A Contemporary Economist’s Account of the “Crowning Folly of Tariff of 1930”

“[T]here came another folly of government intervention in 1930 transcending all the rest in significance. In a world staggering under a load of international debt which could be carried only if countries under pressure could produce goods and export them to their creditors, we, the great creditor nation of the world, with tariffs already far too high, raised our tariffs again. The Hawley-Smoot Tariff Act of June 1930 was the crowning folly of the who period from 1920 to 1933….

Protectionism ran wild all over the world.  Markets were cut off.  Trade lines were narrowed.  Unemployment in the export industries all over the world grew with great rapidity, and the prices of export commodities, notably farm commodities in the United States, dropped with ominous rapidity….

The dangers of this measure were so well understood in financial circles that, up to the very last, the New York financial district retained hope the President Hoover would veto the tariff bill.  But late on Sunday, June 15, it was announced that he would sign the bill. This was headline news Monday morning. The stock market broke twelve points in the New York Time averages that day and the industrials broke nearly twenty points. The market, not the President, was right.”

– Dr. Benjamin M. Anderson [chief economist at Chase National Bank 1920-39], Economics and the Public Welfare: A Financial and Economic History of the United States, 1914-1946 (Indianapolis, Liberty Press, 1979, pp. 229-230)

Cost and Abuse Problems in Low-Income Housing

A new Government Accountability Office report on the Low Income Housing Tax Credit echoes some of the concerns expressed in this 2017 Cato report. Vanessa Brown Calder and I suggested that the $9 billion program was vulnerable to abuse and that the costs of projects may be inflated.

Under the program, the IRS hands out tax credits to state agencies, which in turn give them to favored developers. We argued that the program had little oversight and that developers and contractors may inflate their claimed costs.

The GAO found that “no federal agency monitors or assesses LIHTC development costs, which are key to evaluating the efficiency and effectiveness of the tax credit program.” At the state and local levels, “few agencies have requirements to help guard against misrepresentation of contractor costs (a known fraud risk).” Because the IRS and many state agencies do not require detailed cost certifications, “the vulnerability of the LIHTC program to this fraud risk is heightened.”

The GAO compared the costs of 1,849 projects in 12 jurisdictions. They found a wide variation, as shown in the chart below.

Whether it is taxes, gasoline, or housing, everything seems to cost much more in California than Texas. The cost of low-income housing units are two and half times higher in the Golden State than in the Lone Star State. GAO found that both the hard costs of construction and the soft costs (such as architect fees) were much higher in the former than the latter.

The median per-unit cost of the new construction LIHTC projects was $218,000, of which the land cost was just $9,400. I’m not an expert, but that seems high given that you can buy a really nice tiny house for $80,000 or so.

Vanessa and I call for repeal of the LIHTC program.

To tackle housing affordability, she has suggested a deregulatory approach, which was recently embraced by HUD secretary Ben Carson.

Affordable Housing: Hard Way and Easy Way

A new GAO study examines the Low-Income Housing Tax Credit, which is a complex government program aimed at increasing the supply of affordable housing.

How complex is it? Vanessa Brown Calder and I noted that one LIHTC guidebook is 1,400 pages long.  

The LIHTC is a classic government solution to a problem. It is complicated, raises costs, and is not very effective. Nonetheless, some people favor such approaches. Adam Smith called them “men of system.” 

An easier way to solve problems is to let markets work. This approach leans toward simplicity and low cost. Some efforts may not be effective at first, but through innovation and feedback entrepreneurs eventually nail it. Adam Smith called it the “obvious and simple system of natural liberty.”

Below, a diagram from the GAO study shows part of the LIHTC process. Little tax credit boxes float around and dollar signs flow to LIHTC investors, which are usually major banks. This is the hard way to increase affordable housing supply.

Below that, I’ve diagrammed the easy way, which is to deregulate, remove the subsidies, and let banks and developers compete in the marketplace.

Affordable Housing: The Hard Way

 

Affordable Housing: The Easy Way

Beijing’s Bullying of Taiwan Is Backfiring

            Beijing continues to intensify its diplomatic campaign to isolate Taiwan internationally, and as I describe in a recent article in China-U.S. Focus, that bullying strategy threatens to trigger dangerous tensions between China and the United States.  Chinese leaders were shocked and angered when Taiwanese voters endorsed Tsai Ing-wen and her pro-independence Democratic Progressive Party (DPP) in the 2016 elections.  The communist regime soon moved to adopt an aggressive strategy of diplomatic strangulation.  During her presidency, Beijing has induced five of the 22 countries (mostly small, poor nations in Africa and Latin America) that had still recognized Taipei when she took office to switch ties to Beijing.  The latest defector is El Salvador. 

