Latest Cato Research on Political Philosophy https://www.cato.org/rss/research/political-philosophy en Can Audits Backfire? Evidence from Public Procurement in Chile https://www.cato.org/publications/research-briefs-economic-policy/can-audits-backfire-evidence-public-procurement-chile?utm_source=rss_topic&utm_medium=rss&utm_campaign=rss Maria Paula Gerardino, Stephan Litschig, Dina Pomeranz <div class="lead text-default"> <p>Public-sector audits are widespread and are meant to ensure that policies ranging from infrastructure to regulation to social programs are executed as intended by policymakers. For audits to be effective, however, they should not distort the choices of those who are subject to the audit. In the case of public procurement, a potential distortion arises when audit protocols differ by procurement modality and procurement officials have some discretion over the choice of modality.</p> </div> , <div class="text-default"> <p>We investigate the effects of an audit on the choice of procurement modality by audited officials in Chile. We find clear evidence that the audit triggers a shift from auctions toward direct contracting, which goes against the goals of the national public procurement regulation that the audits are intended to enforce. We also find that there is a reduction in competition and that new and large firms are less likely to win the contract. In addition, within a subset of products for which we can compare prices and for which there is a sizeable shift toward direct contracts, audits lead to higher prices.</p> <p>The shift away from auctions and toward more direct contracting surprised representatives of the Chilean Comptroller Agency. In order to look into the black box of the audit process, the Comptroller Agency agreed to conduct an additional set of similar audits in which they would collect more data on audit checks and findings at the individual contract level. Analysis of these additional audits shows that, relative to comparable direct contracts, auctions undergo more than twice as many checks, exhibit twice the number of infractions, and are twice as likely to lead to follow-up investigations. Overall, these results are consistent with the distortionary effect of an audit design that puts disproportionate scrutiny on auctions rather than direct contracts.</p> <p>Public procurement is a key area for government auditing. It includes practically all public spending other than salaries and transfers and represents a large share of the economy (about 13 percent of GDP and 29 percent of total general government expenditures in the Organisation for Economic Co-operation and Development). The government is the largest buyer in many countries, and public procurement contracts can have significant impacts on supplier firms. Free and fair competition for government contracts is therefore of great importance for both the quality and cost of government purchases and to create a level playing field for all firms. For this reason, many governments and international organizations promote the use of competitive and transparent public auctions over direct contracting.</p> <p>In order to analyze the impacts of government audits on procurement practices, we combine detailed administrative data on public purchases from the Chilean public procurement agency with both administrative and newly collected auditing data from the Comptroller Agency. The procurement agency provided information on all procurement processes conducted on its platform. The Comptroller Agency provided data on audits as well as on a scoring rule and scores used in the selection of entities to be audited during 2011–2012, which our analysis is based on.</p> <p>These data allow us to analyze not only the impact of the audits on the share of amounts purchased through different purchase modalities but also on more nuanced aspects of the purchasing process. There is a particularly strong shift away from auctions with more than three bidders and toward the type of direct contracts that only require one quote, substantially reducing the probability that the purchase will result from a competitive process. Justifications given for the increased use of direct contracting are consistent with the overuse of direct contracting. Whenever Chilean officials use direct contracting, they need to provide one of 21 possible justifications for doing so. Almost half the increase in direct contracting in audited entities is justified as an &quot;emergency.&quot; This is the one justification that is known to be particularly prone to abuse.