[This is the last half of a two-part critique of Douglas Diamond and Philip Dybvig's highly influential paper purporting to show that fractional reserve banking systems are inherently unstable. Part I can be found here.]
Sauce for the Goose…
Half a century after the fact, the "aggregate uncertainty" version of the Diamond-Dybvig model appeared at long last to offer solid proof of the inherent instability of ordinary banks, together with an equally solid foundation for government deposit insurance. But no sooner had the inspectors started poking their flashlights around that supposedly solid structure than its serious weaknesses became evident.
The first casualty of that inspection was Diamond and Dybvig's case for deposit insurance. That case depends on their model's "sequential service" constraint, which calls upon their bank to meet its depositors' demands on a first-come-first-served basis. The constraint matters because, if it could instead delay paying its customers until it has received all of their requests, a Diamond-Dybvig ("D-D") type bank could make its period-1 payments contingent on total period 1 withdrawals, thereby ruling-out runs despite aggregate uncertainly, by achieving the same structure of expected returns it might achieve using the threat of suspension in the aggregate certainly-sequential service case.
The problem with Diamond and Dybvig's case for deposit insurance is that it implicitly and illogically exempts government authorities from the sequential service constraint imposed on the D-D bank. In order for the deposit insurance solution to work, the government must itself accumulate all period-1 payment requests, and then present those making such requests with their (optimal) tax bills before they actually withdraw funds, lest unwanted withdrawals should cut into period-2 returns by interrupting the production process. There must, in other words, be no "first-come-first-taxed" constraint on the government corresponding to the bank's "first-come-first-served" constraint. Although Diamond and Dybvig recognize that their case for deposit insurance rests upon this "asymmetry" in their treatment of the sequential service constraint, they never bother to justify it. They therefore opened themselves to the charge, leveled at them by Neil Wallace, of not taking their model's sequential service constraint "seriously."Read the rest of this post »
This primer is a step-by-step recap of the procedures associated with our remarkable 2020 election. I do not address the politics of the matter, except to comment on the politically-charged debate between advocates for our electoral college and advocates for a national popular vote.
1. What dates are critical when we elect the president?
The presidential election of 2020 was set by federal statute to occur on November 3. Although the candidates’ names are on the ballot, we actually vote for electors who in turn are pledged to vote for each candidate. Then, the electors meet and vote – in 2020, on December 14 – in each state. Those ballots go to Congress, which finalizes the outcome on January 6, 2021, after which the president is inaugurated on January 20.
Article II of the U.S. Constitution provides that “Each State shall appoint [electors] in such Manner as the Legislature thereof may direct.” Of course, the appointment process must be established before the election occurs. All 50 states have opted to choose electors by popular vote. Congress can challenge the electoral outcome in one or more states, but presumably won’t do so if the vote count in the state is certified by state election officials at least six days prior to the electoral college meeting on December 14. In the 2020 election, all the vote counts except Wisconsin’s were certified; and even in Wisconsin, there was no indication of any basis for a congressional challenge.
The Electoral Count Act of 1887 requires Congress to consider any “papers purporting to be certificates of the electoral votes.” If one slate has been certified, Congress will accept that slate. If there are multiple slates, none of which has been properly certified, Congress must choose. Congress will also intervene if at least one House member and one Senator object to a state’s electors. In choosing a slate, both Houses must agree. If there’s no agreement, the Act says that Congress must select the slate (if any) that has been approved by the “state executive,” who is the governor in most states. If there’s still no resolution, none of the electors would be counted. In 2020, the slates in all of the contested states were approved by the governor.
