On Tuesday, the president renewed his earlier criticisms of the Federal Reserve’s interest rates hike—saying he was not happy with the fast pace of the Fed’s “normalization” plan. This pattern has been reported as “breaking” with tradition and questioning the “independence” of the Fed. Then yesterday afternoon, after a plunge in financial markets, Trump sharpened his critique saying “the Fed has gone crazy.”
While it is—at least among recent presidents—unusual for the president to opine on monetary policy, this has been a most unusual presidency from the start. And while Trump’s criticisms of the Fed are good for generating headlines, they risk drawing attention away from more important matters at the central bank. To that end, I want to share two points to help put the president’s remarks in proper contexts—followed by two additional points to reorient the Fed discussion around what’s actually important.
One worry people have about Trump’s comments is that they call into question the Fed’s “independence.” But it is critical to remember that central bank independence is a somewhat amorphous term—with different speakers relying on different definitions. It is, however, a useful concept when independence refers to the Fed conducting monetary policy without regard to political considerations. That is to say, the Fed is an independent institution insofar as it sets policy in reaction to changing macroeconomic conditions—not in reaction to changes in the legislative agenda or electoral prospects. What is not, or should not, be meant by central bank independence is that the Fed is fully divorced from all other public institutions. Chair Powell often, and rightly, stresses that the Fed pursues goals given to it by Congress; in that respect, the Fed is certainly not independent from accountability to the public.
To the extent anyone is worrying that the Powell Fed will change policy based on Trump’s remarks, such concerns are unfounded.
On the policy front, the president seemed to suggest the Fed should wait on raising interest rates until “inflation [comes] back.” What threshold Trump has in mind when he says “back” is anyone’s guess, but inflation has been increasing. While this morning’s CPI release had month‐over‐month inflation below expectations, the Fed’s preferred inflation metric has moved up to their 2% target in recent months. And the ten‐year forecast, put out by the Cleveland Fed, shows long‐run inflation expectations have also increased of late and are now slightly above the Fed’s 2% inflation target.
These inflation data have been moving up as the Fed has been increasing their policy rates, suggesting that monetary policy has not become overly restrictive. Scott Sumner, in a post reacting to yesterday’s stock market developments, points out that while monetary policy was too tight it has recently moved towards a more neutral and appropriate stance. Remember, looking at just interest rates is insufficient to judge the actual stance of monetary policy. Therefore, at least for now, the Fed is likely to continue the normalization plan it has been talking about for years.
Of course, the Fed should not stick to this plan irrespective of any and all changes in the macroeconomy; indeed, I have been critical of their defense of rates increases in the past. But daily stock market volatility and the president’s response to it are not developments that should immediately change the Fed’s longer‐term strategy.
For the astute people monitoring the Fed, the president’s comments ought to be largely ignored. It is far more important to pay attention to two conversations occurring within the Fed.
One conversation is about changing the Fed’s 2% inflation target. Several Fed officials have already endorsed their preferred strategies. Eric Rosengren, President of the Boston Fed, believes an inflation range, perhaps 1.5–3%, is best, while New York Fed President John Williams and Atlanta Fed President Raphael Bostic, want to adopt a new target altogether: a price level target. Ex‐Fed officials have also joined the conversation, with former Fed Chair Ben Bernanke proposing a hybrid system that would move from an inflation target to a price level target when the policy interest rate got close to zero. There are very good reasons for the Fed to begin reconsidering its monetary policy target, but for this conversation to be truly beneficial the Fed should include an NGDP level target on the list of alternatives.
The second conversation, and one of more immediate concern, is about the Fed’s operating framework for executing monetary policy. The current framework—which pays banks an above market interest rate on their deposits held at the Federal Reserve in order to keep the effective federal funds rate within the Fed’s target range—was created during the financial crisis. The Fed is still learning about this new framework for setting interest rate policy and has already needed to tweak the framework once. Chair Powell has signaled that the FOMC will be exploring it further throughout the fall. For those interested in learning more about the potential issues embedded in the Fed’s new operating framework and why it is in need of reform, I would point you toward my colleague George Selgin’s summary of his forthcoming book Floored!.
There are important challenges facing the Fed and its conduct of monetary policy, and they deserve more attention than do the president’s rants.
The Founding Fathers crafted a system of government in which legislative, executive, and judicial authority were each entrusted to different entities. Their purpose in choosing this design was to prevent the consolidation of power in any one individual or group of individuals. The Framers anticipated—and attempted to guard against—a bureaucracy that could serve multiple governmental functions and remain unaccountable to the citizenry. In Federalist No. 47, James Madison recognized that when legislative, executive, and judicial power rest in one entity, individual liberty suffers. Likewise, Justice Anthony Kennedy declared in his concurrence in the 1998 case of Clinton v. New York, which struck down the presidential line‐item veto, “Liberty is always at stake when one or more of the branches seek to transgress the separation of powers.”