</p> <p>The shift from auctions to direct contracting seems to have real economic impacts. Contracts are more likely to be awarded to small firms and to incumbent firms that have sold to the same entity before. The data also allow us to analyze impacts on prices for the small subset of products with clear and comparable units of measurement and for which there is a sizeable shift from auctions to direct contracting. Among these products, we find a substantial increase in prices. However, this result does not necessarily generalize to more complex types of purchases (such as services) for which quality criteria are typically more difficult to specify in auctions.</p> <p>In order to shed light on the underlying mechanism of the shift from auctions to direct contracting, we worked with the Comptroller Agency to collect data through additional audits. These audits were structured in the same way as their standard procurement audit, except that more information was collected in the process. Auditors in Chile typically only recorded detected infractions. In these additional audits, they also recorded information on which purchase contracts were audited and which checks were conducted, independently of whether any infractions were found. Auditors in the field were not aware of the reason for this additional data collection except that the Comptroller Agency was piloting a new approach. The additional information allows us to analyze the audit process at the level of individual checks and corresponding detected infractions for each audited contract. </p> <p>The finding that the additional audits show a much higher number of checks and detected infractions for auctions than for direct contracts seems to stem mainly from the fact that the audit protocol includes many more potential checks for auctions than for direct contracts. It is of course possible that the types of contracts for which auctions and direct contracting are chosen differ along observable or unobservable dimensions. We deal with this issue in two ways. First, we show that the differences in the number of checks and audit findings remain essentially unchanged when we control for contract characteristics such as the amount of the purchase and the type of product. Second, we find that most of the difference between the number of checks and detected infractions stems from auditing of the awarding stage (where the procurement process differs most between purchase modalities) rather than from the execution stage, which is very similar irrespective of modality.</p> <p>When goods and services are acquired through auctions, they are thus subject to more scrutiny than when they are bought through direct contracts. More generally, this common and mechanical &quot;auditing by checklist&quot; approach may therefore inadvertently discourage the use of more regulated processes, which tend to involve more steps and leave a longer paper trail. If agents run the risk of making a mistake in any given step of the process, procedures involving more steps will mechanically lead to a higher probability of being found to be noncompliant. Unless penalties for infractions are lower for processes involving a longer paper trail, audits will lead to higher expected costs as a result of using more complex processes. This distortionary incentive can subvert underlying policy goals unless the regulator actually intends to discourage the more transparent process. But in many cases, the reverse is true.</p> <p>We also investigate an alternative mechanism; namely, that entities might increase the use of direct contracts in year <em>t</em> because the likelihood of an immediate reaudit in year <em>t</em> + 1 might be low, and contracts awarded in year <em>t</em> might therefore be less subject to scrutiny. However, qualitative interviews with procurement officers and auditors revealed that they did not believe there was a reduction in the audit probability in the year following an audit, and that they felt that even if the reaudit probability in year <em>t</em> + 1 were zero, this would not imply that contracts from year <em>t</em> had a low level of scrutiny, because audits typically reach back several years to the date of the last audit. Analyzing this issue quantitatively, we find that indeed the reaudit probability is not lower after an audit. If anything, there is a slight increase in the audit probability in year <em>t</em> + 1.