Air Traffic Control Modernization

The Senate Commerce Committee held a fascinating hearing on Wednesday regarding air traffic control (ATC). The hearing showcased the momentum to proceed with ATC restructuring. Because aviation is crucial to the economy, such a reform would create wide-ranging benefits.

At this point, industry experts are ahead of Congress in thinking about ATC reform. At the hearing, some of the senators seemed short-sighted and parochial. They had not done their homework and they nit-picked instead of considering the big-picture benefits.

However, the witness testimony was powerful and so it hopefully helped sway the skeptics. America’s ATC needs a big upgrade to meet rising passenger demand. Airspace is getting crowded and our antiquated ATC is causing delays and wasting fuel. Other countries have improved performance by separating ATC from their governments. That is the reform that America needs.

The testimonies of former Democratic senator Byron Dorgan (here), Paul Rinaldi of the National Air Traffic Controllers Association (here), and Jeff Smisek of United Airlines (here) were impressive. Kudos to them all for embracing change.

Dorgan heads an ATC reform group, and he clearly had done his homework. If he were still a sitting senator, he might be skeptical of ATC changes, but he now favors restructuring. He argued that separating ATC finances from the federal budget is a crucial step to take. His testimony illustrates that when politicians take the time to learn about policy issues in detail, they are more likely to embrace reform.

Rinaldi is carving out a thoughtful pro-reform position as head of the controller’s union. Unions are often resistant to change. But to Rinaldi and his union’s credit, they have researched international ATC reforms and they seem to be open to major U.S. restructuring.

Is Bitcoin Doomed?

OK, I’m being melodramatic. But the question actually posed by the PanAm Post, “Will Bitcoin’s Fixed Money Supply Be Its Downfall?”, was only slightly less so. They had me take the “yes” position. But as my doubts about Bitcoin’s future are far from certain, I was delighted to see that they got Konrad Graf, a Bitcoin fan who has done some very good work on that cybercurrency’s early development, to oppose me.

The crucial questions, I believe, are whether any exchange medium can become widely adopted without also serving as an economy’s medium of account–that is, the medium to which prices and other payment contracts refer–and whether a new unit is likely to displace an established one unless it’s purchasing power is considered to be relatively stable and predictable. Think about your own employment contract, and of the alternative of having a contract written in Bitcoin, and you have some idea of the challenge. Of course, Bitcoin’s value is bound to be less predictable now than it would be were bitcoins more widely employed in making payments. But its popularity must remain limited unless it can somehow be perceived as offering a relatively stable unit of account.

In this regard it is worth considering Leland Yeager’s plea, in several of his writings, for “separating” the medium of exchange from the unit of account. (Here is a good summary by Bill Woolsey, comparing Yeager’s ideas to those of Market Monetarists.) Although Yeager’s perspective, which argues that it’s better to have a medium of exchange that isn’t also an economy’s medium of account, superficially appears to hold out more promise for Bitcoin than my own arguments, the appearance is deceiving. For what Yeager has in mind is a system in which the unit of account is a stable-value unit, with the value of actual exchange media fluctuating relative to the fixed nominal value of that unit. So while Yeager’s argument does suggest the desirability of a “separated” system, it is only for the sake of being able to have a more stable unit of account that he favors such an arrangement. Otherwise separation doesn’t achieve much, for macroeconomic problems can still arise in consequence of unanticipated changes in the value of the medium of account, and the consequent disruption of contracts that such changes will entail, regardless of the media actually employed in making payments and in settling accounts due. That’s one reason why I, for one, look forward to seeing further experimentation and innovation in the cybercurrency world.

Three Year Mark for Cato’s Police Misconduct Reporting Project

Cross-posted from PoliceMisconduct.net:

So today marks our three year anniversary here at PoliceMisconduct.net!  One of our prime objectives has been to draw more attention to the problem of police misconduct across the country.  Long time readers must be amazed (as are we!) at the attention this subject has been receiving the past few months.  The President himself has acknowledged the “slow-rolling” crisis has been on-going for many years and also that some “soul searching” is in order.   Yes, it’s long overdue.  Better late than never.

