September 2020

September 30, 2020 3:13PM

Big Government, Big Business, Big Protectionism

It is commonly assumed on the left and (increasingly) the right that free markets boost—and that government regulation checks—the growth and market power of large corporations. Liberalized international trade and investment policies, in particular, are often criticized by market skeptics as a tool that Big Business uses to entrench its dominant position to the detriment of workers and potential competitors. Libertarians and other free market advocates, of course, believe much the opposite: that free market competition fuels “creative destruction”—i.e., the economically‐​valuable displacement of old, large companies by new competitors, as first described by economist Joseph Schumpeter—and thus serves as a powerful check on Big Business, which often lobbies for and benefits from trade restrictions and other government regulations that discourage new market entrants.

A new paper from economists Mara Faccio and John McConnell of Purdue University provides strong new support for the “libertarian” view. Examining data for 75 countries (including the United States) since 1910, they find—

  • Consistent with Schumpeter’s proposition, the displacement of old, large firms is the norm in each of the time periods considered, but exceptions to the creative destruction rule do exist. In fact, 13.6 percent of the 20 largest firms in each country remained in the top 20 a hundred years later; 25 percent of the largest firms in 1980 remained dominant in 2018; and 43.8 percent of the top 20 remained from 2000 to 2018.
  • The most important predictor of a firm being an exception to the creative destruction norm is political connections (as measured by the presence of government officials, or people connected to officials, in senior management). In particular, the authors find that “[h]aving a political connection increases the probability that one of the 20 largest firms in 1910 remains among the 20 largest firms in 2018 by 11.5 percentage points” – a “very sizable” effect that is “both economically and statistically significant.” This relationship remains strong in the other, more recent period examined (2000–2018).
  • Regulatory barriers to market entry enable politically‐​connected firms to remain dominant over the long term. In particular, the authors find a strong and statistically significant relationship between restrictions on cross‐​border trade and investment and the likelihood that politically‐​connected large firms are just as powerful decades later. By contrast, trade and investment openness checks Big Business: “[P]olitical connections facilitate the ability of big companies to remain or become big only when their home country is closed to both trade and capital flows. The presence of regulatory barriers to entry appear to be a necessary condition for politically connected firms to remain or become dominant.”

Based on these findings, the authors conclude (emphasis mine)—

[P]olitical connections enable big businesses to remain large, particularly when regulatory barriers to cross‐​border entry and cross‐​border capital flows are in place. The implication is that in an unimpeded market the Schumpeterian process of creative destruction of large firms is likely to prevail. To the extent that it does not, the data suggest that it is because the political process impedes entry.

When skeptics criticize “free markets,” the markets at issue are usually not very free at all. Indeed, the conclusions above are utterly unsurprising to free traders who have for years watched large, well‐​connected corporations capture the administrative state and use regulation to restrict foreign competition and maintain power. If the markets were free (or, at least, freer), and large companies were forced to compete without the government’s thumb on the scale, Big Business’ market power could be significantly checked. You’d think such a result would be welcomed by the populist right and left, but progress (especially these days) is often thwarted by emotional antipathy to markets and “globalism” more broadly. As a result, un-free markets proliferate, and corporate power increases—ironically fueling populist calls for the very government action that increased it in the first place.

September 30, 2020 1:27PM

Colleges Shouldn’t Be Able to Get Away with Violating Student Speech Rights

College is a time to think, to learn, to challenge others’ ideas, and to have your ideas challenged in turn. So thought Chike Uzuegbunam when he attempted to share his religious ideas with fellow students and ran into Georgia Gwinnett College’s “speech zone” policy.

Chike decided to share his beliefs, through one‐​on‐​one conversations and handouts, in a large plaza outside the library. Campus police ordered him to stop. They informed him that he could only speak in designated “speech zones.” Chike applied for permission to use a zone, but could only speak briefly before campus police again accosted him. This time he was told that his speech was “disorderly conduct,” which is any speech that causes discomfort, as judged subjectively by whoever might be listening. The police threatened Chike with prosecution and he was frightened into silence.