</p> <p><strong>NOTE</strong>:<br /> This research brief is based on Maria Paula Gerardino, Stephan Litschig, and Dina Pomeranz, &quot;Can Audits Backfire? Evidence from Public Procurement in Chile,&quot; March 2019, <a href="https://www.econ.uzh.ch/dam/jcr:11279ded-d05c-426b-8a75-604fe07a4e42/Can-Audits-Backfire.pdf" target="_blank">https://www. econ.uzh.ch/dam/jcr:11279ded-d05c-426b-8a75-604fe07a4e42/Can-Audits-Backfire.pdf</a>.</p> </div> Wed, 18 Sep 2019 00:00:00 -0400 Maria Paula Gerardino, Stephan Litschig, Dina Pomeranz https://www.cato.org/publications/research-briefs-economic-policy/can-audits-backfire-evidence-public-procurement-chile Contributors https://www.cato.org/publications/supreme-court-review/contributors?utm_source=rss_topic&utm_medium=rss&utm_campaign=rss Mon, 16 Sep 2019 15:22:32 -0400 https://www.cato.org/publications/supreme-court-review/contributors No Enemies to the Right? https://www.cato.org/publications/commentary/no-enemies-right?utm_source=rss_topic&utm_medium=rss&utm_campaign=rss David Boaz <div class="lead text-default"> <p>Conservatives have long criticized liberals for what they see as a policy of &ldquo;no enemies to the left.&rdquo; That is, they said, liberals might not <em>be</em> socialists, communists, or revolutionaries, but they forbore criticizing such people.</p> </div> , <aside class="aside--right aside pb-lg-0 pt-lg-2"> <div class="pullquote pullquote--default"> <div class="pullquote__content h2"> <p>It would be helpful if those on the left would stop suggesting that everyone on the right is a racist. But it would also be good if those on the right would admit that there are racists and banish them for the good of their cause.</p> </div> </div> </aside> , <div class="text-default"> <p>And they have a point. The <em>Washington Post </em>has mentioned Angela Davis in several articles this year, always describing her as an &ldquo; <a href="https://www.washingtonpost.com/lifestyle/style/legendary-activist-angela-davis-has-overcome-doubters-her-whole-life--and-at-75-shes-still-not-backing-down/2019/02/26/87ffd4c0-3392-11e9-af5b-b51b7ff322e9_story.html" target="_blank">activist</a>&rdquo; and not as a former longtime leader of the Communist Party. Davis has received many awards for her supposed activism for human rights and the environment – as well as the Soviet Union&rsquo;s <a href="https://www.nndb.com/honors/283/000099983/" target="_blank">Lenin Peace Prize</a>, called the Stalin Prize until 1957.</p> <p>Senator Bernie Sanders says he advocates &ldquo;democratic socialism&rdquo; as found in Denmark and Sweden, but he honeymooned in the Soviet Union, defended the communist government of Nicaragua, and signed a letter of support for Venezuela&rsquo;s disastrous strongman Hugo Chavez. And none of his opponents for the Democratic presidential nomination have called him out for that.</p> <p>But now conservatives have a problem of their own. Call it &ldquo;no enemies to the right.&rdquo;</p> <p>William F. Buckley Jr. the founder and editor of <em>National Review</em>, was known for kicking the fringe organs like the John Birch Society <a href="https://www.nationalreview.com/2017/06/william-f-buckley-john-birch-society-history-conflict-robert-welch/" target="_blank">out of the conservative movement</a>.</p> <p>As one of his biographers <a href="https://smile.amazon.com/Man-His-Presidents-Political-Odyssey/dp/0300163843/ref=sr_1_1?crid=1ZKJKHDQU7X8F&amp;keywords=alvin+felzenberg&amp;qid=1565902997&amp;s=gateway&amp;sprefix=alvin+felz%2Caps%2C110&amp;sr=8-1" target="_blank">wrote</a>, Buckley &ldquo;stood guard over the movement he founded and&mdash;in what he called his greatest achievement&mdash;kept it free where he could of extremists, bigots, kooks, anti-Semites and racists.&rdquo;</p> <p>Buckley made some missteps of his own early on. But he did show evidence of changing with the times. As his <em>National Review </em>colleagues <a href="https://www.nationalreview.com/2008/02/william-f-buckley-jr-rip-editors/" target="_blank">put it</a> in announcing his death, &ldquo;He created modern conservatism as an intellectual and then a political movement. He kept it from drifting into the fever swamps.&rdquo;</p> </div> , <div class="text-default"> <p>But things have changed since Buckley&rsquo;s death in 2008, as many conservatives seem to have lost interest in drawing bright lines between themselves and the fever swamps. Just consider a few recent cases.