            Although the Chinese strategy appears to be paying off in the narrow sense of achieving its primary objective, it may ultimately come at an unacceptably high price.  The campaign is producing the opposite reaction in Taiwan of what Beijing seeks.  Tsai and her government have adopted a stance of outright defiance, making it clear that Taipei will not be bullied into taking steps toward reunification with the People’s Republic of China (PRC). 

More ominously, American supporters of Taiwan are pushing back firmly, and they are moving to increase Washington’s support of the island’s de facto independence.  The State Department immediately issued a statement that Washington was “deeply disappointed” by El Salvador’s decision—even though the United States itself does not maintain formal diplomatic ties with Taiwan.  

 Taipei’s friends in Congress ratcheted-up their support for the beleaguered democratic island.  Senator Cory Gardner (R-CO), chairman of the Senate Foreign Relations Committee’s Asia subcommittee, indicated his intention to propose a measure pressuring countries to stick with Taipei.  Among other things, his legislation planned to authorize the State Department to downgrade relations or alter foreign assistance programs to discourage countries from making any decisions deemed adverse to Taiwan.  “The Taipei Act of 2018 would give greater tools and directions to the State Department in making sure we are as strong a voice as possible for Taiwan,” Gardner told Reuters.  A little more than a week later, he and a group of bipartisan co-sponsors, including Marco Rubio (R-FL) and Ed Markey (D-MA) carried through on that pledge and introduced the legislation.

Their initiative is just the latest indication that American backers of Taiwan are becoming more vocal and proactive in pushing U.S. measures to counter the PRC’s hardline policies.  A major step occurred in March 2018 when President Trump signed into law the Taiwan Travel Act, which encouraged “officials at all levels of the United States Government” to visit and meet with their Taiwan counterparts and to “allow high-level officials of Taiwan” to enter the United States and to meet with their U.S. counterparts.  That legislation, which passed both houses of Congress overwhelmingly, ended Washington’s practice adopted when the United States recognized the PRC in 1979 of authorizing meetings only with relatively low-level Taiwanese officials.  It was especially noticeable that the new law specifically promoted interaction by “cabinet-level national security officials.” 

In early July, the Pentagon sent two U.S. warships through the Taiwan Strait, the first such passage in more than a year, in a display of support for Taipei.  That move occurred on the heels of a State Department request that the Defense Department send a small contingent of Marines to guard the American Institute in Taiwan (Washington’s de facto embassy in Taipei).  The United States also invited two senior Taiwanese military officials to participate in a May ceremony at the U.S. Pacific Command. 

Any one of these episodes might not be all that significant, but taken together they confirm that Washington’s backing for Taiwan is escalating.  Beijing can blame itself for much of that development.  The PRC’s strategy of diplomatic strangulation is backfiring, and the surge of Chinese military exercises in the Taiwan Strait is making matters even worse.

Beijing would be wise to dial back its confrontational policies toward Taiwan.  However, Taiwan’s supporters in Congress, the media, and the Trump administration need to appreciate just how sensitive the Taiwan issue is to PRC leaders and the Chinese people.  Excessive, ostentatious U.S. diplomatic support for Taiwan could bring the PRC and the United States closer to a dangerous confrontation.  Both sides need to exercise much greater caution and restraint than they are showing now.

 

 

 

“The Difference between Justice for the Masses and Justice for the Few”

In today’s New York Times, Brooklyn public defender Scott Hechinger makes a very strong case that criminal defendants in American courts face a two-tiered system of justice, and most defendants get the worse of it.

Mr. Trump assailed the practice of pretrial detention as “tough” when Paul Manafort had his bail revoked before his trial began. He then bemoaned the “very unfair” power that prosecutors wield to force people in the system “to break” in the wake of the Michael Cohen plea and the Manafort jury conviction and subsequent guilty plea. He lamented the devastating collateral consequences that arise from “a mere allegation” when Rob Porter was forced to resign after being accused of domestic violence; raged about the late-night, “no knock” raids of Mr. Cohen’s properties; and expressed outrage that the government, in its investigation of Carter Page, was able to overcome the protections of the Fourth Amendment to obtain a FISA warrant with “no hearings,” while also endorsing the idea, raised by the writer Andrew McCarthy, that they should be “looking at the judges who signed off on this stuff.”