The victims of police misconduct are too often without a voice and the extent of the problem was (is) unknown because few seemed interested enough to study it.  We at Cato thought it important to lend some institutional support to this critical area.  And, increasingly, the media (and others) have found this site to be a valuable resource.  Over the past year, we’ve been cited by the Washington Post, Wall Street Journal, the Economist, ABC News, the Atlantic, and Frontline.  If the first step toward addressing a problem is recognizing that a problem exists, then we’re there.

Of course, there’s much more to do.  Just wanted to mark this occasion and provide our friends with an update on our work.  One easy way you can help us is by spreading the word by taking a moment to blast a note to all your contacts via twitter and Facebook.  Thanks for your consideration and support!

The TPP and GDP: Let’s Wait and See

In discussions of the Trans Pacific Partnership (TPP), there are often very specific figures put out there as the estimated economic gains of this trade deal.  $78 billion of annual income gains for the U.S. is a commony cited number.

It is important to keep in mind, however, that these gains are based on assumptions about what might be in the TPP, not what is actually in the TPP.  That’s because there is no TPP yet.  

The estimates come from this study, and a more detailed previous study, by a group of trade economists.  But if you read the fine print, for example on p. 23 of the second link, they make clear that they are simply estimating the TPP benefits based on the liberalization coverage of past agreements among the same parties.

The extent of the liberalization that will be in the TPP is not clear because that’s what the parties are negotiating about right now: How much to liberalize each sector.  If trade policy were run by free market economists, everyone would liberalize on their own right now.  But trade policy is influenced heavily by special interest groups.  As a result, some import restrictions remain even after a trade negotiation.

Many commentators have come out for or against the TPP already, based on assumptions about what will be in it.  I’m waiting to see the full scope of what’s in the TPP (if the negotiations are ever concluded) before making a decision.  Any liberalization needs to be balanced out against “governance” parts, such as intellectual property protection, where the impact on GDP and welfare more generally are more uncertain.  We can’t really make that calculation until we see the final deal.

Hunting Whales: The Problem with Prosecuting SIFIs

Yesterday, Attorney General Loretta Lynch made the unprecedented announcement that five of the world’s largest banks – JP Morgan, Citi, Barclay’s, RBS, and UBS – would be pleading guilty to criminal charges.  According to the allegations, traders and executives working at the banks’ foreign exchange (FOREX) desks colluded through the use of chat rooms to fix currency prices on a daily basis.   The fines are in the hundreds of millions, with Barclay’s total penalty (including those levied by US and UK authorities) at $2.4 billion topping the charts and Citigroup’s $925 million following behind.  According to Assistant Attorney General Leslie Caldwell, these guilty pleas “communicate loud and clear that we will hold financial institutions accountable for criminal misconduct.”

But do they?  Can they?  In the world of “too big to fail,” JP MorganChase and Citigroup are whales among whales.  Dodd-Frank, with its “living will” provision, was supposed to end too big to fail by requiring that systemically important financial institutions (SIFIs) create a plan for an orderly unwinding in the case of failure.  But this provision contains the seeds of its own destruction.  By designating firms as SIFIs, the government has made the too big to fail designation explicit when it was previously only implicit.

If a SIFI behaves badly, even very very badly (and there is no doubt that, if the allegations are true, the FOREX traders at these banks behaved badly indeed), how much can it be punished?  While corporations can be held criminally liable, you obviously cannot imprison a corporation.  Instead, criminal penalties for companies mean two things: (1) public censure and (2) fines.  The big banks are not very popular these days and it’s unlikely the taint of public censure will cause much additional pain. 

So that leaves the government with fines.  For a fine to be a punishment, it must be large enough to hurt.  These fines are not small.  Even for a bank as large as Citi, $925 million is a chunk of change.   But in imposing these fines, the government must walk a fine line.  If Citi is a SIFI, can the government risk imposing a fine large enough that it risks destabilizing the entire company?  Almost certainly not. 