</p> <p>The venerable CPAC, the Conservative Political Action Conference, run by the American Conservative Union, a venue at which Ronald Reagan gave influential speeches, in 2017 invited Milo Yiannopoulos, a guy who sent racist tweets to other writers before being permanently kicked off of Twitter for harassing Leslie Jones, who makes anti-Semitic remarks about others, and falsely accuses transgender people of disproportionate crime rates, to be a keynote speaker. CPAC then disinvited him after revelations that he defended sex between adult men and teenagers on a radio show. But they were proud to have him when he was merely a bigot.</p> <p>The next year CPAC doubled down, inviting Marion Maréchal-Le Pen, granddaughter of Jean-Marie Le Pen and niece of National Front leader Marine Le Pen, to speak. Marion told the <a href="https://www.washingtonpost.com/news/worldviews/wp/2017/04/22/marion-marechal-le-pen-weve-won-the-battle-of-ideas/?utm_term=.26273c1801a3" target="_blank"><em>Washington Post</em></a>, &ldquo;I am the political heir of Jean-Marie Le Pen. He was a visionary. He was right about a lot of things.&rdquo; One of the things Le Pen was best known for was declaring the Holocaust &ldquo;a mere detail in the history of the Second World War.&rdquo;</p> <p>The Claremont Institute, whose mission is to &ldquo;restore the principles of the American Founding,&rdquo; awarded a Lincoln Fellowship to Jack Posobiec, a blogger who has promoted the Pizzagate and Seth Rich conspiracy theories, tweeted about &ldquo;white genocide,&rdquo; and <a href="https://twitter.com/drmistercody/status/1021973081105948672" target="_blank">dropped</a> racist and Nazi code words into numerous tweets. Think of him as a straight and less hip Milo.</p> <p>Fox News host Laura Ingraham criticized social media companies for trying to &ldquo;silence conservative voices.&rdquo; She <a href="https://www.huffpost.com/entry/laura-ingraham-fox-news-paul-nehlen-white-supremacist_n_5cf0ad6be4b0e8085e378c99" target="_blank">posted a graphic</a> listing such maligned intellectuals as conspiracy theorist Alex Jones, Milo himself, professional victim Laura Loomer, and noted anti-Semite Paul Nehlen&mdash;just the sort of fever swamps Buckley tried to steer clear of.</p> <p>Conservatives have heavily touted a study of political bias on social media, claiming that of 22 prominent, politically active individuals known to have been suspended by Twitter since 2005 and who expressed a preference in the 2016 U.S. presidential election, 21 supported Donald Trump. But as Zach Graves of the Lincoln Network <a href="https://www.techdirt.com/articles/20190221/16154641652/does-twitter-have-anti-conservative-bias-just-anti-nazi-bias.shtml" target="_blank">noted</a>, along with a couple of legitimate conservatives, the 21 are largely &ldquo;a who&rsquo;s who of outspoken or accused white nationalists, neo-Confederates, holocaust deniers, conspiracy peddlers, professional trolls, and other alt-right or fringe personalities&rdquo; – including the American Nazi Party and former Ku Klux Klan leader David Duke.</p> <p>It would be helpful if those on the left would stop suggesting that everyone on the right is a racist. But it would also be good if those on the right would admit that there <em>are</em> racists&mdash;and banish them for the <a href="https://thebulwark.com/three-ways-the-gop-could-be-vastly-better-on-race-relations/" target="_blank">good of their cause</a>.</p> <p>From the perspective of a libertarian outsider looking in, it&rsquo;s time for conservatives to decide: do you believe in liberty, limited government, equality under the law, the rule of law, the Declaration of Independence, and the Constitution? If so, you don&rsquo;t belong anywhere near the fever swamps. You have enemies to the left, but also enemies to the right. Redraw those red lines. Put those guardrails back up.</p> </div> Mon, 16 Sep 2019 11:33:28 -0400 David Boaz https://www.cato.org/publications/commentary/no-enemies-right Statewide California Rent Control: Shooting The Price Messenger https://www.cato.org/blog/statewide-california-rent-control-shooting-price-messenger?utm_source=rss_topic&utm_medium=rss&utm_campaign=rss Ryan Bourne <p>California has approved <a href="https://www.nytimes.com/2019/09/11/business/economy/california-rent-control.html?smtyp=cur&amp;smid=tw-nytimes">a statewide annual rent increase cap</a> of 5 percent plus inflation for rentable accommodation in buildings more than 15 years old. Though technically an “anti-gouging” measure (it expires after 10 years), most would recognize this price cap for what it is: rent control.