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Tuesday October 23, 2018 @ 05:40:16 PM mt

Bitcoin After 10 Years

The end of this month (31 October 2018) will mark the 10th anniversary of the online posting of the now-famous white paper by Satoshi Nakamoto outlining the concept of Bitcoin: A Peer-to-Peer Electronic Cash System. This is an opportune occasion to compare what Bitcoin has achieved with what Satoshi wanted to achieve. While Bitcoins rise to a market valuation of over $100 billion is certainly a remarkable accomplishment of one sort, the founder had other aims.

Three problems with the status quo

In announcing the new project in February 2009 Satoshi emphasized three institutional problems with the status quo payment system that Bitcoin would address. First, inflation from central banks that issue fiat money:

The root problem with conventional currency is all the trust thats required to make it work. The central bank must be trusted not to debase the currency, but the history of fiat currencies is full of breaches of that trust.

Second, a lack of privacy and security from commercial banks:

We have to trust them with our privacy, trust them not to let identity thieves drain our accounts.

Third, the high cost of bank-mediated payments:

Their massive overhead costs make micropayments impossible.

How well has Bitcoin addressed these three problems?

Inflation risk and purchasing power volatility

Satoshi wanted to create a currency with less risk of inflation and devaluation. It is of course true that the history of fiat currencies is full of breaches of trust in purchasing-power stability. Central banks issuing fiat money have chronically, and sometime acutely, diluted the value of their currencies by expanding them too rapidly. Bitcoins source code, which predetermines the quantity path of the stock of Bitcoins, does solve that problem. There can be no unexpectedly rapid expansion. This code provides a valuable object lesson in how to write a constitutional monetary rule that is fully automatic and free from discretion.

However, Bitcoins fixed quantity path creates a different problem that inhibits its widespread use as currency. With the number of Bitcoins unresponsive to demand shifts, all the burden of adjustment falls on the price (purchasing power). As a result the market price of Bitcoin is enormously volatile week-to-week and even day-to-day. This makes it very risky to hold or accept BTC as a payment medium for monthly bills that are denominated in anything other than BTC (e.g. in US dollars, other fiat currencies, or commodity index baskets).

Satoshi recognized that demand growth would cause secularly rising value, but said little about the problem of high-frequency volatility of value. He did not design Bitcoin to have an automatically demand-responsive supply, because he did not know how to do it without creating the need for a trusted authority:

[I]ndeed there is nobody to act as central bank or federal reserve to adjust the money supply as the population of users grows. That would have required a trusted party to determine the value, because I dont know a way for software to know the real world value of things. If there was some clever way, or if we wanted to trust someone to actively manage the money supply to peg it to something, the rules could have been programmed for that.

What Satoshi didnt know how to do is still not known. The desirability of a stable-valued cryptocurrency has, however, has stimulated dozens of stablecoin projects in recent years. There are two main types: (a) coin supply managed by an algorithmic central bank that automatically (given a data feed) varies quantity to stabilize purchasing power, and (b) coin supply made endogenous by pegging the coin to a relatively stable fiat currency, to gold, or to a commodity basket. A recent report on The State of Stablecoins has identified 57 projects, of which 23 are up and running. Tether USD, imperfectly pegged to the US dollar, is by far the largest of the live projects. Of the 57, twelve use the algorithmic central bank approach, the remainder being asset-backed either by fiat currency collateral or by cryptoassets. The problem remains unsolved of feeding a program with real-world data in a tamperproof way, or of running a currency peg without any risk to customers from dishonesty or incompetence by the party holding the reserves.

Satoshi suggestedsomewhat inaccuratelythat Bitcoin would behave like gold under a gold standard:

In this sense, its more typical of a precious metal. Instead of the supply changing to keep the value the same, the supply is predetermined and the value changes.

In fact, as I have noted before, the classical gold standard system provided a great deal of long-run elasticity to the quantity of money. A rising purchasing power of gold incentivized the owners of existing mines to dig deeper and increase their output, and encouraged prospectors to seek new sources of gold. The accumulation of increased gold flow over time pushed the purchasing power back to its nearly flat long-run trend. The gold standard thereby historically constrained the inflation rate to near zero in the long term.

F. A. Hayeks vision of competing non-commodity private monies imagined that issuers would maintain purchasing power stability by actively managing supply. A new project called Initiative Q takes basically this approach: not a cryptocurrency governed by a program, but a private non-commodity money whose quantity is governed by a human board that pledges to stabilize its purchasing power. Full disclosure: I have been a paid consultant on this project.

Satoshi anticipated a feature of Bitcoins fixed supply path that has played an important role in its enormous appreciation, and in its high volatility:

As the number of users grows, the value per coin increases. It has the potential for a positive feedback loop; as users increase, the value goes up, which could attract more users to take advantage of the increasing value.