The House, controlled by the Democrats, would no doubt pick the Biden slate. The choice in the Senate is less certain. On January 6, the new Senate will comprise 48 Democrats and 51 Republicans. (The David Perdue-Jon Ossoff runoff in Georgia on January 5 won’t yet be certified. Kelly Loeffler, the other Georgia senator, will be seated because she was appointed to replace a retiring senator until a permanent successor could be elected.) So, it would appear that Republicans would have the edge in the Senate; but a number of Republican senators – e.g., Mitt Romney, Susan Collins, Lisa Murkowski, and Ben Sasse – have already congratulated Biden and might therefore select his slate of electors instead of Trump's. Other Republican senators might well join them.Read the rest of this post »
Yesterday, Farah Stockman of the NY Times editorial board published an op‐ed on the World Trade Organization entitled “The W.T.O. Is Having a Midlife Crisis.” The WTO is only 25 years old, so I’m not sure “midlife crisis” is accurate, but what really concerns me is the various errors and mischaracterizations throughout the piece. I thought it was worth offering some corrections. Here goes.
The first issue I have is that the piece seems to suggest that “the WTO” itself has a great deal of power. For example, the piece states: “When the W.T.O. was created in 1995 to write the rule book for international trade” (emphasis added); or “The W.T.O. wasn’t just powerful. It was ambitious”; or “People began to complain that the W.T.O. just wasn’t up to the task of regulating the world economy” (emphasis added). I’m not sure what the author had in mind exactly, but these statements could be taken to mean that the WTO’s Director‐General, or the 625 staff who work in the WTO Secretariat (which I did many years ago), have much more power than they actually do (it’s worth noting that 625 is a pretty small number of employees compared to, say, the World Bank). In reality, virtually all the power over WTO rules is in the hands of the governments who are members of the WTO. Thus, generally speaking, it’s misleading to say “the WTO” did this or did that. The key decisions are made collectively by governments: Governments write the rules, and governments complain when they think other governments are not complying with the rules. And it is certainly not the case that “the WTO” is tasked with “regulating the world economy.” Again, it’s the governments who are in charge here. (The one exception to all this is rulings by WTO dispute settlement bodies, which are discussed a bit below, but keep in mind that these rulings cannot actually force governments to comply. The most they can do is provide authorization for the complaining government to withdraw some of its own trade “concessions,” in order to rebalance the overall trade negotiating bargain and provide an incentive to comply.)
There are also problems in the piece related to mythology about 1990s capitalism. In the 1990s, the piece states, “The United States, the world’s sole superpower, embraced an almost messianic belief in the ability of unfettered capitalism to improve lives around the world.” It is certainly true that many people were pretty high on capitalism in the 1990s, given the experiences with socialism around the world, but capitalism was hardly “unfettered” and the U.S. government was certainly not “messianic” about it at this time. Debates about deregulation and privatization have a real impact, and at times various governments move back and forth on the continuum a bit, in one direction or the other. But regardless of any marginal successes we on the free market side have had, we have never come close to making capitalism “unfettered.” There are plenty of fetters still in place. And the U.S. government was always pretty practical in its approach, advocating for and using subsidies and trade restrictions in areas where it wanted to impose them.
The piece also makes a common error by attributing rules to the WTO that it doesn’t have: “Americans pushed more than 100 nations to join together to create a strong international body to remove barriers to international trade and protect investors” (emphasis added). I’ve been as critical of international rules on protections for foreign investors as anyone, but the WTO, unlike many other trade agreements, does not have such rules. And just to be clear, on trade barriers in general, WTO rules expressly allows governments to maintain plenty of tariffs, subsidies, and product regulations. We are not talking about anything close to total free trade or a single world market here.
Then there are mistakes about how the rules have been applied in WTO disputes, such as this statement: “The W.T.O. has ordered countries to gut programs that encouraged renewable energy and laws that protected workers from unfair foreign competition, as if international commerce were more important than climate change and workers’ rights.”
When the WTO dispute settlement system has heard complaints that particular renewable energy programs violate WTO obligations, it has offered very narrow rulings, not a “gutting.” The violation was not because WTO rules prohibit governments from encouraging renewable energy – they most certainly can and do! Rather, it was because these programs discriminated against foreign companies in favor of domestic companies. There’s a pretty strong argument that an approach using nationality‐based discrimination is actually bad for renewable energy, because it makes the industry less efficient and the energy more expensive (both at home and in foreign countries, if they copy the approach). And just to be clear, the “unfair foreign competition” at issue in WTO disputes does not directly address workers’ rights. Rather, it is about the so‐called “trade remedies” — anti‐dumping, countervailing duties, and safeguards. These laws protect domestic industries from foreign competition, but do not involve labor protections.