</p> <p>Economists should be baffled about rent control’s recent revival. Controlling rental prices is one of those rare policies that practitioners of the dismal science <a href="http://www.igmchicago.org/surveys/rent-control">overwhelmingly oppose</a>. It’s even more troubling that it has been introduced in California. <a href="https://www.nber.org/papers/w24181">Recent academic evidence</a> suggests that a 1994 San Francisco ballot initiative to introduce rent control for small multifamily housing built before 1980 actually led to:</p> <ul> <li><span>rent-controlled buildings being almost 10% more likely to convert to a condo or a Tenancy in Common (TIC) than buildings in a control group. </span></li> <li><span>a 15% decline in the number of renters living in these buildings and a 25% reduction in the number of renters living in rent-controlled units, as landlords converted existing accommodation to other uses and demolished old buildings and replaced them with new units outside the controls </span></li> <li><span>a city-wide rent price increase of 5.1%.</span></li> </ul> <p><span>Rent control then had exactly the effects economists would predict. Capping a market price below its equilibrium creates shortages. Many landlords remove rentable accommodation from the market to more profitable uses, or else rebuild accommodation (that is often more expensive) to avoid the charges. The twin effects? Higher market rents and accelerated gentrification, to the detriment of poorer residents.</span></p> <p><span>Now, the urge for policymakers to “do something” on California’s housing problem is understandable. <a href="http://www.demographia.com/dhi.pdf">Demographia’s median multiple calculations</a> (median house price in a market, divided by median household income) shows that California contains 15 of the US’s 28 “severely unaffordable” housing markets – defined as those where the median multiple exceeds 5.1. In Los Angeles, San Jose and Santa Cruz that multiple actually exceeds 9! Homelessness is rife in some of California’s largest cities. The state has the <a href="https://www.census.gov/content/dam/Census/library/publications/2019/demo/p60-268.pdf">highest poverty rate</a> in the country. These problems are all exacerbated by high housing service costs.</span></p> <p><span>But rent control worsens, rather than dealing with, these problems. High and rising rental costs suggest that supply is relatively unresponsive to demand, often due to overly restrictive land use planning and zoning laws. High or rising prices and rents are therefore like a messenger, urging developers to build more houses or apartment buildings.</span></p> <p><span>What rent control amounts to is an attempt to muffle that message and pretend there is no problem. But in capping rents when markets are heating, you reduce the profitability for landlords to rent the accommodation in the first place, worsening the supply problem that’s pushed up rental costs to begin with.</span></p> <p><span>Indeed, as I said when <a href="https://www.cato.org/publications/commentary/statewide-rent-control-will-ultimately-please-nobody">Oregon introduced similar legislation</a>, this new California measure will ultimately please very few people. In areas where tenants face rent increases above earnings but below the cap, rent controls will have no effect. Increases will eat into families’ incomes further, and with affordability worsening, tenant groups are likely, in time, to demand tighter controls.</span></p> <p><span>Yet where market rents really are spiraling, capping them to prevent so-called “economic eviction” (as this measure does) dampens the incentive for developers to bring new supply to market - even more so if they see these measures as a precursor to even tighter controls. </span></p> <p><span>Some tenants, usually the less mobile and those opting not to move, will benefit from lower rents, of course. But the cost is a significantly worsened availability of rentable housing precisely where it is needed most.</span></p> <p><span>The California legislators think they get around this supply-reducing effect by only applying the controls to properties more than 15 years old. But as the San Francisco evidence shows, there’s nothing to stop landlords changing the use of existing properties, or else knocking down older buildings or houses, to then provide new exempted forms of accommodation.</span></p> <p><span>On housing there really is no substitute to liberalizing supply. California lawmakers should stop shooting the rent price messenger, and deliver the more difficult zoning and planning reforms to improve housing affordability more broadly.