In this way attracting speculators who want an appreciating store of value (and dont care much about short-term volatility) is at root incompatible with attracting potential currency-users who want short-term value predictability. Having attracted speculative hodlers, it is harder to expand the set of Bitcoin users much beyond them.

Retail use of Bitcoin remains small, from all available indicators. The largest BTC retail payment processor, Bitpay, reported in October 2017 that its merchants are receiving $110 M\+ in bitcoin payments per month, which multiplies out to $1.32 billion per year. For comparison, VISA reported in June 2018 an annual payment volume of $11 trillion, or $11,000 billion. lists 13,365 brick-and-mortar Bitcoin acceptance points worldwide, which is of course a tiny subset of retail establishments. Checking the map for Fairfax County, VA, I find that there are only seven sellers of goods and services listed, plus another 7 Bitcoin ATMs.


Satoshi wanted to create a payment system with greater privacy. Bitcoin does enable users to send funds outside the financial panopticon that is the regulated banking system, where Know Your Customer and Anti- Money Laundering edicts require banks to surveil customer account use and report certain kinds of activity. This escape hatch has allowed ordinary people to protect their wealth from restrictions such as exchange controls and from confiscatory taxes. For example, Bitcoin became suddenly popular in Cyprus when the government imposed controls on international bank transfers and proposed to take 10 percent of bank balancesduring a banking crisis in 2013.

However, the way Bitcoins distributed ledger system shares addresses and size information about every transaction provides less privacy than would a design sharing less information. Bitcoin is not anonymous, only pseudonymous, and the pseudonyms can be pierced. This shortcoming has inspired a number of privacycoin projects. The best known live projects are Monero, Dash, and Zcash (for head-to-head contrasts of these and three others see here). Two interesting up-and-coming projects, using a newer-generation blockchain technology called MimbleWimble, are Beam and Grin.

Cheaper payments

As far as making micropayments at negligible cost, the Bitcoin blockchain has turned out to be infeasible for doing so. It becomes quickly congested as it approaches the modest volume of 7 transactions per second. This technological limitation was discussed by insiders (Hal Finney, Nick Szabo) as early as 2010, but did not come to wider attention until massive congestion arose with Bitcoins expansion in popularity in 2017, bringing a sharp rise in fees for moving your transaction to the front of the queue. Developers are now working on sidechains for small paymentsmost famously the Lightning Networkthat will settle only periodically on the main BTC blockchain. So there may be a technical workaround retaining the Bitcoin standard. The MimbleWimble projects represent another approach: because their blockchains are designed to transmit much less information among miners, they should not only provide greater privacy, but also handle many more transactions per second.


Bitcoin should not be regarded as the last word in private money, but should be appreciated as a remarkable technological breakthrough. Ten years after its launch, we must recognize it as the innovation that has launched financial and non-financial blockchain industries that are still in their early days. Bitcoin has established its value as an asset, and its usefulness as a medium of exchange for a certain subset of transactions. It is the main unit of account and payment medium, preferred to fiat monies, for markets in other cryptocurrencies below the top five. Whether it will achieve common use as a medium of exchange remains doubtful. The inbuilt volatility of its purchasing power makes it unlikely to displace the incumbent fiat currencies barring an inflationary explosion. Even in that case, gold seems likely to prove more popular. Whether a credible stablecoin built on Bitcoins shoulders, or some completely different approach, will achieve critical mass as a private money remains to be seen.

[Cross-posted from]

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Tuesday October 23, 2018 @ 05:40:05 PM mt

The Jones Act Isn't Working. Just Ask Its Supporters.

Although the Jones Actsstated purpose is to ensurethat the United States shall have a merchant marine of the best equipped and most suitable types of vessels sufficient to carry the greater portion of its commerce and serve as a naval or military auxiliary in time of war or national emergency, this plainly isnt the case. But dont take my word for it, just listen to ardent backers of the law such as Rep. John Garamendi (D-CA):

Our military relies on privately-owned sealift capacity and highly trained and credentialed merchant mariners to transport and sustain our armed forces when deployed overseas during times of conflict. But the number of ocean-going U.S.-flag vessels has dropped from 249 in the 1980s, to 106 in 2012, to at most 81 today.

The consequences of this steep decline are not just theoretical. Our military has had to turn to foreign-flagged vessels for sustainment in times of war, and experience shows that can have dangerous consequences. In the 1991 Gulf War, our armed forces relied on 192 foreign-flagged ships to carry cargo to the war zone. Theforeign crews on thirteen vessels mutinied, forcing those ships to abandon their military mission. Would foreign flag carriers be any more reliable today, especially for a long-term deployment into active war zones?

But the number of ships is not the only issue: The U.S. Transportation Command and Federal Maritime Administration estimate that our country is now at least 1,800 mariners short of the minimum required for adequate military sealift, even with the Jones Act firmly in place. Without the Jones Act, our nation would be wholly unprepared to meet the labor demands of rapid, large-scale force projection for national security.

