Archives: 08/2016

Reforming Last-Resort Lending: The Flexible Open Market Alternative

Having spent the last month or so poring over writings on last-resort lending,* and especially writings dealing with the recent crisis and its aftermath, with the particular aim of discovering the best means for supplying last-resort credit when it’s called for, and for not supplying it when it isn’t, I’ve reached a number of tentative conclusions that seem worth reporting. I report them despite their tentative nature so that I might be convinced sooner rather than later that I’m barking up the wrong tree, and also because, if I’m actually on to something, I might get others to help me flesh-out my ideas.

I hasten to add that I regard any need for last-resort lending as reflecting, not the inherent shortcomings of private financial markets, but the debilitating effects of misguided regulatory interference with the free development of those markets. Some of the least regulated banking systems of the past, including systems that lacked central banks, were also famously crisis-free, or close to it.

Modern banking systems are, sadly, a far cry from those ideal arrangements. It’s quite impossible, for that reason, to suppose that we might safely dispense altogether with central bank last-resort lending, without first undertaking other, major reforms. In the meantime, we can strive to  reform last-resort lending arrangements, so that they might lower the risk of future crises, instead of making them more likely by contributing to moral hazard, or by otherwise misallocating credit.

Don’t Exaggerate Cuban Immigration Surge

More Cubans will flee their island to the United States this year than any year in decades, according to new data obtained by the Pew Research Center. But the flow should not be exaggerated. The United States has handled much larger influxes of Cubans in the past, and the large Cuban American community in the United States is fully capable of integrating the newcomers. Moreover, Cuban asylees are not attempting to sneak into the country, but rather presenting themselves for security checks to agents at ports of entry.

As can be seen in Figure 1, net Cuban immigration was at its highest level in the 1960s following the communist takeover of the Island. From 1960 to 1970, the number of Cuban immigrants living in the United States grew more than fourfold—by nearly 360,000, according to the Census Bureau. No decade has seen such rapid growth in percentage or absolute terms. Since 1970, the U.S. Cuban-born population has grown more gradually to reach almost 1.2 million in 2014. 

Figure 1: Cuban Foreign-Born Population in the United States

Sources: Census (1960-2000); American Community Survey (2005-2014)

Figuring out the number of annual arrivals is much more difficult. The immigration service keeps the number of aliens obtaining lawful permanent residence (LPR) each year, so that gives an approximation of the number of newcomers. Because the Cuban Adjustment Act requires Cuban immigrants to wait a year to apply for LPR status, however, the numbers reflect arrivals that occurred earlier. This impacts the figures in the 1980s most significantly. More Cubans arrived in 1980 than any other year on record, 125,000 in six months alone, but the surge overwhelmed the service and it waited until 1985, 1986, and 1987 to process their LPR applications.

While imprecise, the LPR numbers give us some context. In terms of annual in-flow, the United States saw much greater influxes in 1968, 1977, and 1980. On a per-capita basis, this year will likely see less than half the rate of immigration in1968 and 1980.

Figure 2: Cubans Obtaining Legal Permanent Residency (FY1960-2014)


Sources: Immigration and Naturalization Service/DHS Statistical Yearbooks (1978-2014); Annual Reports of the Immigration and Naturalization Service (1960-1978)

The LPR figures also don’t indicate how the person came to the United States—whether they presented themselves at a port of entry, were apprehended crossing the border, or came with a visa. Over the last decade, roughly 60 percent of all Cubans identified by DHS presented themselves at a legal point of entry—such as an airport or border crossing station—without a visa, compared to just 14 percent who were apprehended without documentation away from a port. The other 26 percent came to the United States legally, either as refugees or immigrants.  

Figure 3: Mode of Identification of Cubans Arriving in the United States by Homeland Security

Sources: Congressional Research Service; DHS Statistical Yearbooks; State Department; Pew (2016 10-month total is annualized)

The reason that Cubans present themselves at ports of entry is that the vast majority receive legal permanent residency through the Cuban Adjustment Act (CAA) of 1966, which grants Cubans asylum automatically upon reaching land in the United States. The CAA obviates the need to avoid detection and immigrate illegally. After one year in asylee status, Cubans can adjust to permanent residency. Overall, roughly three quarters of all Cuban immigrants since 1960 have used this law to receive permanent residency in the country.

Figure 4: Cubans Obtaining Permanent Residency by Type of Immigration

Sources: DHS Statistical Yearbooks

Although the increases in Cuban arrivals in the past couple of years are dramatic, they are not unprecedented or alarming from the standpoint of how they are occurring. Americans should and will welcome them just like they have welcomed each wave of Cubans who escaped the communist island in the past.