</span></p> Thu, 12 Sep 2019 14:30:00 -0400 Ryan Bourne https://www.cato.org/blog/statewide-california-rent-control-shooting-price-messenger Veronique de Rugy participates in the event, "Victims of cronyism: Government cannot pick winners without making losers," hosted by AEI https://www.cato.org/multimedia/media-highlights-tv/veronique-de-rugy-participates-event-victims-cronyism-government?utm_source=rss_topic&utm_medium=rss&utm_campaign=rss Wed, 11 Sep 2019 11:07:31 -0400 Veronique de Rugy https://www.cato.org/multimedia/media-highlights-tv/veronique-de-rugy-participates-event-victims-cronyism-government Juan Carlos Hidalgo discusses various topics on NTN24's Club de Prensa https://www.cato.org/multimedia/media-highlights-tv/juan-carlos-hidalgo-discusses-various-topics-ntn24s-club-de-10?utm_source=rss_topic&utm_medium=rss&utm_campaign=rss Tue, 10 Sep 2019 11:11:37 -0400 Juan Carlos Hidalgo https://www.cato.org/multimedia/media-highlights-tv/juan-carlos-hidalgo-discusses-various-topics-ntn24s-club-de-10 Cribsheet: A Data-Driven Guide to Better, More Relaxed Parenting, from Birth to Preschool https://www.cato.org/multimedia/events/cribsheet-data-driven-guide-better-more-relaxed-parenting?utm_source=rss_topic&utm_medium=rss&utm_campaign=rss Emily Oster, Julie Gunlock, Chelsea Follett <p>Economist Emily Oster’s new book,<em>Cribsheet: A Data-Driven Guide to Better, More Relaxed Parenting, from Birth to Preschool</em>, cuts through the alarmist rhetoric and fearmongering that surrounds modern-day parenting with a cool-headed look at the data. Oster’s book argues there is no single optimal set of child-rearing decisions. Rather, she applies economic thinking to help parents evaluate the available choices for themselves. She also shows that many widely held views and official government recommendations for parents are not backed up by evidence. Join us to hear Oster and Julie Gunlock discuss the ”dismal science”, statistical literacy, and how to make parenting decisions in the face of an alarmist parenting culture.</p> Tue, 10 Sep 2019 10:36:20 -0400 Emily Oster, Julie Gunlock, Chelsea Follett https://www.cato.org/multimedia/events/cribsheet-data-driven-guide-better-more-relaxed-parenting Does Price Regulation Affect Competition?: Evidence from Credit Card Solicitations https://www.cato.org/publications/research-briefs-economic-policy/does-price-regulation-affect-competition-evidence?utm_source=rss_topic&utm_medium=rss&utm_campaign=rss Yiwei Dou, Geng Li, Joshua Ronen <div class="lead text-default"> <p>The subprime mortgage crisis of 2008 led to a surge of policy and legislative initiatives in regulating consumer financial products. A number of federal legislations were rolled out, while others meant to protect consumers in household finance markets were under consideration. A notable example of such legislations is the Credit Card Accountability, Responsibility, and Disclosure Act of 2009 (CARD Act). The CARD Act was enacted with the objective of protecting consumers and establishing fair and transparent practices in the credit card market. The CARD Act restricts, among other things, consumer credit card issuers’ ability to increase interest rates on outstanding balances. This restriction prompted the classic concern regarding unintended consequences of hampering competition, since it limits issuers’ feasible pricing space, making credit supply less elastic. We investigate the effect of the CARD Act on issuers’ competition.</p> </div> , <div class="text-default"> <p>Identifying effects on competition is challenging in part because, lacking proper instruments, it is difficult to parse out observed quantity and price changes in equilibrium into supply-and-demand effects. We take advantage of a unique proprietary data set of credit card mail solicitations that presents supply measures helpful for analyzing the dynamics of competition among major credit card issuers. Direct mail marketing has been one of the most important channels through which banks market their credit card products to consumers. Research demonstrates that the information contained in these mail offers can be used to infer the supply of such credit.</p> <p>We focus on the degree to which a credit card issuer reacts to recent changes by its competitors, which we refer to as the competitive responsiveness. The responsiveness of a firm to rivals’ actions has been used to assess competition in other industries. For example, using a similar approach, Maura Doyle and Christopher Snyder examine the motor vehicle industry and find that firms adjust their planned and actual production in response to similar actions of their rivals.