Also on WTO disputes, the piece says this: “The W.T.O.’s decision‐making looked even more questionable after the body turned a blind eye to China’s bad behavior. Its judges ruled against government subsidies for locally produced solar panels in the United States and India, on the grounds that they were unfair to foreign producers. But a smorgasbord of subsidies in China were deemed no problem at all.” To be clear, the rulings on solar panel subsidies did not say you can’t subsidize solar panels; they just said that you can’t offer the subsidies in a way that discriminates against foreign producers. And the subsidies provided by China were not “deemed no problem at all.” Rather, the ruling was that the way the U.S. Department of Commerce calculated the subsidies was in violation of WTO rules. (It’s worth noting here that when governments have brought WTO complaints against China directly, they have been fairly successful.)
Along the same lines, the piece argues as follows: “The world has a historic opportunity to change the direction of international trade rules and carve out more space for countries to experiment with solutions to climate change and income inequality. Countries around the world could use economic stimulus funding to make strategic investments in green energy with subsidies. That’s what Mr. Biden’s Build Back Better plan is all about. But so much of the plan — from subsidies for green energy infrastructure to strong “Buy American” provisions — risks running afoul of W.T.O. rules.”
Putting aside the merits of these policies, when you look closely at WTO rules and their exceptions, it is clear that there is plenty of space “to experiment with solutions to climate change and income inequality.” Where governments get in trouble is when they add protectionist elements to their experimenting. For example, if you want to offer subsidies to consumers to buy an electric car, you will not be in violation of WTO rules. On the other hand, if you offer the subsidies to consumers who buy domestically‐produced electric cars only, you will probably be in violation. But that finding of violation may actually be useful if your goal is to convince people to buy electric cars, because it means more choices and lower prices for electric car consumers. Adding protectionism to environmental regulations can make these regulations less effective for achieving their objective.
Finally, the piece also throws in this assertion, although it’s not clear how it fits with an op‐ed on the WTO: “Investment banks pushed for financial deregulation around the world, rolling back laws like Glass‐Steagall, which kept Wall Street from recklessly gambling away pension funds.” It may be true that investment banks pushed for this, but I’m not sure what that has to do with the WTO. Financial deregulation came about through domestic political efforts, rather than in response to any rules governments negotiated at the WTO.
It’s not necessarily worth a takedown of every piece that gets things wrong, but this one was in the NY Times and therefore I thought some clarifications might be in order. There are plenty of good criticisms to make of the WTO, and I and others make them all the time (e.g., WTO dispute settlement is too slow to be effective, something that the piece notes briefly, but which gets lost amidst all the errors). This piece was a missed opportunity in that regard.
Yesterday, the Centers for Disease Control and Prevention reported that the drug overdose death rate, already accelerating after a brief pause in 2018, increased at an alarming rate coinciding with the mobility restrictions and emotionally stress of the COVID-19 pandemic. There were more than 81,000 overdose deaths during the 12 months ending in May 2020—a new record. There were just over 71,000 deaths reported for the 12 months ending in December 2019.
To be sure, the isolation, loneliness, and anxiety of the pandemic and its management exacerbate mental health problems, including substance use disorder. Their effect on the overdose rate was noted by White House “drug czar” Jim Carroll in the late spring of this year.
But the most important feature of the latest report from the CDC is the fact that illicit fentanyl, made in clandestine labs in Asia and Mexico, was responsible for roughly 57 percent of all overdose deaths. Cocaine was found in roughly 22 percent of overdoses. And methamphetamines were found in 23 percent of all overdose deaths.
Yet the CDC maintains its focus on doctors prescribing opioids to their patients in pain in its list of recommendations for dealing with this dispiriting news. It tells health care providers to co‐prescribe the opioid overdose antidote naloxone to their pain patients when they prescribe high doses of opioids—despite the fact that prescription opioids account for an ever‐decreasing percentage of the drugs involved in overdose deaths, with overwhelming evidence that the overdoses are from illicit drugs obtained in the black market. As Josh Bloom and I recently pointed out, the crackdown on prescription opioids has fueled a “street drug epidemic” while it has harmed patients in pain.