The HouseCoast Guard and Maritime TransportationSubcommittees ranking memberis absolutely correct about the sad state of the U.S. merchant fleet. Some of his numbers, however, are off the mark. The drop in the number of ocean-going U.S.-flag vessels is even more dramatic than what he states, declining from 737 in 1985 to a current figure of 180. Regarding the 1991 Gulf War, meanwhile, the actual number of foreign-flagged ships used as part of the U.S. sealift was 177 rather than 192. Its also inaccurate to say that thirteen vessels were forced to abandon their military mission, with eight of those vessels ultimately delivering their cargo after initial hesitations.

Although an article of faith in pro-Jones Act circles, the congressmans claim that the United States would be in even more dire straits absent the law is open to question. The Jones Acts domestic build requirement, for example, forces U.S. carriers to purchase vessels at vastly inflated prices compared to foreign shipyards (4x is a figure used by many observers while a 2017Congressional Research Service report placed the U.S. price at 6-8x higher). Using basic microeconomics we can intuit that higher prices mean fewer ships, and thus fewer mariners to crew them.

Linking to a Cato Institute analysis of the Jones Act, Garamendi then turns his attention to accusations that the law is an outdated protectionist anachronism:

Opponents of the Jones Actroutinely claim that it is an outdated protectionist anachronism that does more harm than good, but nothing could be further from the truth. A comprehensive 2018 survey of seafaring and industrial nations around the world shows that cabotage laws such as the Jones Act, which provide for domestic preference for shipping policies, are the norm, not the exception. Ninety-one U.N. member states comprising80 percent of the worlds coastlines have cabotage lawsprotecting domestic maritime trade. The conclusive fact from this survey is clear: seafaring nations understand the importance of their domestic maritime industries, and have laws on the books to safeguard them.

This misses the point. While cabotage laws are indeed common, the Jones Acts stringent requirementsandin particular its mandate that ships must be built in the United Statesplace it well outside the mainstream. Indeed, the World Economic Forum calls the Jones Act the worlds most restrictive example of cabotage laws, noting that not even China has a domestic build requirement.

Finally, he addresses the Jones Acts economic impact on Puerto Rico:

Just as important, a recent nonpartisan economic study found that the Jones Act does not impact consumer prices in Puerto Rico. Rather, the Jones Act has a net positive economic impact, because the certainty of the regularly scheduled coastwise trade allows shippers to invest in state of the art maritime technologies and local port investments. In fact, consumer price comparisons of common household commodities between Puerto Rico and other Caribbean islands found that consumer prices on Puerto Rico are commonly lower.

The referenced studymay have been nonpartisan but it was hardly the product of disinterested observers, having been funded by the pro-Jones Act American Maritime Partnership. As discussed in a previous blog post the studys methodology is dubious and its claims should be treated with a great deal of skepticism.

In addition, the logic behind the claim that the Jones Act has a net positive economic impact on Puerto Rico is unclear. State of the art maritime technologies and local port investments are certainly good for the carriers, but it is unclear how this benefits the average Puerto Rican. If the argument is that these confer efficiencies that allow Jones Act carriers to lower transport costs, then they should have little to fear from competing against foreign-flag ships. The fact that they steadily refrain from doing so and instead cling to the Jones Acts protections, however, is telling.

Its also worth noting that regularly scheduled trade with Puerto Rico happens outside of the Jones Act, with Tropical Shipping (whose owner, Saltchuk, also owns Jones Act carrier TOTE Maritime), for example, offering regular service from Halifax, Canada.

Although the Jones Acts alleged economic benefits to Puerto Rico are fictional its costs are very real and well documented. A 2012reportfrom the Federal Reserve Bank of New York, for example, stated thatshipping a twenty-foot container of household and commercial goods from the East Coast to Puerto Rico costs roughly twice that of shipping the same goods to nearby Jamaica or the Dominican Republic.

In addition, a 2013 GAO report points out that the high cost of shipping resulting from the Jones Act results in Puerto Rican farmers purchasing grain from Canada instead of New Jersey and jet fuel from countries such as Venezuela rather than the Gulf Coast. The report also highlighted price fixing in the Jones Act trade servicing Puerto Rico, with a federal investigation resulting in three of four Jones Act carriers pleading guilty and fined about $46 million. Six executives were sentenced to a total of more than 11 years in prison.

All of these points and much more will be discussed during the Cato Institutes upcoming conference on the Jones Act in December, the culmination of which will be a debate between those who favor and oppose the law.

We invite Rep. Garamendi to participate in this debate and defend the Jones Act in this public setting.

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Tuesday October 23, 2018 @ 05:39:54 PM mt

Terminating the INF Treaty Makes No Sense

President Trumps announcement that he plans to withdraw from the Intermediate-Range Nuclear Forces (INF) Treaty is worrying news for U.S.-Russian relations and for the prospect of effective arms control moving forward.