</p> <p>We propose an intuitive and theoretically appealing indicator to measure competition in the credit card market — the degree to which a card issuer responds to earlier changes inoffered interest rates of its competitors. If competition in the credit card market weakened, each issuer will dampen its responses to competitors’ changes in offered interest rates.</p> <p>Credit card mail solicitations are infamously complex, typically including dozens of contractual terms, many of which are presented only in the fine print. Our analysis focuses on one particular term in solicitations — the regular purchase interest rate — for three reasons. First, since the CARD Act explicitly restricts increasing interest rates, it most directly affects card issuers’ competition on interest rates. Second, unlike the fine-print terms that consumers may often overlook or ignore (such as international transaction fees), the regular purchase interest rate (often referred to as the “go-to rate”) is one of the top-line terms that the solicitations saliently highlight, and it directly impacts consumers’ borrowing decisions. Third, extant research demonstrates that individual consumers face substantial search and switching costs. This potentially mutes observed manifestations of rate competition in existing credit card accounts. In contrast, changes in offered interest rates in solicitations and reactions to these changes among credit card issuers better capture the dynamics of competition in the industry.</p> <p>When competitors lower offered interest rates, an issuer’s optimal response must balance two countervailing forces. On one hand, if an issuer does not lower its own offered interest rates in response to competitors lowering theirs, it may lose potential customers to competitors. On the other hand, lower average rates slash future interest revenue, at least until repricing the account. Such interest revenue losses tended to be limited prior to the CARD Act, since the card issuers were subject to few restrictions on raising rates on existing accounts. Because the CARD Act limits issuers’ ability to reprice, it also potentially increases revenue losses and thereby increases the cost of mimicking lower rates offered by competitors. We therefore expect an issuer’s responsiveness to its competitors’ changes in offered interest rates (in particular, rate reductions) to become more muted after the implementation of the CARD Act, indicating a decrease in competition.</p> <p>Unobservable factors present a challenge to testing our conjectures that is frequently encountered in policy-evaluation exercises. These factors, rather than the CARD Act, might have contributed to changes in issuers’ responses to competitors’ moves. We circumvent this identification difficulty by using offers of small-business credit cards, which are not subject to the provisions of the CARD Act, as the control group. Specifically, we analyze a sample of consumer and small-business credit card offers during 2001–2016, which enables us to compare the pre– and post–CARD Act responsiveness of issuers between consumer and small-business credit card offers extended in the same county. The data we use allow us to confirm that the recipients of consumer and small-business card offers exhibit similar annual changes in demographic and socioeconomic characteristics, both before and after the implementation of the CARD Act. In addition, we control for an extensive set of offer-recipient characteristics and economic conditions in the local area — all potentially affect the competitive actions of issuers marketing to borrowers in a given county.</p> <p>Our analysis suggests that issuers’ responsiveness to competitors’ changes in consumer card offered interest rates weakened after the CARD Act relative to offers for small-business cards. Before the CARD Act, for each 1 percentage point change in the average interest rate offered by competitors to consumers in the previous year, a card issuer adjusted its own offered interest rates in the current year by about half a percentage point in the same direction. This competitive responsiveness decreased by about 40 percent after the implementation of the CARD Act. We obtain similar results when focusing on counties with both consumer and small-business card offers and when implementing the analysis at the metropolitan statistical area level.