As a public college, Georgia Gwinnett is bound by the First Amendment not to abridge speech. But the school cordoned off the “free and open expression of divergent points of view” into two miniscule areas of campus, which were only available a few hours a day on weekdays and required a three‐​day advanced reservation. The college had unfettered discretion in approving who may speak and when and how.

Not stymied, Chike and Joseph Bradford—another student discouraged from speaking by the speech code—traded their soapboxes for jury boxes and took the school to court. When challenging unconstitutional speech policies, students may ask for two things: an injunction preventing the school from enforcing the policy against them going forward and money damages for the harm the policy has already done to them.

To get an injunction, the students must themselves be at risk of having their rights violated. This risk ceases to exist if they graduate before the case is over or if the college modifies the policy, but these future considerations do not ordinarily prevent students from seeking damages for past constitutional wrongs. These are a dollar amount expressing how much harm the constitutional violation caused. Violations of the First Amendment often do not cause substantial injuries, however, so victims of these policies often sue for nominal damages—small amounts covering the intangible harm of having a right violated. In a recent ruling, the U.S. Court of Appeals for the Eleventh Circuit decided not to consider nominal damages requests if parties cannot also seek a future injunction or greater damages.

Following that ruling, the district court dismissed Chike and Joseph’s suit, which dismissal the Eleventh Circuit affirmed. Instead of deciding whether the speech code was constitutional, the courts’ new rule forbids students from even challenging a past violation of their First Amendment rights if the school changes its policy, unless they have an injury expressible in a dollar amount.

Chike and Joseph have now taken their case to the Supreme Court. The Cato Institute has joined the Foundation for Individual Rights in Education to file an amicus brief supporting their argument. We argue that nominal damages are an important mechanism for vindicating constitutional rights, particularly in campus speech cases where other forms of relief are often unavailable.

September 30, 2020 11:21AM

CBP at U.S. Ports Denied Foreign Investors, Executives, & Parents of U.S. Citizens

By mid‐​May, Customs and Border Protection (CBP) had used the president’s entry travel bans to deny admission to thousands of noncitizens, including parents of U.S. citizens, minor children of U.S. legal permanent residents, foreign investors, professional athletes, and multinational executives after they traveled to U.S. ports of entry. Rejecting investors who must own and expand U.S. businesses to qualify for their status and multinational executives who are overseeing foreign investments harms the U.S. recovery.

In a response to a Freedom of Information Act submitted in March, the Department of Homeland Security (DHS) finally provided a list of those rejected at ports of entry under all COVID-19 related policies by country of citizenship as well as, in a few cases, by attempted entry status as of May 13. The main reason for the delay is that CBP stopped processing FOIAs related to COVID-19, passing them all through DHS headquarters for approval.

The data show that 3,854 citizens of 82 countries were barred entry to the United States by May 13 at a U.S. port of entry, meaning that they had already traveled to the United States. The most common nationality was Canada followed by Mexico largely because citizens of those countries can simply show up at a land port of entry along the northern or southern border. But most denials were of people who arrived at U.S. airports only to be denied.

CBP noted the category of attempted entry status in just 10 percent of the cases it identified. Table 1 shows that list. The most common was for individuals with border crossing visas followed by foreign students. The third most common category was for E-2 investors who come from a country where the U.S. has a treaty of commerce and navigation. E-2 investors are often businesses owners who have invested a substantial amount of capital in their business, creating jobs for Americans.

Other noteworthy denials include (at least) four L-1A multinational executives overseeing foreign investments in the United States from the United Kingdom and Spain. Discouraging investment in U.S. companies during a recession is simply bad economic policy. At least three Canadian parents of U.S. citizens were denied entry, and at least five P-1 professional athletes from Kenya and Mexico. Of course, since CBP only provided the category for 10 percent of all denials, the actual amounts could be 10 times the amounts listed in Table 1.

This only skims the surface of the number of people prevented from coming to the United States under the president’s bans since they mainly affect people applying for visas abroad. But all of these people denied by CBP were already on U.S. soil at an airport or land port of entry when they were denied.