The INF Treaty was negotiated by President Ronald Reagan and Soviet leader Mikhail Gorbachev. Each party agreed to eliminate their nuclear and conventional ground-launched ballistic and cruise missiles with ranges of 500 to 5,500 km. It was a quite successful arms control agreement, at least until recently. In the last few years, Moscow has tested and deployed cruise missiles that appear to violate INF limits.

This is the Trump administrations rationale for terminating the agreement. And the reasoning has a powerful logic. If Russia isnt going to fully comply with the treaty, why should the United States?

The problem is that simply withdrawing is the most extreme option available and robs us of viable diplomatic solutions while doing nothing to pressure Russia to get back into compliance. Indeed, terminating the agreement is probably the option most likely to generate a new arms race.

It is worth noting that the Russians claim we cheated first by deploying missile defense systems in Europe that, if used offensively, would violate the terms of the INF treaty. Its a debatable accusation, but this mutual suspicion is resolvable over the negotiating table. Unfortunately, the Trump administration has barely made an effort to discuss it with Moscow.

Instead of pressuring Moscow to bring itself back into compliance with the treaty, Trumps planned withdrawal along with not-so-subtle hints that the administration plans to ramp up production of just the type of missiles the INF prohibits merely gives the greenlight to Russia to expand their own capabilities in this area.

Ironically, the United States doesnt have much strategic use for intermediate-range missiles of the kind the INF covers. As the Arms Control Associationpoints out, The United States can already deploy air- and sea-launched systems that can threaten the same Russian targets that ground-launched missiles that are prohibited by INF Treaty would.

Withdrawing from the INF could also make extending New START more difficult. New START is a treaty that sets limits on American and Russian deployed strategic nuclear warheads and delivery systems and will expire in 2021 if it is not extended. The Trump administration, and especially national security advisor John Bolton, have shown little interest in extending New START thus far. While there is still time to negotiate an extension, the death of the INF Treaty does not bode well for the future of arms control under the Trump administration.

The other potential target of American INF-range missiles is China. Since Beijing is not a party to the INF it has produced many cruise and ballistic missiles that are banned by the treaty. Supporters of leaving INF argue that adhering to it ties Americas hands in the military competition with China.

While it is true that U.S. cruise and ballistic missiles in Asia would improve operational flexibility, it wouldnt make a significant enough impact on the military balance with China to warrant the costs of leaving the treaty. The chief military advantage of Chinas INF-range missiles is their ability to strike a few large U.S. air and naval bases in the region. American missiles would likely target similar installations in China, but there are many more Chinese bases than American ones. Fielding a U.S. missile force that can threaten enough targets to significantly alter the current balance of power in Asia would be expensive and very time consuming, and China would be able to counter U.S. deployments by growing their own force.

Moreover, there is no guarantee that U.S. allies in Asia will support missile deployments on their territory. In fact, Japan has already cautionedWashington against terminating the treaty. While China is a major source of concern to U.S. allies, their threat perceptions do not neatly line up with the United States. U.S. allies certainly want to maintain good relations with Washington, but they also want to avoid antagonizing China.

The long and short of it is that the Trump administration is choosing to initiate a competition in nuclear and missile capabilities (i.e., an arms race) for no good reason. The diplomatic options to bring Russia back into full compliance have not been exhausted. And in any case, even under INF restrictions, the United States currently possesses the capability to hit any Russian or Chinese target. The INF Treaty is simply a low cost way to discourage an arms race and maintain a cooperative relationship on such issues with Russia. Terminating it is short-sighted and will come with serious costs.

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Tuesday October 23, 2018 @ 05:39:45 PM mt

Fat Cats in the New Yorker

This cover image in the New Yorker, titled obviously Fat Cats, is brought to you by Gucci, Fidelity Investments, Gemfields, Northern Trust, Big Pharma, Mastercard Black Card, First Republic Private Wealth Management, Ocean Reef Club, Swann Auction Galleries, Suntrust Private Wealth Reserve, Ike Behar, Wells Fargo, and other purveyors of goods and services to well, fat cats.

And most especially, on the flip side of this cartoon mocking rich men in suits, as economist Lawrence H. White noted on Facebook, is a two-page spread advertising made-to-measure suits from Giorgio Armani.

Who was it who first said, Think left, live right?

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Tuesday October 23, 2018 @ 05:39:33 PM mt

Police Clearance Rates Are Not Lower in States with Many Illegal Immigrants

Immigrant criminality and its impact on the United States is one of the most important issues in the public debate over immigration. In order to provide new insight into this topic, my coauthor Michelangelo Landgrave and I have attempted to estimate the illegal immigrant incarceration rate. I have also written a short paper on Texas criminal conviction rates by immigration status and crime based on data provided by the state of Texas. All three papers found that illegal immigrants were less likely to be convicted or incarcerated for crimes than native-born Americans.

My paper on illegal immigrant crime rates in Texas is based on data from the Texas Department of Public Safety (DPS) that I obtained through a Public Information Act request. The Texas DPS data separately show the number of convictions and arrests of illegal immigrants, legal immigrants, and native-born Americans for 44 and 46 different crimes, respectively, in the state of Texas by year from January 1, 2011, to November 15, 2017.