There Are Worse Things than Libertarian Fantasies

So says I, in commenting on Amar Bhidé’s ill-informed opinion piece in yesterday’s FT.

Here, with some minor edits (which I failed to fix on time in the original), is what I wrote:

Were Mr. Bhidé’s own suggestions for monetary policy reforms sound, his swipe at fundamental criticisms of central banking as “libertarian fantasies” would be perfectly gratuitous, but no worse than that. In fact, the idea that we’d be better off starting with a clean slate than trying to fix central banks seems to me considerably less fantastic than Mr. Bhidé’s suggestion that the Fed might manage money responsibly simply by checking commercial banks’ imprudent lending. That the Fed has a miserable track record when it comes to detecting, much less discouraging, imprudent lending, is the least of it: Bhidé’s more fundamental error consists of not imagining that merely by keeping an eye on imprudent lending the Fed would also avoid gross mismanagement of the money supply, and the macroeconomic disturbances consequences thereof. If there’s a theory that supports this view, I’d like to see it!

Nor is it true, despite what Mr. Bhidé claims, that the Fed managed the money supply in its early years merely by discouraging imprudent bank lending. It isn’t true, first, because the Fed’s management of the U.S. money stock was in fact notoriously irresponsible in its first decades (consider the rampant post-WWI inflation, the depression of 1920-21, the boom of the late 1920s, and the Great Monetary Contraction of the early 1930s); second, because “checking imprudent lending” wasn’t the Fed’s mandate then (it was “providing an elastic currency” — an entirely different matter); and third, because the long-run behavior of the money stock was constrained by the working of the gold standard.

Mr. Bhidé is right in one respect: he is right to regard the Fed’s dual mandate as supplying an insufficient check against imprudent Fed actions. The fix, though, isn’t Mr. Bhidé’s even more unsound prescription. It consists of replacing the dual mandate with a single stable spending growth mandate. Unlike Mr. Bhidé’s proposal, such a mandate would place definite limits on inflation, though ones that would vary with the economy’s productivity. It would, to be sure, not suffice to rule out imprudent actions by commercial bankers. But then, no monetary policy mandate should be expected to serve that purpose.

On a separate note, I do wish that Mr. Bhidé and other persons inclined to dismiss arguments to the effect that we’d be better off without central banks as “libertarian fantasies,” or the equivalent (besides Mr. Bhidé, Paul Tucker comes to mind), would grapple with the actual arguments of central bank critics, instead of merely labeling them. As for economists calling things “fantasies” because they seem far from politically possible, it seems to me that by making such pronouncements they shirk their proper duty, which consists of altering the boundaries of the politically possible through their influence upon people’s beliefs. Where would we be today had Adam Smith chosen, not to elaborate upon the potential benefits of free trade, but to dismiss the idea as a “libertarian fantasy?”

[Cross-posted from]

Have Trade Agreements Killed the Manufacturing Sector?

An interesting 80-second video by Johan Norberg, executive director of Free To Choose Media and senior fellow at the Cato Institute, makes the case that trade agreements have not led to the deindustrialization of America.  He notes that the share of U.S. workers employed in manufacturing has been falling at an average of 0.4 percent per year from 2000 to 2010, but it also fell at that same rate between 1960 and 2000.  Thus, NAFTA and other trade agreements don’t seem to have had a great deal of influence on the gradual evolution of the economy away from employment in manufacturing and toward employment in services.

If he had more time, Norberg also might have pointed out that the U.S. manufacturing sector has never been larger.  Value added by the U.S. factories reached an all-time high of $2.4 trillion in 2015.  Manufacturing accounts for about 13 percent of GDP.

Yes, it’s true – fewer people work in manufacturing today than in the past.  Peak U.S. manufacturing employment was 19.4 million workers in 1979, but has generally trended downward since then.  Today only around 12 million people work for manufacturers, a decline of roughly one third over the past 35 years.  Productivity has risen so much that many fewer workers now produce many more manufactured products.

A recent study by the Center for Business and Economic Research at Ball State University found that trade has had some effect on manufacturing employment.  Researchers estimate that approximately 13 percent of manufacturing job losses have been due to trade.  But the dominant factor has been productivity growth, which accounted for 85 percent of the employment decline.  (Robots and computers ate the jobs.)  So imports bear a relatively small degree of responsibility for the reduction in manufacturing employment, but take a large share of the blame from politicians.

There are a lot of good things that can be said about U.S. manufacturing.  Workers are better educated, better paid, use more sophisticated equipment, and produce more high-value goods.  Our country may produce fewer shirts and tennis shoes than before, but we produce more valuable items such as airplanes, motor vehicles, and industrial equipment.  So even though there is an abundance of good news for manufacturers, don’t expect to hear much about it in this particularly anti-trade political season.