September 30, 2020 11:07AM

COVID-19 Transformed U.S. Policy Along the Southwest Border

In response to COVID-19, the Trump administration ordered immigration enforcement agencies along the border to expel those apprehended under 42 U.S.C. § 265. That statute allows the government, in whole or in part, to close the border to prevent the spread of communicable disease – although there is some ambiguity about the scope of the statute. It’s important for the government to limit the spread of serious communicable diseases across borders in normal times and during pandemics, although it remains unclear that such closures actually affected the spread of COVID-19 domestically. Aliens apprehended until Title 42 are expelled quickly, which is a big change from earlier policies to mostly punish unlawful border crossers with detention and criminal charges under Title 8 of the U.S. Code (immigration law).

Figure 1 shows just how dramatically Title 42 changed border enforcement policy. Both Border Patrol agents and Office of Field Operations agents who man border checkpoints were both tasked with enforcing the new order. As a result, Title 42 expulsions went from 21 percent of all apprehensions and expulsions in March 2020 (the order was issued March 21, so it only applied to about one‐​fourth of that month) to 91 percent in April.

Since 2005, the government has employed an enforcement with consequences strategy to reduce the number of illegal border crossers by specifically attempting to cut the recidivism rate, with some success. Those consequence include detaining illegal border crossers for longer, charging more of them with immigration crimes like unlawful entry, treating repeat offenders more harshly, other punishments. Those consequences combine to raise the costs for illegal border crossers by reducing their expected income from entering the United States by channeling them into more expense means of entry like hiring more sophisticated smugglers who charge a higher price and taking more dangerous routes to cross the border. Imposing higher costs on illegal border crossers means that fewer will try to cross illegally in the first place and they will try fewer times.

Title 42 expulsions also lower the costs for illegal border crossers. By removing them very rapidly and not enforcing consequences, apprehended and expelled illegal border crossers face lower costs in their attempts to cross the border. Thus, we should expect more of them to try and the recidivism rate to rise beginning in March 2020, ceteris paribus. Of course, not all else remains equal as the U.S. recession has somewhat dimmed the jobs magnet that attracts most illegal immigrants in the first place, although the relative difference is likely smaller given the recession in Mexico. When recidivism data become available for 2020, I suspect we’ll see an increase in recidivism rates compared to earlier years as the consequences have been so reduced.

September 30, 2020 10:14AM

The Fed’s Policy Drift

The unanimous decision of the Federal Open Market Committee (FOMC) to shift from inflation targeting to average inflation targeting is another step away from its mandate to achieve long‐​run price stability. Section 2A of the Federal Reserve Act does not say the Fed’s long‐​run objective should be 2 percent inflation. It calls for maintaining the growth of money and credit to “promote effectively the goals of maximum employment, stable prices, and moderate long‐​term interest rates.” The legal basis for price stability has not changed, but the Fed’s interpretation of that responsibility has drifted, so that “price stability” now means an increase in the price level (P) that averages 2 percent over time, with the proviso that the average inflation target (AIT) must be “flexible.”

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September 29, 2020 3:30PM

Officials Misled Congress to Ignore Asylum Law & Set Up Family Separations

In 2018, the Department of Homeland Security (DHS) instituted a policy of capping the number of asylum seekers that it would process at southwest ports of entry in direct violation of the law, which states that officers “shall refer” aliens arriving in the United States “for an interview by an asylum officer.” In December 2018, DHS Secretary Kirstjen Nielsen defended this “metering” policy and told Rep. Zoe Lofgren in sworn testimony that the agency lacked the “capacity” to follow the law or even to increase at all the processing of people who arrive “without papers.”

In response to Freedom of Information Act (FOIA) requests, we now know this was an indefensible statement. DHS both had more agents than ever at the southwest border and had double the detention capacity than it was using in December 2018. It simply chose to ignore the law. The true purpose behind “metering” was to stop people from making asylum claims legally at the ports—as one DHS official admitted at the time—and force them into Border Patrol’s family separation machine.

This is how it played out: DHS set the caps on asylum at ports so low that families were stranded in squalid and dangerous conditions in Mexico. Facing destitution, homelessness, and crime, asylum seeking families crossed illegally around the ports in order to apply for asylum as the law allows. Border Patrol arrested those families and, from April to June 2018, separated the children from their parents in order to refer the parents for criminal prosecution for crossing illegally.