One of the persistent criticisms of my paper on Texas criminal conviction rates is that the DPS data do not record the number of illegal immigrants who commit crimes but are not convicted. Given data limitations, that is probably an impossible question to answer in a satisfactory way for immigrants and for natives. However, I try to address this criticism in my Texas paper by showing that the gap between the arrest rates and conviction rates for illegal immigrants and the gap between the arrest rates and conviction rates for native-born Americans are similar, indicating that there are few illegal immigrants who are arrested for offenses who then disappear or are deported before their convictions relative to natives who are arrested and then not convicted.

A related criticism is that illegal immigrants flee Texas and then go back to their home countries after they commit crimes, which means that the Texas state conviction data would not count them. Thus, the criminal conviction rate for illegal immigrants is so low because they commit their crimes and flee an option that few native-born American criminals possess. This argument makes a certain amount of sense in Texas as it shares a long border with Mexico, the source of a majority of illegal immigrants in Texas.

To answer that second criticism, we decided to investigate whether police clearance rates are correlated with the number of illegal immigrants on the state level. According to the FBIs Uniform Crime Reporting (UCR) Program, law enforcement agencies can clear offenses by one of two means. The first is called cleared by arrest whereby a person must be arrested, charged with an offense, and turned over to a court for prosecution. The second is called cleared by exceptional means, whereby the police must identify the offender, gather enough evidence for an arrest and to charge them with a crime, identify the offenders exact location, and have encountered a circumstance out of law enforcements control that prevents an arrest. The death of the offender or the lack of an extradition treaty with the country harboring a suspected criminal are common causes of clearances by exceptional means. Mexico and the United States have an extradition treaty. An offense is cleared when the police have taken certain actions to solve the underlying crime short of a criminal conviction.

Landgrave ran many regressions between clearance rates (logged) and the proportion of the population of each state who were illegal immigrants (logged) with state-year and region-year fixed effects. The regressions control for demographiccharacteristics, the number of police officers for every 100,000 residents, education, and population density. He ran regressions for clearance rates by major crime and the entire crime index. All he found is that motor vehicle theft and burglary clearance rates are positively correlated with the proportion of the population who are illegal immigrants, but only at the 10 percent level for the state-year fixed effects (Table 1, click for larger version). There were no other statistically significant results.

Table 1: Correlation between State Police Clearance Rates and Illegal Immigrant Population

As a quick exercise to test this persistent criticism, these results reveal that there is no nationwide link between clearance rates and the proportion of the population who are illegal immigrants. The only exception is that police clear more motor vehicle and burglary offenses in states with more illegal immigrants as a proportion of their population, but only in one permutation and only at the 10 percent level. Although the theory that illegal immigrants commit crimes and then flee states seems plausible, we see no evidence of that in the aggregate clearance rates.

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Tuesday October 23, 2018 @ 05:39:24 PM mt

Does the Migrant Caravan Pose a Terrorism Risk

Yesterday, President Trump tweeted that unknown Middle Easterners are mixed in with the migrant caravan approaching the U.S. border. Vice President Pence later tried to justify President Trumps comment by arguing that, It is inconvincible that there are not people of Middle Eastern descent in a crowd of more than 7,000 people advancing toward our border. Todd Bensman of the Center for Immigration Studies wrote thatthe president was obviously referencing special interest aliens U.S.-bound migrants moving along well-established Latin America smuggling routes from [Muslim] countries. Perhaps President Trump was referencing special interest aliens but the clear implication is that they are potential terrorists who are using the caravan to sneak into the United States and murder Americans.

The members of the migrant caravan will either apply for asylum at the U.S. border or try to enter illegally. From 1975 through the end of 2017, 9 Americans have been murdered in attacks committed on U.S. soil by 20 foreign-born terrorists who entered illegally or as asylees. During that time, the annual chance of being murdered in a terrorist attack committed by an asylum seeker or an illegal immigrant was about 1 in 1.3 billion per year. Those estimates are based on this methodology with updated numbers.

During that time, about 31.3 million illegal immigrants entered the U.S. illegally (most have since emigrated, legalized, or passed away) and about 732 thousand asylum seekers have been admitted. Nine of the 20 terrorists who entered did so as illegal immigrants, meaning that about 1 terrorist entered hidden amongst every 3.48 million illegal immigrants. They killed zero people in domestic terror attacks. The 11 terrorists who entered as asylum seekers murdered 9 people in terrorist attacks or about 1 murder for every 81,000 asylum seekers let in.

Of those 9 terrorists who entered illegally, only 3 did so along the border with Mexico: Shain Duka, Britan Duka, and Eljvir Duka crossed as children with their parents in 1984. They are ethnic Albanians from Macedonia. They were 3 conspirators in the incompetently planned Fort Dix plot that the FBI foiled in 2007, long after they became adults and more than two decades after they entered illegally. There is no evidence that the Fort Dix plot was more than 23 years in the making.