(A more detailed review of the economic effects of trade agreements can be found in this study by the U.S. International Trade Commission.)


Should Realists Denounce Trump’s Foreign Policy?

The 2016 election season continues to unfold in increasingly bizarre ways. Donald Trump’s latest attempt to construct a coherent foreign policy speech may have failed to impress, but his campaign’s use of the word ‘realism’ led once again to calls for realists to openly denounce the Republican candidate and his views. As Dan Drezner argues over at the Washington Post,

In the interest of political self-preservation, realists need to get out in front on this. Because the thing about Trump is that every foreign policy position he touches has become less popular over the past calendar year. If realism gets lumped together with Trumpism, that is very, very bad for realists.

There are a bunch of problems with this argument, starting with the fact that Trump really isn’t espousing a realist worldview. To be sure, the Republican candidate has said a couple of things that are more restrained than his party’s foreign policy has been in recent years. Skepticism of nation-building and the idea that American allies should contribute more to their own defense are relatively uncontroversial (and generally popular) ideas that would move U.S. foreign policy in a more restrained direction. Most of Trump’s other proposals, however, including his ill-defined strategy to combat ISIS, his determination to reverse the nuclear deal with Iran, his apparent and disturbing willingness to consider the use of nuclear weapons, and his eagerness for trade wars, are not.

As many have noted, Trump’s foreign policy is best defined as incoherent. Monday’s speech provides another case in point: though the campaign described it as a return to “foreign policy realism,” the approach outlined by the candidate sounded more like a form of nationalist imperialism – complete with the seizure of natural resources from distressed countries – than anything else. Frankly, the only major similarity between Trump’s policy proposals and realism is his willingness to view the world in a win/loss framework. As a theory, realism is more than cost-benefit analysis, but one can see why a simplistic understanding of it would appeal to the candidate.

Here’s another problem with the demand that realists should repudiate Trump: they already have, loudly and repeatedly. In Foreign Policy, Stephen Walt admonished Donald Trump to “keep your hands off the foreign policy ideas I believe in.” Cato’s own Trevor Thrall highlighted Trump’s know-nothing approach to foreign policy here. Many others have done likewise. As I wrote back in April, the primary defining characteristic of Trump’s foreign policy is not restraint, but inconsistency.   

And there is no evidence that realists (or restrainers) support Donald Trump. Reporters from Defense News recently tried to ascertain who a potential Trump administration might call on to staff key positions. It’s unlikely that John Bolton, recently suggested by Trump as a potential Secretary of State, will be mistaken for a realist any time soon. Not only did they find no realists willing to take such positions – one prominent advocate of restraint is mentioned in a purely speculative way – but they found few foreign policy experts willing to consider it, period.

Finally, the notion that realists can only repudiate Trump specifically by signing an open letter is unhelpful. The first open letter of the campaign season – signed by over 120 Republican foreign policy specialists – was valuable, signaling their broad disgust for their party’s nominee and his policies. But it was narrowly written, and since that time at least four other open letters have been published, each with a slightly different rationale, and slightly different signatory lists. Indeed, most have already been signed by prominent advocates of both restraint and realism. And there are a variety of reasons why some realists might not have signed the prior letters: they may not agree with everything proposed, they may be barred by professional or legal obligations from supporting or opposing political candidates, or perhaps they are simply not Republicans! Another open letter will not solve these problems.

Such criticism often comes with the implicit – or explicit – demand that realists endorse Hillary Clinton. Yet Clinton’s interventionist foreign policy approach is also problematic. Her support for the interventions in Iraq and Libya, and her continued support for unwise ideas like a no-fly zone in Syria remain concerning. Ultimately, those who call for realists to denounce Trump may be right about one thing: for realists, this election is a lose-lose proposition. 

Criticism of Not Counting Dependents of Legal Immigrants Is Unfounded

In a post last week, I described how every administration since 1990 has misinterpreted immigration law, admitting far fewer legal immigrants than Congress authorized. Legal immigrants qualify for a visa either by having U.S. sponsors—employers or family members—or by winning a visa in the diversity visa lottery. Except for spouses and minor children of U.S. citizens, the law limits the number of immigrants with quotas, but it has no such cap for their spouses and children that come with them. Nevertheless the government still counts them against the limits.

Naturally, the folks at the Center for Immigration Studies (CIS)—the leading opponents of legal immigration—disagree. In a post responding to former congressman Bruce Morrison’s support of this view, CIS’s John Miano asserts that the coauthor of the relevant law (the Immigration Act of 1990) doesn’t understand the law that he helped write.

