product—deficits haven’t been that severe since World War II.

At the same time, the Federal Reserve increased the broad money supply (M2) by 40 percent and massively increased its asset holdings, including government bonds and mortgage-backed securities, by $4 trillion. Record-high deficits and an intense bout of inflation accompanied the unprecedented fiscal and monetary expansion as the pandemic came to an end.

Eventually, the Fed responded to elevated inflation with interest rate hikes and by reducing its asset holdings. While inflation appears to have slowed, it remains a problem, underscoring the challenge of using monetary instruments to deal with a fiscally driven problem. The pandemic episode illustrates an example of fiscal dominance whereby, as the Mercatus Center’s Eric Leeper puts it, “some fiscal action forces the central bank to react in ways that it otherwise would not.”

With Congress currently unwilling to seriously address the entitlement spending problem that’s driving the US toward a fiscal cliff, it’s worth evaluating the possibility of more frequent episodes of fiscal dominance and their consequences.

History as a Guide

To understand whether we live in a fiscal or monetary dominance regime, we should ask: is the central bank’s prime directive to maintain an inflation target, or is the central bank primarily focused on accommodating government spending? When fiscal dominance reigns supreme, countries experience higher inflation and sometimes hyperinflation (high and accelerating inflation). Several historical examples illustrate the dangers of fiscal dominance.

During emergencies, central banks may temporarily accommodate expansionary fiscal policy, such as during World War II or the COVID-19 pandemic. As Cato’s James Dorn points out, “Fiscal authorities normally dominate central banks during wartime. That was certainly the case during the two world wars. The Fed kept yields low on government securities by monetizing a large share of the US debt.” Dorn further highlights the 1960s and early 1970s, when the “Fed engaged in easy monetary policies to fund fiscal deficits, which led to inflation.”

Fiscal dominance can also be observed abroad. According to Greg Ip, writing in the Wall Street Journal, Argentina is a textbook case of fiscal dominance. To finance fiscal deficits, the Argentine treasury issues bonds that are bought up by the central bank. This debt monetization has led to devastating inflation, reaching a 12-month rate of 276 percent in February.

Leeper identifies two more examples of fiscal dominance overseas. After World War I, Germany realized it could not pay off its debts through conventional taxes alone, so it rapidly printed money to finance new spending. Likewise, President Erdoğan of Turkey eroded central bank independence, pushed for lower interest rates, and expanded government spending in recent years. As Leeper stated, “Erdoğan effectively converted an independent inflation-targeting central bank into a fiscal ATM.” In both cases, fiscal dominance resulted in severe and economically damaging inflation.

The US Threat of Fiscal Dominance

Fiscal dominance has a track record of triggering severe inflation and leading to economic decline. With US deficits at crisis levels in the face of rising entitlement spending, and with the federal debt-to-GDP ratio exceeding its record high of 106 percent in 2028 (Figure 1), the risks of fiscal dominance in the United States are rising. An excessive and rising debt, high interest rates, and a political landscape hostile to entitlement spending reductions create a dangerous fiscal environment that may exhaust the US fiscal space over the next 15–20 years.

If Congress leaves spending corrections to the last minute, legislators may perceive the draconian fiscal consolidation necessary to bring debt under control as less desirable than monetizing the debt. In such a scenario, printing more money might become the easiest or only politically feasible way out.

At a recent House Budget Committee hearing on the need for a fiscal commission to resolve the US debt challenge, former chairman John Yarmuth suggested just such a policy, stating on the record,

We are a sovereign currency, we can print all the money we want to serve the people whom we serve. … [W]hy are we paying interest on the money we borrow? And why do we borrow money anyway? We can print it and put it in the Treasury.

No amount of balance sheet manipulations will allow the US to print more money ad infinitum with no adverse consequences. Should this type of thinking become more mainstream, it is not entirely unrealistic to think that fiscal dominance and debt monetization might be willingly undertaken under the right political circumstances.

Avoiding Fiscal Catastrophe

Rising US spending and debt in light of heightened political polarization and congressional budgetary gridlock raise concerns about the sustainability of government finances. The recent credit downgrade by Fitch Ratings and Moody’s Investors Service lowering its outlook on the US credit rating is a reflection of the nation’s concerning long-term fiscal trajectory and poor fiscal governance. Without a political willingness to reduce the growth in old age benefit programs, the erosion of central bank independence to finance future spending represents a growing risk. Argentina, Germany, Turkey, and other historical cases serve as stark reminders of the dangers of fiscal dominance. Central bank money printing to finance government spending can lead to hyperinflation and economic ruin.