[…]

I understand President Trump’s outrage. It is remarkable that people, presumed innocent, are locked up before being convicted of any crime. It is deeply unfair that mere accusations can lead to devastating, lifelong consequences. It is alarming that, in a system theoretically built around transparency and truth seeking, police and prosecutors have such outsize power to surveil, search, detain, bully, coerce and nearly destroy a person without producing evidence sufficient to secure a conviction. (emphasis in original.)

But it’s important to note how these defendants were actually treated as they work their way through the system, and how it differs from most everyone else.

Take Mr. Manafort’s experience with pretrial detention. Despite the seriousness of the allegations and his clear ability to flee, he was not in jail for a majority of his case pretrial. He and his attorneys were able to arrange an intricate bail package that was tailored to his financial circumstances, including $10 million bond and the surrender of his passport. This is how bail is supposed to work — not as punishment to lock someone up before a conviction, but as a way to guarantee that the accused will return to court while at liberty. Mr. Manafort was detained pretrial only after the presiding judge found evidence of witness tampering, following nearly two weeks of motion practice and then oral argument while Mr. Manafort continued to sleep in his own bed.

This kind of accommodation is unheard-of for the roughly quarter million people, my clients included, in jail for no reason other than their inability to pay bail. In the real world, despite the constitutional prohibition on excessive bail, decisions to detain people happen in a matter of seconds, with little to no consideration of an individual’s ability to pay. In just the past month alone, prosecutors requested and judges set bail totaling over $200,000 on clients of mine who, collectively, could not have afforded one one-thousandth of that.

Hechinger is also correct when he writes that the treatment of these high-profile defendants should not be resented: rather, it’s the double-standard for the privileged that should be eliminated. A meaningful presumption of innocence and the other rights afforded to Manafort et al. should be replicated and applied to the accused throughout the state and federal justice systems because they reflect constitutional protections intended to curb the coercive power of government.

The piece is worth reading in full here.

Highways and Gas Tax Diversions

The federal government imposes a gasoline tax of 18.4 cents per gallon. Lobby groups are pressing for an increase and President Trump has suggested that he may support one. But a federal gas tax increase makes no sense.

State governments own America’s highways, and they are free to raise their own gas taxes whenever they want. Indeed, 19 states have raised their gas taxes just since 2015, showing that the states are entirely capable of raising funds for their own transportation needs. State gas taxes average 34 cents per gallon.

Also consider that gas taxes used to be a more pure user charge for highways, but these days gas tax money is diverted to inefficient nonhighway uses such as transit. Politicians say, “We need a gas tax increase to fix our crumbling highways,” and then they spend the money on other things. It is a bait-and-switch.

Federal fuel taxes and vehicle fees raise about $41 billion per year. About 20 percent of those funds (about $8 billion) are diverted to transit and other nonhighway uses.

With state fuel taxes the diversion is even larger, as shown in this Federal Highway Administration table. In 2016, state governments raised $44 billion from fuel taxes, and they diverted 24 percent—14 percent to transit and 10 percent to other activities. Texas, for example, diverts 25 percent of its fuel taxes to education spending.

The states also raised $38 billion from vehicle fees. They diverted 34 percent of those funds—13 percent to transit and 21 percent to other activities.

In total, states raised $82 billion from fuel taxes and vehicle fees. They spent $59 billion (72 percent) on highways and $23 billion (28 percent) on other activities. If the highways in your state have congestion and potholes, it may because your government is taking money raised from highway users and diverting it to other activities.  

The chart below shows the shares of state fuel taxes and vehicle fees diverted to nonhighway uses. South Carolina, for example, diverts 31 percent.

Last year, South Carolina’s governor Henry McMaster vetoed a gas tax increase. He objected to his state’s diversion: “Over one-fourth of your gas-tax dollars are not used for road repairs … They’re siphoned off for government agency overhead and programs that have nothing to do with roads.”

As a rough user charge, gas taxes are a good way to fund highways, and our highways do need more investment. But motorists should be skeptical of gas tax increases until policymakers stop diverting funds to inefficient transit systems with declining riderships.