But it is Mr. Miano who is confused. He argues that because spouses and children (dependents) of immigrants are not included in the categories of immigrants who are admitted without being subject to annual quotas, “the plain reading of the section unambiguously states that some quota applies to dependent immigrants.” First of all, the statute doesn’t discuss dependents at all, so it doesn’t unambiguously say anything about them. But as I noted in my original post, the most obvious reading is that the quotas only apply to those who the law actually says they apply to. Here, for instance, is the quota for the first family-based category:

Aliens subject to the worldwide level specified in section 1151(c) of this title for family-sponsored immigrants shall be allotted visas as follows:
(1) Unmarried sons and daughters of citizens.—Qualified immigrants who are the unmarried sons or daughters of citizens of the United States shall be allocated visas in a number not to exceed 23,400.

The “plain reading” here is that the limitation applies only to “unmarried sons and daughters of citizens.” Mr. Miano has to read dependents into these provisions.

Secretary Pritzker Forgets About Steel Users

Commerce Secretary Penny Pritzker authored an Aug. 12, 2016, opinion piece in the on-line version of the Cleveland Plain Dealer that emphasizes her desire to protect the steel industry from import competition. She states, “We take seriously our ongoing responsibility to combat unfair trade that threatens the viability of this industry and the good people in our steel-making communities.” Pritzker notes that at the Department of Commerce, “Currently, we are enforcing 161 anti-dumping (AD) and countervailing duty (CVD) cases on steel products to combat the countries, like China, that are trying to dump steel on our market.”

There is no doubt that steel producers are being affected by global steel overcapacity, as I have noted here, here, and here. Much of the overcapacity is due to China’s use of various policy measures to stimulate steel industry expansion. In 1995, China produced 95 million metric tons (MMT) of steel, equal to the amount produced in the United States. Twenty years later in 2015, Chinese production had risen more than eight-fold to 803 MMT. U.S. production decreased 17 percent over that same period, amounting to 79 MMT in 2015. Global production more than doubled, rising from 753 MMT in 1995 to over 1600 MMT today. The boost in China’s output exceeded 700 MMT and accounted for more than 80 percent of the increase for the entire world. It is reasonable to conclude that China’s actions have been the most important factor in glutting the global steel market.

A world marketplace so strongly influenced by government policies can hardly be described as fair. The effects of the steel surplus are felt around the globe, including in the United States. U.S. steel producers have been dealing with relatively low-priced imports from a number of countries. They have responded by filing many AD/CVD petitions, which helps to explain Sec. Pritzker’s statement about her role in “enforcing 161 AD/CVD cases.” Those measures restrict the importation of a variety of steel products from numerous countries. They have succeeded in making the United States a somewhat high-priced island in a world awash with low-priced steel. The AD/CVD restrictions apparently haven’t been sufficient, though, to ensure the profitability of American steel producers. United States Steel Corporation reported a loss of $1.5 billion in 2015.

However, what Sec. Pritzker ignores is that efforts to restrict imports to the benefit of steel producers come at the expense of steel users. U.S. manufacturing firms that use steel as an input have to pay prices that are higher than those paid by competitors located in other countries. This makes steel-consuming manufacturers vulnerable to losing sales to lower-priced imported goods that compete with them in the U.S. marketplace. Economists long have understood that imposing trade restrictions lowers the economic welfare of the country that puts them in place. Since the steel-consuming sector is so much larger than the steel-producing sector, the welfare losses for the overall U.S. economy are magnified.

The Bureau of Economic Analysis (BEA) is part of Sec. Pritzker’s Department of Commerce. BEA data indicate that value added by “primary metal manufacturing” amounted to $59.7 billion in 2014. (Note: Primary metal manufacturing [NAICS 331] includes nonferrous metals, such as copper, aluminum, magnesium, lead, tin, silver, and gold, so is much broader than the steel industry.)  Downstream manufacturers that utilize steel as an input generate value added of $990 billion, more than 16 times larger than primary metal industries. The disparity in employment also is more than 16 times greater. Primary metal manufacturing employed 400,000 people in 2014. Downstream manufacturers employed 6.5 million. Employment by U.S. steel producers is somewhere in the range of 100,000 – 150,000.

The point is not that the U.S. steel industry is small and insignificant, because clearly it is not. Rather, the point is that the problems of the steel industry need to be kept in perspective. The bottom line is that it would be a poor policy choice to attempt to protect steel producers in ways that do much greater harm to steel users. Those who wish to provide policy support for the steel industry should look for approaches that do not involve restricting trade.