Fiscal dominance could also deteriorate the reputation of the US as a guarantor of its credit. The perception of Treasury securities as safe assets undergirds the entire financial system. US policymakers should not clumsily waltz into additional periods of fiscal dominance that could contribute to economic instability and reduce the global standing of the US dollar.

As Charles Calomiris notes, “Ultimately, the US may face a political choice between reforming entitlement programs and tolerating high inflation and financial backwardness.” Confronting the entitlement spending behemoth is politically daunting but necessary and can be done through a well-designed fiscal commission. Establishing smart fiscal guardrails, backed by a shared understanding of the budgetary future the US faces, can similarly reduce the risk of a fiscal crisis.

Time is of the essence to slow the growth in spending before fiscal dominance becomes the seemingly more attractive option.

There are eight federal programs remaining in Spending Madness 2024. These are high-priority spending cuts for Congress to consider, according to our crowdsourced tournament results so far.

Please vote today in the quarterfinals, and then we’ll move to the next round on April 4.

The failures of the eight remaining programs are summarized when you click the pictures here. One common failing of government programs is stagnancy. While market economies are always adapting and improving, the bureaucratic government falls behind. Outdated programs linger for decades consuming taxpayer resources and undermining the economy.

The Corporation for Public Broadcasting was launched in the 1960s but adds little value in today’s expansive media environment where vast educational content is available on YouTube. Even more outdated are farm subsidies, which were launched in the 1930s when many farmers were poor. Today, farmers are much wealthier than other people, and farm subsidies mainly go to large corporate-style operations.

And there is public housing. What do you notice in these photos (below) of a project in Alexandria, Virginia? When you walk around it, you see that all 13 buildings are the same, and they are unchanged in the seven decades since the government opened them in 1947. It apparently never occurred to the government managers to plant any trees, bushes, or flowers.

Because people in public housing are not owners, no one has put in bay windows, added an addition, painted their homes, built a deck, or made any other normal improvement. I wonder where tenants are even allowed to plant anything.

Government programs and policies tend to be stagnant and uniform. Many programs have outlived any usefulness their original supporters envisioned. Congress should end subsidies for activities—such as housing, broadcasting, and farming—that markets can tackle with diverse and innovative approaches.

Background. The photos are the Samuel Madden Homes built in an area called The Hump. The construction was part of Big Government “slum clearing” efforts in the mid-20 century, which used eminent domain and federal dollars. As one history notes, Alexandria “began a program of ‘slum’ clearance in 1939 and two years later condemned and demolished homes in two mixed-race neighborhoods, The Berg and The Hump, sending Black residents into substandard, segregated public housing.” The Samuel Madden Homes are finally being redeveloped after 77 years, and hopefully some lessons have been learned.

Is the United States “losing” from international trade? Does globalization harm American workers or lead to a “race to the bottom” for the world’s poor? Are we really “de-globalizing” today? I recently sat down with John Stossel to discuss these and other popular myths, as well as the Cato Institute’s Defending Globalization project. The result of our conversation is this great new video from Stossel TV:

All of the data cited in the video, and plenty more, can be found at the Defending Globalization webpage.

Between its proposal to restrict overdraft fees and nonsufficient fund (NSF) fees, the Consumer Financial Protection Bureau (CFPB) has created a mess. 

When I testified before Congress, I warned that establishing price controls would likely lead to two outcomes: shortages of the restricted service and higher costs elsewhere. Still, the CFPB pressed ahead with its proposal to restrict overdraft fees to a soon-to-be-determined “benchmark fee.”

Yet that is not to say that the CFPB does not recognize the consequences I warned about. In fact, in a separate proposal to restrict NSF fees, the CFPB admits that restricting overdraft fees may lead financial institutions to raise fees elsewhere:

[If] the Overdraft Proposed Rule is finalized and reduces overdraft fee revenue for covered financial institutions, it may lead some institutions to consider imposing new fees. Increasing the prevalence of NSF fees on covered transactions could be one way that covered financial institutions respond, while market forces could lead even non-covered financial institutions to begin charging NSF fees on covered transactions.

Were it not for that, it seems unlikely that the regulator would have ever sought to restrict NSF fees given they are so uncommon. For example, the CFPB repeatedly stated that “many financial institutions in recent years have stopped charging NSF fees,” “NSF fees are rarely charged,” and the “CFPB understands that it is currently uncommon for financial institutions to charge NSF fees on covered transactions.” In other words, this proposal is a preemptive prohibition based on the expected, extended consequences of the CFPB’s other price controls.