In passing the Dodd‐Frank Wall Street Reform and Consumer Protection Act, however, Congress circumvented constitutional design and violated the separation of powers doctrine. Among its multifarious failings, Dodd‐Frank created the Consumer Financial Protection Bureau (CFPB), controlled by a single director who has the unilateral power to enact, enforce, and adjudicate regulations. The director is not accountable to any internal structure, is exempt from congressional oversight, and cannot be removed by the president for policy reasons. Since its inception, the CFPB has issued 19 federal consumer protection rules, affecting everything from student loans to banking practices, all without checks, balances, or accountability to voters. Essentially, Congress assigned a vast amount of authority to a bureau that answers to no one.
When a challenge to Congress’s unconstitutional delegation went before the U.S. Court of Appeals for the D.C. Circuit, the court refused to consider the impact that the CFPB’s actions have on individual liberty. However, the Supreme Court, in Commodity Futures Trading Commission v. Schor (1986), reminded us that the separation of powers protects “primarily personal, rather than structural, interests.” In other words, substantive freedom, rather than simply procedural rights, is most at risk when checks and balances fail. And so the CFPB, going far beyond simply contravening checks and balances, regulates areas such as home finance and credit cards. These sectors are essential to individual economic activity, so the D.C. Circuit was wrong to hold that the CFPB’s infringements upon these liberties were irrelevant.
The State National Bank of Big Spring, based in west Texas, filed a petition asking the Supreme Court to review the D.C. Circuit’s erroneous decision. Cato has joined the Southeastern Legal Foundation and National Federation of Independent Business on a brief supporting this petition. We argue that the separation of powers, as our Founding Fathers correctly recognized, is a bulwark of our individual liberties. If we allow Congress to delegate authority in a blatantly unconstitutional fashion, our republican system of government will be eroded by powerful bureaucracies with unchecked authority.
The Supreme Court will decide whether to take up State National Bank of Big Spring v. Mnuchin later this fall.
On Monday, President Trump told a gathering of police chiefs that cities faced with serious crime problems should return to the policing practice known as stop‐and‐frisk. “Stop‐and‐frisk works and it was meant for problems like Chicago.” This is an old theme for Trump, one he shares with former New York City Mayor Michael Bloomberg, whose rumored 2020 presidential candidacy raises the possibility of a contest between two stop‐and‐frisk enthusiasts. In Terry v. Ohio (1968) the Supreme Court found the tactic constitutional, but judges since then have sometimes ruled, as in a high‐profile case against New York City, that the tactic was being employed in unconstitutional ways. (Despite predictions from some quarters that crime would soar in New York City following that ruling, no such thing happened.)
Cato has had a lot to say about stop‐and‐frisk over the years. A sampling:
- “How did we the people of New York City allow this long‐term disgrace to continue?” — the late Nat Hentoff, 2010.
- “A ‘stop’ is an involuntary citizen‐police encounter… [Stop‐and‐frisk] can be a degrading and humiliating event to endure.” — Tim Lynch, 2012.
- “Statistics do not answer whether it is okay for an ostensibly free society to gratuitously stop‐and‐frisk its citizens.” — Trevor Burrus, 2013.
- Even after the curtailment of the New York City program, “for too many Americans, the basic liberty to move freely in society has been debased and degraded by police fighting the drug war” — Jonathan Blanks, 2018.
Neither the government nor a private party may compel you to speak; nor may a private party masquerading as a government entity compel you to speak, even when it’s supposedly for your own good. In Delano Farms v. California Table Grape Commission, Cato, joined by the Reason Foundation, Institute for Justice, and DKT Liberty Project, is continuing to support a farm business’s challenge to a California state‐established commission that compels grape growers to contribute money for government‐endorsed advertisements. We had previously filed in the California Supreme Court, which was a losing battle, and are now asking the U.S. Supreme Court to take the case.
Now, governments are allowed to disseminate their own messages and can use tax revenue to do it under what’s called, simply enough, the “government‐speech doctrine.” They can also tax industries specifically and earmark those funds to promote those particular industries; the Supreme Court has upheld several industry‐advertising programs, including national campaigns for beef. In many of these targeted tax‐and‐advertise programs, the government requires taxes or “fees” from anyone doing business in the industry. One justification for these fees is that all producers benefit from such a “group advertisement.” If some were able to get the marketing benefit without paying, the system would suffer from “free riders.” For such a program to actually constitute government speech and thus avoid First Amendment problems, however, it is the government itself that must be speaking.
