Cato At Liberty

A few months after my April 2018 Soho debate with him concerning whether fractional reserve banking is damaging to an economy’s health, Bob Murphy gave a lecture on “Rothbardians vs. ‘Free Bankers’ on Fractional Reserve Banking.”

Bob devotes a substantial chunk of that lecture to elaborating upon what he considers shortcomings of my particular arguments in favor of free banking. Though he is generous enough to allow that my theoretical arguments are not quite a cinch to refute, he thinks rather less of the empirical evidence I offer in support of those arguments. In particular, he calls the evidence supporting my claim that the Scottish and the Canadian free banking systems were quite stable “very weak.”

So far as the Scottish episode is concerned, Bob’s claim rests mainly on the fact that, between 1797 and 1821, Scottish banks followed the Bank of England’s example, though without the statutory permission Parliament had granted it, of temporarily “restricting” specie payments. So far as he’s concerned, their having done so is ipso-facto proof of their having run roughshod over their creditors’ rights and reduced their welfare. In truth the story of the Scottish bank restriction, and the correct lessons to be drawn from it, are far less straightforward than Bob supposes. Having already devoted three longish posts to explaining what happened (here, here, and here), I leave it to my readers to decide whether the evidence I assemble in those posts suffices to exonerate the Scottish bankers, as I believe to be the case. I also continue to look forward to Bob’s own response to that evidence.

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Mathew Kelly and I provided a new ranking of state educational systems that was published as a Cato Policy Analysis in November of 2018. Our goal was to provide a ranking that did not treat all states as if their student populations were identical, unlike traditional state rankings. Instead, students of a particular ethnic group were compared across states and the state ranked based on its average of the group rankings. These rankings were further extended to provide evidence of how much student learning ‘bang’ states were getting for their expenditures (‘bucks’). Finally, we ran some regressions of state performance, measured in this manner, to see which factors appeared to be related to successful educational outcomes.

Rutgers University professor Bruce D. Baker responded to this work in a review published by the National Education Policy Center.[1] While scholars often feel gratified to see their work discussed by other academics, this gratification can turn to annoyance if the discussion becomes unreasonably hostile or unprofessional, especially when the discussion is filled with errors, as Baker’s discussion is. Fortunately, Baker’s commentary, though replete with nasty slights, mostly deals with questions that were already answered in our report, making my response easier.

Before responding to Baker’s critiques, however, some housekeeping items are in order. Baker reports several times that our study was published by the Reason Foundation as a “policy brief”. This is incorrect. We did publish a short article in the November 2018 issue of the monthly Reason Magazine which summarizes our results and methods and was written for a lay audience.[2] At the end of that Reason article we steered readers to the more complete, academic style article published as a Cato Policy Analysis on November 13th of that year, and Baker does reference this Cato report in his first footnote.[3] Nevertheless, he mislabels this Cato Policy Analysis as a Reason Policy Brief over a dozen times throughout his text. He refers over thirty times to our “reports” in the plural when we have only one academic style published report, the Cato Policy Analysis, which obviously replaces the prior working paper that we had uploaded on a working paper website.[4] Baker should know that academics routinely improve working papers into final published articles and that references should be made to the published article. This ‘housekeeping’ error is a minor issue in the larger scheme of things, but at a fundamental level it reveals a sloppiness that permeates Baker’s overall analysis.

All of my discussion here is based on the Cato Policy Analysis, which is the complete finalized published work, not a short magazine article or an unpublished working paper.

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In January, I published “How ‘Market Failure’ Arguments Lead to Misguided Policy.” One major criticism I had of the way “externalities” are talked about in public debate was policymakers ignoring that supposed “corrections” for these “market failures” could induce behaviors with their own external costs.

Consider a bill proposed in the Oklahoma house by Rep. Merleyn Bell (D-Norman).

He is concerned about the costs emanating from driving under the influence (DUI) of alcohol. He wants to raise funds to subsidize deterrents, such as stop-checks on roadways. But rather than raise alcohol taxes, which would affect all consumers, he wants to “price in” the externality by imposing costs on those travelling at times when people are more likely to drink. The way he suggests doing so is baffling, however: adding a 20 percent supplement to rideshare surge pricing for companies such as Uber and Lift. Surge pricing, of course, tends to occur at weekends and after sports events and concerts.

Now, it doesn’t take a genius to work out a big problem here.

Raising the price of using ride-share services will reduce the quantity of ride-share services demanded. On the margin, that probably means fewer ride-share drivers themselves under the influence of alcohol. But I suspect those whose livelihoods depend on driving are among the least likely to DUI in the first place.

No, the overwhelming effect of raising rideshare surge prices will be to deter consumers from using those services. That means those who’ve been out drinking for the weekend will be more likely to drive themselves home or get in the car of someone else who has been drinking, increasing the risk of DUI-related costs and negating any deterrent from the spot-checks.