Rather than begin a never-ending game of “regulatory whac-a-mole,” the CFPB (and the Biden administration) should drop its price controls. 

Are you interested in learning more about price controls? Ryan Bourne’s latest book, The War on Prices, is available for pre‐​order here and will be released on May 14, 2024.

On March 11, 2024, the Stockholm International Peace Research Institute (SIPRI) released an annual update to its Arms Transfers Database, which is the primary data source that our arms backlog dataset uses to track US weapon deliveries to Taiwan.

As shown in Figure 1, the SIPRI database update brings the current backlog of US arms sales to Taiwan to at least $19.17 billion—$66 million higher than our February 2024 update. See the tabs in Figure 2 to compare the February and March versions of backlog.

There were no new US arms sales to Taiwan announced in March 2024. Instead, the change in value from last month is due to new information about previous sales.

Removing Torpedoes, Adding Anti-Tank Missiles

For the March 2024 update to the Taiwan arms backlog dataset, we removed a 2017 sale of lightweight torpedo conversion kits while adding a 2019 sale of TOW-2B anti-tank guided missiles.

In June 2017, the Defense Security Cooperation Agency (DSCA) announced a $175 million sale of equipment to upgrade 168 MK-46 Mod 5 lightweight torpedoes to the MK-54 configuration. This sale is coded in our dataset as a munition. These torpedoes are launched from aircraft and warships to attack enemy submarines. Besides the initial DSCA announcement, there was very little publicly available information on the lightweight torpedo sale. Even the 2023 edition of SIPRI’s Arms Transfers Database did not include any information on these torpedoes.

The 2024 update to SIPRI’s Arms Transfers Database indicates that the final delivery of the lightweight torpedo conversion kits occurred sometime in 2022. Based on this new information, we have marked this sale as completed and removed it from the arms backlog, reducing the backlog’s value by $175 million.

However, this reduction in the arms backlog dataset is offset by an addition. On July 8, 2019, DSCA notified Congress that it was modifying a 2015 sale of TOW-2B anti-tank guided missiles to add 1,240 missiles and associated equipment valued at $241 million. Based on the other equipment mentioned in the arms sale announcement, these TOW missiles will likely be mounted to relatively light military vehicles, like Humvees, to improve their anti-armor capabilities. We code the TOW missiles as an asymmetric capability instead of munitions, as the sale includes other equipment in addition to the missiles. 

We should have captured the additional TOWs in our January 2024 update because that is the first update that uses the Congressional Record as a data source. The mistake came to our attention when we reviewed SIPRI’s new data, which prompted us to double-check the Congressional Record and locate the TOW notification. However, these additional TOWs will not be in the backlog for long. Reporting from last year citing Taiwan’s Ministry of National Defense indicates that delivery of the missiles should occur sometime this year.

To sum up, based on SIPRI’s new data, we removed a $175 million sale of lightweight torpedo conversion kits from the backlog and added a $241 million sale of TOW anti-tank missiles, which increased the overall value of the US arms backlog to Taiwan by $66 million. As with other updates to our data, these additions and subtractions result from new information coming to light rather than newly announced sales or recent deliveries. Table 1 contains the itemized composition of the backlog.

Deliveries in Progress

The new SIPRI data include some interesting details about the arms backlog that are worth mentioning.

Our January 2024 arms backlog update mentioned that Taiwan purchased 18 additional HIMARS launchers after canceling an order of Paladin mobile howitzers. According to SIPRI’s data, this modification also included a purchase of 864 guided rockets, which would be a major boost to Taiwan’s asymmetric capabilities. Unfortunately, SIPRI does not mention a dollar figure for the rockets or additional HIMARS launchers.

There are three arms sales in the backlog that SIPRI reports as partially delivered. Three of six MS-110 aircraft reconnaissance pods, sale announced in October 2020, were in Taiwan’s hands by the end of 2023. Taiwan also received its first two Abrams tanks in 2022, likely for initial familiarization and training before the remaining 106 tanks arrive in tranches between 2024 and 2026. Finally, Taiwan received five MK-48 heavyweight torpedoes in 2023. According to SIPRI, the remaining 41 torpedoes should be delivered by 2026.

Thus far, our arms backlog dataset has removed items once final delivery is complete rather than trying to partially reduce dollar amounts based on partial delivery. We will continue using this method, but the SIPRI update does provide a look at partial deliveries that we do not typically see.

Taiwan Arms Backlog Dataset, March 2024