The California Table Grapes Commission has claimed that it is part of the government and that its speech is thus “government speech.” But the commission isn’t the government; it’s a commercial entity or trade group that uses compelled subsidies to fund speech. The commission’s generic advertisements for California grapes don’t really benefit the entire industry. Instead, they benefit some members of the industry by making it seem that all products are equally good. Furthermore the commission can’t be considered part of the government because it, unlike the actual government, can be disbanded based on a vote of the table grape producers.
Put another way, no person employed by the California government has ever written, produced, or even reviewed the speech the commission compels. In all other cases where the government programs were held constitutional, the government took direct control of the message and maintained oversight of a regulatory entity. None of that is true here. The commission here is a private entity, with the power to exact fees from members who have no choice but to pay for whatever message it ends up promoting.
In our brief, we argue that the Supreme Court should take this case and treat forced subsidies for generic advertising the same way it treats other such subsidies: as violations of the First Amendment freedoms of speech and association. The California courts relied on a decision recently overturned in the Supreme Court’s Janus holding this past June, in which compelled association and speech in union representation was deemed a violation of the First Amendment. The Court should continue with this line of reasoning here: no one should be compelled to support a non‐government message.
I’ll be a participant in an immigration conference in Michigan organized by Shikha Dalmia of the Reason Foundation later this week. As part of the conference, Dalmia asked the participants to write essays on specific immigration subtopics that she will later assemble in a book (if I recall correctly). Dalmia asked me to write an essay on Singapore’s immigration policy – a challenging assignment as I only had the vaguest impressions of their immigration policy from a few readings over the years and a lunch meeting with Singaporean officials from the Ministry of Manpower five years ago.
Singapore’s immigration system has two main tiers. The first tier is for highly paid professionals and their families who are encouraged to become permanent residents and eventually citizens. The second tier is for skilled and semi‐skilled temporary migrant workers who will eventually return to their home countries and cannot become Singaporean citizens. I ended my essay with recommendations for marginal improvements to Singapore’s immigration system that would maintain the two‐tier system while increasing the benefits to Singaporeans and foreign workers.
Singapore is a city‐state in Southeast Asia with the fourth highest GDP per capita (PPP adjusted) in the world. Singapore gained its independence in 1965 and developed rapidly since then. From 1965 to 2017, Singapore’s average annual rate of GDP growth was 7.5 percent, averaging 9.1 percent prior to 1998. Immigrants and temporary migrant workers have been important components of Singapore’s economic growth since the nineteenth century. In 1965, 28 percent of the resident population of Singapore was foreign‐born. In 2017, about 47 percent of Singapore’s residents were foreign‐born – a figure that dwarfs the 13.7 foreign‐born percentage in the United States. To give a comparison of how liberal Singapore’s immigration policy is, none of the top ten largest American cities had an immigrant percentage of their respective populations above 40 percent.
The United States can learn much from Singapore’s immigration system, but I will focus on one lesson below: The United States should create a visa for domestic workers based on Singapore’s Foreign Domestic Worker (FDW) visa.
The FDW visa is Singapore’s most interesting and distinct second tier visa for workers who labor in the home providing domestic services, elderly care, childcare. FDWs are tightly regulated under Singaporean law. Among other requirements, they must be female, 23–50 years of age, be from an approved country of origin in South or East Asia, and have a minimum of 8 years of education. Once in Singapore, the FDW cannot start a business or change employers. The employers of FDWs must also meet stringent regulatory requirements. For instance, the FDW must work at the employer’s home address, cannot be related to the employer, the employer must put up a $5,000 security bond, pay for medical exams, and cover most other costs of living – with fewer restrictions on FDWs from Malaysia. According to government surveys, FDWs have high levels of job satisfaction and most intend to apply again for work as an FDW (Ministry of Manpower 2016, 5; Ministry of Manpower 2017).
The United States should adopt a visa like the FDW for at least three reasons.
First, the FDW likely increased the native Singaporean skilled female labor force participation rate (LFPR). From 1990–2017, Singapore’s female LFPR rose from 48.8 to 59.8 percent while the male LFPR dropped from 77.5 to 76 percent. Some portion of that increase in the female LFPR can be attributed to FDWs because they specialize in domestic production which allows Singaporean women to enter the workforce. There is some evidence in the United States that additional lower‐skilled immigrants slightly increased female time in the workplace but that is in the highly regulated and expensive childcare market in the United States. Although some more research is needed to analyze how FDWs affected female LFPR in Singapore, it’s likely than an FDW visa in the United States would allow more women with children to work if they want to.