As far as we can tell, virtually all the members of the migrant caravan come from Central America while the asylum-seeker and illegal immigrant terrorists who committed or attempted to commit attacks on U.S. soil came from Cuba, Lebanon, Pakistan, Palestine, Canada, Algeria, Somalia, Macedonia, Kyrgyzstan, and Afghanistan. Not a single terrorist in any visa category came from Mexico or Central America during the 43-year period.

None of the above estimates are meant to imply that those asylum seekers or illegal immigrants who committed or attempted to commit attacks were terrorists when they entered. Some, like Ramzi Yousef, obviously did enter as terrorists but the Boston Bombers Dzhokhar Tsarnaev and Tamerlan Tsarnaev entered as children too young to be plotting a terrorist attack years later. My colleague David Bier has shown just how rare it is that a foreign-born terrorist intends to come to the United States and how infrequently the government fails to stop him or her.

This issue is complicated by the recent statements of Guatemalan president Jimmy Morales, who announced that his governmentapprehended close to 100 persons completely involved with terrorists, with ISIS and we have not only detained them within our territory, but they have been deported to their country of origin. Morales then stated that information about these supposed terrorists (like their names or countries of origin) was classified, which should raise a red flag as governments love to brag about their anti-terrorism actions with specifics even when such bragging is unjustified.

Even if we assume that some members of the migrant caravan are Middle Easterners who might pose a higher terrorism risk, that is still no good reason to bar the Central American migrants from applying for asylum. If some Middle Easterners are in this caravan, they too will be able to apply and face the same terrorism vetting procedures that work so well. There is little evidence that there are Middle Easterners in this caravan, even less that there are actual terrorists, and the risk from terrorists crossing the border has been tiny historically. This time could be different, but there is no real evidence to suggest that it is. Whatever problems may arise due to this caravan, the actual threat of terrorism from its members is very small.

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Tuesday October 23, 2018 @ 03:28:54 PM mt

Have Republicans Given Up on Limited Government

Given Congressional Republicans' abdication on the nuts and bolts of limited government, does the GOP deserve an electoral beat-down in November? Republican U.S. Representative Mark Sanford comments.
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Tuesday October 23, 2018 @ 06:39:42 AM mt

Universal Savings Accounts Can Fix 401k Leakage

More than 50 million Americans hold trillions of dollars in 401(k) accounts. The retirement accounts have been a big success. By eliminating the double-taxation of savings under the income tax, 401(k)s encourage individuals to build larger nest eggs.

However, many people needing near-term cash end up withdrawing funds from their accounts or borrowing against their balances. Retirement experts are concerned about such leakage. But the real problem is that the system imposes paperwork burdens and penalties on people for accessing their own money.

The solution is to create a savings vehicle that would allow withdrawals without a mess of rules, penalties, and paperwork. The solution is Universal Savings Accounts (USAs), as discussed in this Cato study.

USAs would be the first tier of savings for individuals, with the funds available for any near-term expenses that may arise. For individuals that didnt end up needing the funds in the near-term, account balances would grow tax-free and help cover future retirement needs.

Because USAs would allow withdrawals free of hassles and penalties, they would encourage more savings. The simplicity and liquidity of USAs would make the accounts popular across all age and income groups, which is the experience with similar accounts in Britain and Canada.

The Wall Street Journal yesterday highlighted the 401(k) leakage issue:

Annual defaults on loans taken against investors 401(k)s threaten to reduce the wealth in U.S. retirement accounts by about $210 billion when the lost savings are compounded over employees careers, according to an analysis by Deloitte Consulting LLP.

The projected future loss amounts to about 2.7% of the $7.8 trillion currently in 401(k)-style retirement accounts.

The numbers highlight the problem of tapping 401(k) savings before retirement, known in the industry as leakage. Most leakage occurs because about 30% to 40% of people leaving jobs elect to cash out their accounts and pay taxes or penalties rather than leave the money or transfer it to another 401(k) or an individual retirement account.

But employees also take out loans, which about 90% of 401(k) plans offer. Workers can generally choose to borrow up to half of their 401(k) balance or $50,000, whichever is less.

About one-fifth of 401(k) participants with access to 401(k) loans take them, according to the Investment Company Institute, a mutual-fund industry trade group. While most 401(k) borrowers repay themselves with interest, about 10% default, or fail to repay their accounts, triggering taxes and often penalties, according to research by authors including Olivia Mitchell, an economist at the University of Pennsylvanias Wharton School.

Failing to restore the funds typically occurs when employees with outstanding 401(k) loans leave companies before fully repaying their balances.

Money lost to 401(k) leakage, including loan defaults and cashouts, reduces the wealth in U.S. retirement accounts by an estimated 25% when the lost annual savings are compounded over 30 years, according to an analysis by economists at Boston Colleges Center for Retirement Research.