Many transportation experts say that the rise of electric vehicles will be the end of the road for gas taxes, and they are eager to impose new vehicle miles traveled (VMT) charges to fund highways. However, governments are diverting more than $30 billion in fuel tax revenues and vehicle charges a year to nonhighway uses. If that diversion was ended, these revenues could continue to be America’s highway funding source for years to come.

 

More on highways and the gas tax:

https://www.downsizinggovernment.org/transportation/federal-highway-policies

https://www.downsizinggovernment.org/infrastructure-investment

https://www.downsizinggovernment.org/chamber-commerce-misguided-gas-tax

https://www.cato.org/blog/federal-gas-tax-increase-misguided

https://www.cato.org/blog/federal-gas-tax-lahood-makes-no-sense

Census Data Detail Transit’s Decline

Transit ridership has been declining now for four years, and the latest census data, released last week, reveal that the biggest declines are among the groups that you might least expect: young people and low-income people. These results come from the American Community Survey, a survey of more than 3 million households a year conducted by the Census Bureau. Here are some of the key findings revealed by the data.

Young People Are Deserting Transit

Those who subscribe to the popular belief that Millennials and other young people prefer to  transit over owning and driving a car were shocked last week when the Washington Post published an article indicating that “a Millennial exodus” was “behind [Washington] Metro’s diving ridership.” This was based on a study that found that, from 2016 to 2018, young people had reduced their use of transit for commuting by 20 percent, while older people had reduced it by smaller amounts or not at all. The study used cell phone records from one of the nation’s largest wireless carriers, probably Verizon or AT&T.

Young people seem to be deserting transit more than older commuters.

Although the census data only go as far as 2017, they seem to confirm this finding. As shown in the above chart, the largest declines in transit commuting, both nationally and in the Washington DC urban area, are among younger people. Commuting forms only a part of transit ridership, but to the extent that declining ridership is due to ride-hailing services such as Uber and Lyft, those services disproportionately used by people the age of 35. For more information about transit declines by age class, including links to data files for 2017 going back to 2005, see my longer post on the subject. In addition to national data, the files show how people in various age classes commuted to work in each state and each major county, city, and urban area.

2. Low-Income People Are Deserting Transit

Although transit subsidies are often justified by the need to provide mobility to low-income people, the reality is that transit commuting by people in the lowest income classes is shrinking while transit commuting is growing fastest among people in the highest income classes.

Transit commuting in the lowest income classes is shrinking faster than the total size of those classes while in the highest classes it is growing faster than the total size of those classes.

Transit commuting is increasingly skewed to people who earn more than $75,000 a year. Even though only 19 percent of American workers were in this income class in 2017, they made up 26 percent of transit commuters, an increase from just 14 percent in 2005. Both the average and the median income of transit commuters are higher than those of all workers. For more information on transit commuting and income, including links to data files from 2006 through 2017, see my more detailed post on the subject.

3. Vehicle Ownership Continues to Rise

While ride hailing is probably responsible for much of the decline in transit ridership among young people, increasing auto ownership is responsible for much of the decline among low-income people. Between 2014 and 2017, the share of households that lacked access to a motor vehicle declined from 9.1 to 8.6 percent. Moreover, the share of workers who live in households with no vehicles declined from 4.6 to 4.2 percent.

In 1960, more than 20 percent of American households had no motor vehicles while only a small percentage owned three or more, figures that have practically reversed themselves today.

While a few tenths of a percent may not sound like much, remember that in all but a handful of urban areas more than 90 percent of commuters get to work by car while less than 2 percent take transit. Thus, a small increase in auto ownership can lead to a large percentage decrease in transit usage.

Curiously, most American workers who live in households without cars don’t take transit to work. In fact, in most states and urban areas, more workers who live in households without cars nevertheless drive alone to work than take transit to work. How do they drive alone if they don’t have a car? Probably in employer-supplied vehicles. In any case, this is just one more indicator of transit’s declining relevance. For more information on increasing auto ownership, including data files, see my detailed post on the subject.

4. Transit Is Increasingly Irrelevant

Transit agencies and their supporters act as though transit is somehow vital to the national and local economies. That may still be true in New York City, but it is only marginally true in Boston, Chicago, Philadelphia, San Francisco, and Washington, and not at all true elsewhere. The decline in transit ridership among young people who were supposed to love transit the most, and among low-income people who were supposed to need transit the most just reinforces this declining relevance and argues against any further subsidies to this obsolete industry.