Nielsen never explained what she meant by the ports lacking processing “capacity,” but FOIA responses from Customs and Border Protection Office of Field Operations (CBP-OFO), the DHS component that handles admissions at ports of entry, show that it had more agents at its field offices along the southwest border than in 2016 when the agency processed more immigrants.

Indeed, CBP-OFO greatly increased processing of undocumented immigrants at ports despite falling staff from 2012 to 2016, while increasing staff from 2016 to 2019 oversaw less processing. As Figure 1 shows, the Obama administration processed 82,106 more undocumented migrants in 2016 than in 2012—more than double the earlier amount—despite 97 fewer CBP-OFO officers. The Trump administration added officers every year—increases of 692, or 11 percent—yet it cut port processing. There were actually more agents than this under Trump because CBP-OFO also made an undisclosed number of temporary transfers to the southwest border as well.

But the annual figures significantly understate the reductions in port processing under Trump. In the month of October 2016, the Obama administration processed 20,524 undocumented migrants at ports. In December 2018, the Trump administration processed just 10,030. As Figure 2 shows, agents were processing fewer undocumented migrants down all along the border in all four field offices. Overall, the average CBP-OFO officer at a port of entry went from processing 3.1 undocumented migrants in October 2016 to just 1.4 per month—again less than half—in December 2018. During family separation, CBP-OFO dropped the caps on port processing even lower. There were also more families and children processed at ports in October 2016 than in any month of 2018.

Despite more agents, DHS also insists incorrectly that it must detain asylum seekers too, and it lacked space to do so. This “space” constraint was also untrue. CBP-OFO revealed in a FOIA release this month that it had the capacity for double the number of daily detentions than it was allowing in December 2018 at the time of Nielsen’s testimony.

Figure 3 shows the average daily number of detained persons by CBP-OFO at southwest ports of entry by month from 2012 until December 2018. In December 2018, it had a daily average detained population of 324 compared to 657 in October 2016. In other words, CBP-OFO had twice as much detention capacity as it was using in December 2018, and yet Nielsen insisted that the ports were at capacity. Again, the detained population actually declined all along the border at ports during family separation as agents turned families away.

This confirms contemporaneous reports that there were no overcrowded detention facilities at ports of entry. The DHS Office of the Inspector General wrote in September 2018 that “CBP reported that overcrowding at the ports of entry caused them to limit the flow of people,” but “the OIG team did not observe severe overcrowding at the ports of entry.” Again, in July 2018, “the processing rooms visible in the ports of entry visited by Human Rights First appeared to be largely empty.”

During family separation, Nielsen said, “there is no reason to break the law and illegally cross between ports of entry. You are not breaking the law by seeking asylum at a port of entry.” She neglected to mention that she was breaking the law by having her agents to turn them away. This practice resulted in the death of a father and his daughter after agents forced them back into Mexico, and they tried to cross the river.

September 29, 2020 11:35AM

Two Sorts of Average Inflation Targeting

It occurs to me that recent discussions of the Fed's new average inflation targeting plan gloss over a subtle distinction between two different kinds of Average Inflation Targeting (AIT). Hence this post explaining the difference, and why I think it matters.

The difference between the two sorts of AIT that I have in mind is subtle, so pay close attention! It hinges not on any different central bank objectives or reaction function parameters or that sort of thing, but on two different reasons why a central bank might find that it has veered from its inflation target in the first place. A central bank may fail to hit its target because the authorities fail to correctly anticipate upcoming changes in various price level determinants. Call such misses "unexpected target deviations." Or it may fail because, although its forecasts are correct, circumstances prevent it from adjusting its stance as needed, given its forecast, to keep the price level on target. Call these "expected target deviations." The "zero lower bound" (ZLB) problem is the most conspicuous example of a circumstance that could lead to expected target deviations. Allowing that unconventional policies are either impractical or inadequate, a central bank stuck at the ZLB may know perfectly well that it's about to undershoot its inflation target, without being able to avoid doing so.

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