Even those who successfully repay 401(k) loans can end up with less at retirement than they would have had. One reason is that many borrowers reduce their 401(k) contributions while repaying their loans.

While 401(k) loan defaults currently amount to about $7.3 billion a year, the impact is far greater given that many borrowers in default withdraw additional money to cover the taxes and early-withdrawal penalties they owe on their outstanding balances, says Gursharan Jhuty, senior manager at Deloitte Consulting.

Few employers are willing to eliminate 401(k) loans, in part because academic studies have shown that they encourage 401(k) plan participation.

The fact that leakage is so high reveals a household need for flexibility that is not being met with current accounts. Universal Savings Accounts would fill the need by allowing withdrawals at any time for any reason.

Ryan Bourne and I discussed the advantages of USAs in this study last year, and policymakers followed through with legislation this year. Republicans included USA accounts in their recent Tax Reform 2.0 package that passed the House.

We shall see which way control of Congress goes, but helping Americans at all income levels increase their financial security with USAs should be a bipartisan goal.

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Tuesday October 23, 2018 @ 06:39:35 AM mt

Everything You Need to Know About Net or Gross Saving Rates

Writing in Project Syndicate, Stephen Roach, former chief economist for Morgan Stanley, declares the U.S. economys foundations fundamentally unsound:

Americas net national savings rate the sum of saving by businesses, households and the government sector stood at just 2.1% of [gross] national income in the third quarter of 2017. That is only one third of the 6.3% of the average that prevailed in the final three decades of the twentieth century America is saving next to nothing. Alas, the story doesnt end there. To finance consumption and growth, the U.S. borrows surplus saving from abroad to compensate for the domestic shortfall. All that borrowing implies a large balance of payments deficit with the rest of the world which spawns an equally large trade deficit.

This alleged savings crisis has popped up periodically since the 1980s when theres a Republican in White House, such as 2006 when I wrote about it.

Roach believes it important to think about saving in net terms, which excludes the depreciation of obsolete or worn-out capacity in order to assess how much the economy is putting aside to fund the expansion of productive capacity.

Dividing net savings by gross national income subtracts a semi-arbitrary estimate of depreciation from the numerator but not from the denominator. Dividing net by gross shrinks the resulting savings/income ratio. For Roach to suggest that more net savings could in any sense pay for more consumption and growth is misleading at best. Dont expect a discount on a new car because you hope to pay with net savings, after subtracting estimated depreciation.

The amount of money needed for new plants and equipment is gross, not net. And it is the dollar gap between gross investment and gross saving that needs to be financed by attracting foreign investment. Mr. Roach calls foreign investment in U.S. equity (stocks) or real property borrowing, but thats not how we describe the same investments if made by a U.S. resident.

The blue line in the first graph shows gross savings as apercentage of gross national income (GNI). The red line shows gross private domestic investment as a percentage of GDP, which is quite similar to GNI (GDP excludes income of foreigners spent in the U.S. and remitted income of Americans living abroad).

The dotted green line is net savings divided by gross income the extraneous ratio that worries Mr. Roach. The green line appears to fall much more than the blue line simply because estimated depreciation rose from 12.3% of national income in 1969 to 15.9% in 2017 as the capital stock shifted from structures to rapidly-depreciating high-tech. Because rising depreciation estimates are subtracted from saving yet added to income, the downward tilt of the green line is exaggerated by the oddity of dividing net savings by gross income.

A declining net savings rate since the mid-1960s did not thwart fixed investment, though recessions always do. Real net domestic fixed investment nearly tripled from $379.9 billion in 1983 (in 2009 dollars) to over $1 trillion by 2005-2006, and has again been heading up since the 2008-09 recession.

In the second graph, the ups and downs in the net savings rate (green line) do not track or explain the movements in net exports (exports minus imports). The U.S. runs a capital surplus and current account deficit when the economy is growing briskly. Trade deficits shrink just before, during and right after recessions.

When previous net savings anxieties appeared, they were used as a rationale for raising taxes. In accounting, unlike economics, it sounds simple to raise national savings by reducing the governments negative savings (budget deficits). If we carelessly assume that higher taxes have no bad effects on the economy or private savings, budget deficits would then fall with higher taxes and national saving (the sum of public and private saving) would rise. In this simplistic bookkeeping, more taxes are defined as being identical to more savings.

There are big problems with assuming a $100 million tax-financed cut in the deficit equals a $100 million increase in national savings. One is that politicians favorite targets for new taxes are savers and savings retained corporate profits, dividends, interest, capital gains and high incomes in general. If successful firms and families pay more in taxes, theyll have less to save.

But the biggest problem with assuming smaller budget deficits add to national savings is that it is rarely true. Smaller deficits (particularly surpluses) are frequently offset by lower private savings.