The CDC also gives lip service to a few harm reduction strategies in its recommendations. For example, it recommends more widespread distribution of the overdose antidote naloxone, without urging the Food and Drug Administration to reclassify naloxone as an over‐the‐counter drug—an obvious way to increase its dissemination.
The CDC also encourages the expansion of medication assisted treatment (MAT) programs with drugs such as methadone and buprenorphine, which it recognizes as the most effective form of treatment for substance use disorder due to opioids. Yet it makes no mention of proposals to deregulate methadone and buprenorphine treatment programs by letting health care practitioners more easily prescribe these drugs to their patients, as they do in many developed countries. Congress can build upon the temporary relaxation of MAT regulations during the COVID pandemic and implement permanent reforms.
The tragic report by the CDC lacks the boldness to admit that restricting patients’ access to legal drugs (e.g., prescription opioids in the case of opioid‐related deaths and pseudoephedrine in the case of methamphetamine‐related deaths) has, if anything, inflamed the drug overdose crisis while harming patients. It failed to argue for reforming or repealing laws that obstruct harm reduction strategies. So it should come as no surprise that it failed to identify the ultimate source of the drug overdose crisis: drug prohibition and the dangerous black market it fuels.
Today, Cato published a new compilation of 30 short essays by 15 authors including some of the leading immigration law experts in the United States that explains executive actions that could improve and expand the legal immigration system. It is titled: Deregulating Legal Immigration: A Blueprint for Agency Action. Going into this project, we had the following goals:
- Each proposal goes beyond reversing Trump policies. Obviously, we support the wholesale and immediate reversal of nearly every Trump immigration policy since nearly all have been harmful, but we felt that the Biden officials will already have marching orders to reverse Trump policies, so there was more of a need for ideas to make the system better than it was before Trump. We hope that Trump policies get swept away quickly so officials can turn their attention to our ideas.
- Each proposal helps legal immigrants navigate our bureaucratic, outdated, and restrictive system. We adopted this focus mainly because we feel that the Biden team has already fully thought‐out proposals to address immigrants without legal status, and others were better equipped to flesh out those ideas. Thus, this compilation was about filling niche in the market of ideas for reforming the system, not giving every important idea for reform.
- Each proposal provides the legal authorities for action. We have many ideas for improving legal immigration (I have laid them out briefly here and here), but it was imperative for us that these executive actions have strong legal foundations under current law. These ideas are all legally actionable based on existing law and precedent, and this volume gives the administration almost everything that they need to implement them.
- Each proposal is concise and easily read by nonexperts. This last one was exceptionally important to us. Legal experts have spilled thousands of pages about problems with the legal system, but our goal was to provide a product that could be consumed by administration officials, advocates, and others who may not be experts on these matters but could take an interest in seeing these ideas across the finish line.
- Each proposal is authored by a legal expert: It was important to us that this was not simply a Cato‐only project. We wanted to introduce ideas from many of the leading immigration authorities in this country (as well as a few of my own). These included multiple past presidents of the American Immigration Lawyers Association, a former administration official, authors of the leading immigration law reference texts in the United States, and other well‐known immigration experts.
I hope that we accomplished these goals. I believe this is the most comprehensive and concrete, but also most consumable and concise compendium of legal immigration ideas for President Biden. The Biden administration should act quickly to undo as much of the damage of the last four years as possible. But he should go further and deregulate the legal immigration system to the greatest extent that the laws allow. Table 1 lists the ideas we included and their authors. The entire paper is available here.