Second, an FDW visa would put downward price pressure on childcare providers by reducing demand for their services. If an FDW visa was available in the United States, many American households would take their children out of daycares and other childcare arrangements and hire FDWs instead. High‐earning American households would especially be interested in the FDW as they are also the ones most likely to employ au pairs on the poorly‐designed J-1 visa. Taking many high‐earning American households out of the daycare and childcare market would initially lower prices, thus allowing Americans with lower incomes to afford those services for the first time. Americans who would continue with daycare and childcare services would also gain in the form of lower prices.
Third, a large and robust FDW visa program could increase the fertility rate of highly‐skilled native‐born American women. Over time, there is a strong negative correlation between female LFPR and fertility, but that relationship has weakened substantially in the United States. Economists Delia Furtado and Heinrich Hock found that that weakening relationship is partly explained by low‐skilled immigrants lowering the cost of childcare, resulting in an 8.6 percent increase in fertility and a 2.3 percent increase in female LFPR (for native‐born skilled women in cities in prime birth years). Although I do not support fertility subsidies in the United States, the FDW is a wise policy that would improve the livelihood of Americans and achieve the same end much cheaper than an expanded child tax credit – reformicons should love it.
Singapore’s FDW visa has many problems than an American version should avoid. For instance, an American FDW visa should allow FDWs to live on their own if they want, move between FDW employers without legal penalty or ex ante government permission, be open to both sexes, have a wider age‐range, and allow FDWs to sign longer‐term labor contracts. Such a visa would help many American households, migrants, and increase the range of choices open to American women who want to work and become mothers.
The Senate appears poised to vote soon on a Congressional Review Act resolution sponsored by Sen. Tammy Baldwin (D-WI) that would rescind the Trump administration’s final rule on “short‐term limited duration insurance.” Nearly every Senate Democrat has cosponsored the Baldwin resolution because they believe it would protect consumers. It would do exactly the opposite.
The Baldwin resolution…
- …would increase the number of uninsured. Various scholars have estimated that by making health insurance more affordable, the Trump short‐term plans rule would reduce the number of uninsured Americans by up to 2 million. The Baldwin resolution would rescind that rule, thereby denying health insurance to up to 2 million Americans.
- …would reduce protections for the sick. The Baldwin resolution would reduce consumer protections in short‐term plans and expose sick patients to higher premiums, denied coverage, bankruptcy, and denied care. It would revert to the Obama administration’s 2016 short‐term plans rule, which limited short‐term plans to 3 months and banned renewals. As state insurance regulators noted at the time, “[There are] no data to support the premise that a three‐month limit would protect consumers or markets. In fact, state regulators believe the arbitrary limit proposed in the rule could harm some consumers. For example, if an individual misses the [ACA] open‐enrollment period and applies for short‐term, limited duration coverage in February, a 3‐month policy would not provide coverage until the next policy year (which will start on January 1). The only option would be to buy another short‐term policy at the end of the three months, but since the short‐term health plans nearly always exclude pre‐existing conditions, if the person develops a new condition while covered under the first policy, the condition would be denied as a preexisting condition under the next short‐term policy.” The Trump rule allows consumers to purchase coverage that lasts until the next ObamaCare open‐enrollment period. The Baldwin resolution would result in that patient being re‐underwritten and denied coverage and care for up to nine months.
- …would not reduce ObamaCare premiums and could increase them. The Trump rule allows consumers to couple short‐term plans with standalone renewal guarantees, which allow enrollees who develop expensive illnesses to keep paying healthy‐person premiums. Since it gives expensive patients a lower‐cost alternative to ObamaCare coverage, the Trump rule can reduce ObamaCare premiums by keeping expensive patients out of those risk pools. In contrast, the Baldwin resolution would force those expensive patients into ObamaCare plans, increasing the cost of ObamaCare coverage to both enrollees and taxpayers. In 2016, state insurance commissioners again explained the fundamental flaw of Baldwin’s approach: “If the concern is that healthy individuals will stay out of the general pool by buying short‐term, limited duration coverage, there is nothing in this proposal that would stop that. If consumers are healthy they can continue buying a new policy every three months. Only those who become unhealthy will be unable to afford [short‐term plans], and that is not good for the [ACA] risk pools in the long run.”