The last graph compares recent changes in government savings (red line) with changes in private saving (blue) in billions of 2009 dollars. When the red line falls sharply (2000-2002 and 2006-2009), that indicates a rising budget deficit. Each time the red line fell, however, the blue line rose nearly as much leaving total national saving little changed. Conversely, when the deficit was greatly reduced from 2011 to 2014, private savings was greatly reduced too, with little net effect on total public and private saving.

This inverse relationship between public and private savings is not unique to the United States, nor to the last 30 years. In A Reconstruction of Macroeconomics (1992), I displayed graphs for the U.K., Sweden, Norway,and Japan to show the household savings rates fell dramatically (sometimes into negative territory) when these countries moved from budget deficits to surpluses for a few years in the 1978-92 period. This is consistent with Ricardian Equivalence (taxpayers regard more national debt as their own, so they save to pay more future taxes), but perhaps also consistent with simpler cyclical explanations (people save more in recessions to rebuild lost wealth, and do the opposite in boom times).

We do not live in a closed economy, where new investment might have to be financed from flows of new domestic saving rather than from stocks of appreciated assets. Global capital finds investment opportunities around the world, and foreign firms and investors find many of the best opportunities in the USA. More capital is better than less, and a dollar is a dollar.

Since the purpose of saving is to add to wealth, the best measure of saving is the addition to wealth. In the first quarter of 2018, household net worth was a record 685% of disposable income according to the Federal Reserve up from 548% six years earlier. When the value of accumulated wealth rises that much, annual additions to the stockpile (saving) become far less urgent or significant.

Dire warnings of a looming savings crisis have been reported many, many times before, always in ways that are agitated, confused, mistaken and irrelevant.

The net savings rate does not explain or predict investment, trade deficits, interest rates, or anything else worthy of concern.

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Tuesday October 23, 2018 @ 06:39:28 AM mt

Untangling At Last: Policymakers Take Aim at Ending Arms Sales to Saudi Arabia

Saudi Arabia has a big problem on its hands this week. Despite funneling significant resources into lobbying efforts and U.S. congressional campaigns, the kingdom has found itself in a pickle that it cannot seem to easily extricate itself from: the disappearance of Jamal Khashoggi.

For years, Saudi Arabias war in Yemen has drawn significant criticism for its strategy and tactics. The Saudi naval blockade has the kingdoms smaller neighbor grappling with a devastating famine and a dearth of medical supplies and humanitarian aid. The Saudi air campaign has also proven deeply problematiceither from poor aim or amoral choices of target.

International critiques seemed to reach a crescendo last month after the Saudis mistakenly bombed a school bus full of children, killing 26 and injuring 19 Yemeni kids. European nations issued statements that they would halt weapons shipments to the kingdom for the foreseeable futurebecause ofthe incident, but many of those nations (including Spain and Germany) did an abrupt U-turn later in the month and proceeded with the sales.

Some American policymakers have also tried to halt weapon sales to the nation over the past two years. There have been two outright votes on the matter led by bipartisan, bicameral coalitions, but bothmeasures werenarrowly defeated.

Saudi Arabias role in Khashoggis disappearance has created a pivotal moment for the effort led by some in Congress to untangle the United States from Saudi crimes.Make no mistake, this change is not out of the blueits reaching critical mass. The champions of previous amendments, including Sen. Rand Paul, Sen. Bernie Sanders, Sen. Chris Murphy, and Sen. Mike Lee, now have powerful policymaker allies that had been previously opposed to their efforts.

But it should never have taken the disappearance of a Washington Post journalist to reach critical mass. Saudi Arabia has a staggering history of involvement in human rights concerns in Yemen that should have provided enough momentum to stop and question the current scope of defense exports flowing into the country. The evidence that, at the very least, selling weapons to the country was a risky endeavor has been clear for years.

On the Risk Assessment Index, a comprehensive estimate meant to objectively measure the risks of negative consequences flowing from American arms sales to particular countries, Saudi Arabia scored a 12 on a scale of 5 (lowest risk) to 15 (highest risk). The overall measure was created from making one unique composite score for each nation from the Fragile State Index, Freedom House Index, U.S. State Departments Political Terror Scale, Global Terrorism Index, and the UCDP/PRIO Armed Conflict Database.A full breakdown of the index and its implications can be found in my and Trevor Thralls recent paper, Risky Business.

While President Trump may tout the economic benefits of weapons exports, Congress has a responsibility to also consider the foreign policy implications of continuing U.S. support. As I wrote recently in the Wall Street Journal,

The U.S. makes arms-sales decisions under legislative restrictions The 1976 Arms Export Control Act creates a directive to ensure that American-made weapons dont spark arms races, support terrorism, or enable human-rights violations abroad. These arent worries or aversions. Its the law.

The signs have been clear for a while. The smartest move for policymakers would be to at least halt deliveries to the kingdom until Khashoggis disappearance can be thoroughly investigated, and to use that time to seriously evaluate the trade-offs that come from selling weapons to Saudi Arabia.

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