As my Cato colleague Chris Edwards and I have been documenting here recently, COVID-19 has accelerated the longer‐term migration of many Americans from expensive cities like New York and San Francisco to places with lower taxes and a lower overall cost of living. Examining changes to LinkedIn members’ zipcodes and various cost‐of‐living metrics, Bloomberg’s Misyrlena Egkolfopoulou today provides more evidence of the “Expensive Exodus”:
Citing these and other data, as well as various anecdotes, Egkolfopoulou concludes that cost of living — especially housing — is playing a “major role” in movers’ decisions:
[S]ome of the most expensive urban areas [are] seeing the biggest population loss versus previous years. Outbound moves in the Bay Area rose 8% in May‐September, compared with the same period in 2019, while Seattle and New York both experienced a 7% increase… Meanwhile, Jacksonville, Raleigh, Charlotte, Nashville and Phoenix were among cities with the most inbound moves, according to the Webster Pacific and United Van Lines data.
She adds that tax policy is another important driver:
…Covid‐19 is accelerating a decision that was being made by scores of others even before the pandemic. While cost of living, lifestyle, property prices and jobs influence the moves, the cities that are attracting the most people are in states with lower or zero local income tax rates.
As Edwards and I have noted, these migration trends pre‐dated COVID-19 but have been amplified for wealthier Americans who are more likely to be working from home during the pandemic and have the means to change addresses relatively quickly. While their departure from expensive “superstar” cities has been cheered by some, the University of Toronto’s Richard Florida warns that this trend could have a serious impact on local budgets: “A whopping 80% of New York City’s income tax revenue, according to one estimate, comes from the 17% of its residents who earn more than $100,000 per year. If just 5% of those folks decided to move away, it would cost the city almost one billion ($933 million) in lost tax revenue.” He remains optimistic about superstar cities’ long‐term prospects but warns that, if these places’ “policies don’t change, their budgets will suffer in the meantime, and their least‐advantaged people and neighborhoods will bear the brunt of it as budget cuts and austerity measures eliminate key services.” Because Florida blames much of the current exodus on the 2017 federal tax law’s limitations on deductions for state and local taxes (SALT), which once gave high‐tax cities “a fighting chance against their lower‐tax rivals,” he suggest that city and state governments develop “new revenue models that account for the locations of both the people and their businesses” to counter the “effect of new remote technology on state and local taxes.”
However, that approach would seem to ignore the many non‐tax reasons why wealthier Americans — now unburdened by a physical office — are leaving costlier places (though the SALT deduction is indeed likely playing a role). Most notable in this regard is housing: beyond the home price data noted above, for example, St. Louis Fed’s Regional Price Parity (RPP) indices, which allow economists to compare living costs across state metro areas, shows that rent differences between out‐migration states and in‐migration states are in most cases quite substantial:
A novel “revenue” solution also elides the far more straightforward policy approach that high‐cost states and cities could undertake: attacking costs head‐on through less‐punitive taxes (on both income and goods), less regulation (especially for housing), better governance, and more personal freedom. As Edwards notes in his 2018 paper, such policies could not only dissuade current residents from leaving, but also attract new people and investments.
These places can’t change their weather, but they can certainly improve their economic climate.
Section 230 shields an ecosystem. Rather than protecting particular platforms or offering separate rules for different sorts of services, it protects all internet intermediaries equally, regardless of their size, purpose, or policies. Under this uniform, predicable arrangement, specific platforms may set their own rules, choosing to cater to mass audiences or niche subcultures and governing their services accordingly. Diversity of opinion marks the whole system but not every platform therein. This liberal, decentralized approach remains the best mechanism for ensuring freedom of speech online.
Section 230 was intended to let a thousand platforms bloom, ensuring that, according to the Congressional findings that precede the bill’s substantive sections:
“The Internet and other interactive computer services offer a forum for a true diversity of political discourse, unique opportunities for cultural development, and myriad avenues for intellectual activity.”
Crucially, this expectation was made of the internet as a whole, or, “the internet and other interactive computer services,” when taken together, not specific services. Unfortunately, critics of the policies of particular platforms such as Twitter and Facebook increasingly misread this expectation as relating to individual platforms.
In a Federalist Society Blog post titled “Section 230 and the Whole First Amendment,” Craig Parshall, General Counsel of the National Religious Broadcasters, claims that Section 230 was intended to incentivize individual tech platforms to open themselves to all speech.