Complicating the government’s position is the fact that three of the banks – RBS, Barclay’s, and UBS – are foreign (RBS and Barclay’s are British, and UBS is Swiss).  These banks have large footprints in the U.S. markets but, even if they were to falter, the government would be hard-pressed to offer a bailout even if it wanted to.  Consider what happened during the financial crisis.  Several large foreign banks were put at risk when AIG failed.  Because the U.S. government could not, for political reasons if for no other, directly bail out these banks (even though their failure would impact U.S. markets), it instead engineered the so-called “back door bailout” by which TARP funds injected into AIG wound up in the hands of foreign banks.  If the Department of Justice were to impose a heavy enough fine on RBS, Barclay’s, and UBS today that it really hurt those banks, that is, that it put any significant part of their business at risk, it could harm U.S. markets.

Secret price-fixing is bad.  It distorts markets and prevents them from performing one of their most essential functions: price discovery.  But having doubled-down on the too big to fail designation, the government has put itself into an impossible situation when it comes to reining in SIFIs’ bad behavior.

How Much Profit Is There in Thwarting Financial Innovation?

Ben Lawsky is resigning as superintendent of financial services in New York. The New York Times says he plans to open his own firm and lecture at Stanford University. The Post reports that he will consult on digital currencies such as Bitcoin.

The move West suggests that Lawsky may want a piece of the action in Silicon Valley. If he does, it’s worth noting that the action is not in New York.

Lawsky was a leading Bitcoin antagonist. Bitcoin has not particularly flourished in New York, and Lawsky’s work makes it unlikely that New York will be a Bitcoin-friendly jurisdiction.

Ben Lawsky welcomed Bitcoin in August 2013 by sending out subpoenas to everyone in the Bitcoin world. He went on television talking about the “real dangers” of Bitcoin, including use by “narco-terrorists.” (Asked for evidence of Bitcoin misuse, he cited a centralized digital currency called Liberty Reserve, which is not Bitcoin.)

Around the same time, Lawsky precipitously announced a plan for a special “BitLicense.” Shortly after producing it, his office violated New York’s Freedom of Information Law by refusing to release the research and analysis that it claimed to have done to validate the regulation. The NYDFS found that the BitLicense would have no impact on employment in the state, after which investors poured hundreds of millions of dollars into Bitcoin companies outside of New York. (See my comments to the NYDFS for more.)

Fiscal Fights with Friends, Part I: Responding to Reihan Salam’s Argument against the Flat Tax

In my ultimate fantasy world, Washington wouldn’t need any sort of broad-based tax because we succeeded in shrinking the federal government back to the very limited size and scope envisioned by our Founding Fathers.

In my more realistic fantasy world, we might not be able to restore constitutional limits on Washington, but at least we could reform the tax code so that revenues were generated in a less destructive fashion.

That’s why I’m a big advocate of a simple and fair flat tax, which has several desirable features.

  • The rate is as low as possible, to minimize penalties on productive behavior.
  • There’s no double taxation, so no more bias against saving and investment.
  • And there are no distorting loopholes that bribe people into inefficient choices.

But not everyone is on board, The class-warfare crowd will never like a flat tax. And Washington insiders hate tax reform because it undermines their power.

But there are also sensible people who are hesitant to back fundamental reform.

Consider what Reihan Salam just wrote for National Review. He starts with a reasonably fair description of the proposal.

The original flat tax, championed by the economists Robert Hall and Alvin Rabushka, which formed the basis of Steve Forbes’s flat-tax proposal in 1996, is a single-rate tax on consumption, with a substantial exemption to make the tax progressive at the low end of the household-income distribution.

Though if I want to nit-pick, I could point out that the flat tax has effective progressivity across all incomes because the family-based exemption is available to everyone. As such, a poor household pays nothing. A middle-income household might have an effective tax rate of 12 percent. And the tax rate for Bill Gates would be asymptotically approaching 17 percent (or whatever the statutory rate is).

My far greater concerns arise when Reihan delves into economic analysis.