- …would make short‐term plans less comprehensive. The Baldwin resolution would not protect consumers from inadequate coverage. It would re‐create the bad old days when excessive regulation blocked consumers from purchasing more‐comprehensive short‐term plans. The Congressional Budget Office writes that under the Trump rule only “a small percentage of [short‐term] plans would resemble current STLDI plans, which do not meet CBO’s definition of health insurance coverage.” Instead, most short‐term plans would “resemble[e] nongroup insurance products sold before the implementation of the Affordable Care Act” that offer “financial protection against high‐cost, low‐probability medical events.” In other words, the Trump rule allows the sort of health plans consumers want. The Baldwin resolution would make those products disappear again.
- …would gut conscience protections. The Trump rule protects conscience rights by improving the market for short‐term plans, which are exempt from ObamaCare’s contraceptives mandate. The Baldwin resolution would strip away those conscience protections.
- …would not protect people with preexisting conditions. The Washington Post’s Paige Winfield Cunningham reports it “doesn’t exactly make sense” for Democrats to claim that restricting short‐term plans helps patients with preexisting conditions. “Even with the expansion of these short‐term plans, the marketplace plans guaranteeing preexisting protections will still be available to those who need them… So expanding the availability of short‐term plans…doesn’t mean people with preexisting conditions would lose access to crucial coverage protections.”
- …is pure symbolism. The Baldwin resolution has zero chance of becoming law. To rescind a final agency rule, Congressional Review Act resolutions must pass both chambers of Congress and receive the president’s signature. The House is unlikely to pass the Baldwin resolution. Even if it did, there is zero chance President Trump would sign a resolution nullifying a rule he himself asked his administration to produce.
- …is terrible politics. Or at least it could be, if opponents expose it as subjecting patients with expensive illnesses to higher premiums, cancelled coverage, medical bankruptcy, and denied care—all to serve supporters’ ideological goal of destroying a free‐market alternative to ObamaCare.
From the beginning, there is one embarrassing and evident fact that Professor White has to cope with: that "free" Scottish banks suspended specie payment when England did, in 1797, and, like England, maintained that suspension until 1821. Free banks are not supposed to be able to, or want to, suspend specie payment, thereby violating the property rights of their depositors and noteholders, while they themselves are permitted to continue in business and force payment upon their debtors. …White correctly notes that the suspension was illegal under Scottish law, adding that it was 'curious' that their actions were not challenged in court. Not so curious, if we realize that the suspension obviously had the British government's tacit consent.
--Murray Rothbard, "The Myth of Free Banking in Scotland"
Back in April, while Bob Murphy and I were debating whether fractional reserve banking poses a threat to market stability, Bob asked whether it was the case that, despite not having had Parliament's permission to do so, the Scottish banks joined the Bank of England in restricting specie payments between 1797 and 1821. The answer, I said, was that they had indeed done so. I also pointed out that, although the Scottish banks' decision was presumably illegal, the Scottish public appeared to go along with it.
In this and a subsequent post, I plan to delve more deeply into the story of the Scottish bank suspension, so as to offer more complete and accurate answers to Bob's questions, and to answer as well other important questions that the restriction episode raises. If the British government didn't authorize a Scottish suspension of payments, did it otherwise alter the rights of holders of claims against the Scottish banks? If those banks refused to pay their notes in specie despite being obliged to do so, why was no Scottish bank ever taken to court? To what extent, and in what fashion, were Scottish bank creditors harmed by the Scottish bankers' actions? Should those actions prevent us from regarding the pre-1845 Scottish banking system as an informative case study of free banking? Does the Scottish suspension suggest that fractional reserve banking is, inconsistent with genuine freedom in banking, including the consistent honoring of bank customers' property rights?
In this post, I'll first review the events leading to the passage of the Bank Restriction Act. Then I'll discuss how that act altered the legal rights of Scottish bank creditors. Finally I'll propose an explanation for the fact that no Scottish banks were sued for suspending payment. In Part 2 I'll consider the adverse effects of the Scottish suspension on the Scottish public. The restriction's main victims, I plan to argue, were tradespeople and others whose livelihood depended upon ready access to small change. But their plight, far from enduring throughout the full period of the restriction, was confined to its opening months. Finally, in Part 3, I'll argue that the Scottish restriction does not, after all, warrant any major revision of claims that Larry White and I and other members of the "modern free banking school" have made regarding the implications of unrestricted freedom in banking. On the contrary: to the extent that Scottish bankers were guilty of "violating the property rights of their depositors and note holders," the fault lay mainly, not with freedom banking, but with provisions of the 1765 Scottish Bank Notes Act that placed unwise and unwarranted limits upon that freedom.