“The intent behind Section 230 was to incentivize tech platforms to screen out harmful and offensive content while also providing a “forum for a true diversity of political discourse, unique opportunities for cultural development, and myriad of avenues for intellectual activity.
It is time that they be required to live up to their part of the bargain; namely, expressly conditioning their protection under Section 230 in return for their use of a First Amendment free speech paradigm for their decisions on third‐party content.”
Setting aside the problem of how platforms might be expected to screen “offensive and harmful” material while simultaneously mirroring the First Amendment, by substituting “tech platforms” for “the internet,” Parshall dramatically alters Section 230’s expectations.
More recently, Conservative Partnership Institute Policy Director Rachel Bovard makes the switch in an opinion piece for USA Today;
Internet platforms would receive a liability shield so they could voluntarily screen out harmful content accessible to children, and in return they would provide a forum for “true diversity of political discourse” and “myriad avenues for intellectual activity.”
By narrowing “the internet” to particular “internet platforms,” Bovard and Parshall invent a Section 230 that demands diversity within platforms, rather than between them. The expectation that all platforms offer truly diverse forums amounts to an expectation of uniformity in platform policy. If all platforms must serve as a “forum for a true diversity of political discourse,” none may serve particular communities. This leveling would perversely render the internet as a whole far less diverse than it is today. Instead of Ravelry offering a platform for knitters and TheDonald.win offering a home for unfiltered MAGA fandom, Bovard and Parshall would have both platforms host it all. Taking a narrow view of the internet as a handful of major platforms, they propose systemic changes that would put the diversity they ignore on the chopping block.
Their unworkable expectation is at odds with a plain reading of the statute and the intentions of Section 230’s drafters, Representatives Ron Wyden (D-OR) and Chris Cox (R-CA). In a recent letter to the Federal Communications Commission objecting to its efforts to modify the statute via rule‐making, they write:
In our view as the law’s authors, this requires that government allow a thousand flowers to bloom—not that a single website has to represent every conceivable point of view. The reason that Section 230 does not require political neutrality, and was never intended to do so, is that it would enforce homogeneity: every website would have the same “neutral” point of view. This is the opposite of true diversity.
By allowing individual websites to screen off‐topic or “otherwise objectionable,” Section 230 ensures that online communities and service providers can chose whatever rules or standards they think most fitting for their particular corner of the internet.
All platforms have rules intended to foster particular sorts and styles of conversation. Some are enforced by moderators or bots, while others are built in to the platform’s architecture. Twitter maintains rules against threats of violence, and the platform will not allow an account to post more than 100 tweets in an hour. Even ostensibly ungoverned platforms maintain rules. 4chan is divided into topic specific image boards for everything from “Papercraft & Origami” to “Adult Cartoons.”
Because online real estate is an unlimited resource, for those who find a given ruleset ill‐fitting, exit is cheap. Section 230’s intermediary liability protections keep the cost of exit low by preventing platforms from being held liable for their users’ speech. While The Atlantic staff writer Kaitlyn Tiffany calls this capacity for exit “the internet’s structural penchant for hate,” it prevents any single set of platform rules from creating a universal prohibition. Unlike legal speech restrictions, unwanted platform restrictions are intended to be avoided through the creation of competing jurisdictions.
This is particularly important for explicitly dissident alternatives to mainstream platforms. Both TheDonald.win and Ovarit were created as off‐platform alternatives to banned subreddits. For these burgeoning, essentially moderator‐run forums, the fact that they regularly host speech deemed impermissible by Reddit would serve as a magnet for litigation in the absence of Section 230.
Indeed, at a time when traditional media gatekeepers have deemed migration to Parler “a threat to democracy,” and treat podcast apps as the next front in an unending War on Disinformation, intermediary liability protections are vital speech protections. Advocates of liberal speech governance should refrain from reading expectations of uniformity into Section 230. Undermining protections for diverse approaches to content moderation will serve only to nip alternatives to mainstream platforms in the bud.