</p> <p>We extend our analysis in a number of directions to shed more light on the relationship between the CARD Act and reduced competitive responsiveness. First, we exploit the fact that the CARD Act restricts an increase (but not a decrease) in interest rates of existing accounts, which may lead to different competitive-responsiveness changes with respect to competitors raising versus lowering their offered interest rates. We find that consumer credit card issuers appeared to be reluctant to follow a competitor’s decreases (but not increases) in offered rates.</p> <p>Second, we track the more precise timing of the change in the offered-rate responsiveness and find that the weakening in responsiveness in the consumer market relative to the small-business market did not take place before 2009, suggesting parallel pre–CARD Act trends of interest rate responsiveness to consumer and small-business card offers.</p> <p>Third, we test whether the reduction in the offered-rate responsiveness varies with average credit risk of consumers in a given area, and we find a more pronounced reduction in an issuer’s responsiveness to rivals’ decreases in offered interest rates in counties with a larger share of subprime borrowers.</p> <p>Fourth, we investigate whether the findings are driven by the shift of consumer credit card offers toward different client pools by different issuers. In such a scenario, if the profile of the recipients of an issuer’s offer becomes riskier after the CARD Act, competitive responsiveness would appear to be more subdued; the opposite would be observed if the profile becomes less risky. We track the share of subprime recipients and the average credit scores of recipients to capture changes in offer recipients’ credit quality, and we find no evidence for this alternative explanation.</p> <p>Fifth, we find no decline in competitive responsiveness to major credit card terms (such as reward programs and annual fees) other than the interest rate.</p> <p>Finally, we examine the extent to which weakened competitive responsiveness led to more dispersed interest rates and higher markups in consumer card offers. In comparison to small-business cards, we find that the dispersion in consumer card offered rates and the spread of these rates over a two-year Treasury yield have increased after the CARD Act. The results corroborate the proposition that reduced competition leads to greater price dispersion and higher prices paid by consumers.</p> <p><strong>NOTE:</strong><br />This research brief is based on Yiwei Dou, Geng Li, and Joshua Ronen, “Does Price Regulation Affect Competition? Evidence from Credit Card Solicitations,” Board of Governors of the Federal Reserve System Finance and Economics Discussion Paper no. 2019-018, February 2019, <a href="https://www.federalreserve.gov/econres/feds/files/2019018pap.pdf" target="_blank">https://www.federalreserve.gov/econres/feds/files/2019018pap.pdf</a>.</p> <p><em>The views presented in this research brief are those of the authors and do not necessarily reflect those of the Federal Reserve Board or its staff.</em></p> </div> Wed, 04 Sep 2019 03:00:00 -0400 Yiwei Dou, Geng Li, Joshua Ronen https://www.cato.org/publications/research-briefs-economic-policy/does-price-regulation-affect-competition-evidence A Conservative Evaluation of Conservative Nationalism https://www.cato.org/multimedia/cato-daily-podcast/conservative-evaluation-conservative-nationalism?utm_source=rss_topic&utm_medium=rss&utm_campaign=rss Richard Reinsch, Caleb O. Brown <p>What do conservatives think of the emerging nationalist conservatism that rejects much of recent decades of conservative and libertarian thinking? Richard Reinsch of <em>Law and Liberty</em> gives his assessment.</p> Tue, 03 Sep 2019 17:40:00 -0400 Richard Reinsch, Caleb O. Brown https://www.cato.org/multimedia/cato-daily-podcast/conservative-evaluation-conservative-nationalism Grace Blakeley’s Stolen Is a Tired Invective against Market Capitalism https://www.cato.org/publications/commentary/grace-blakeleys-stolen-tired-invective-against-market-capitalism?utm_source=rss_topic&utm_medium=rss&utm_campaign=rss Diego Zuluaga <div class="lead text-default"> <p>It is safe to assume that most books bearing the term “financialisation” in the title are not mainly about finance. Grace Blakeley’s <em><a href="https://www.amazon.co.uk/Stolen-How-Save-World-Financialisation/dp/1912248379">Stolen: How to Save the World from Financialisation</a></em> is no exception.</p> </div> , <div class="text-default"> <p>Blakeley’s book, her first, is a sweeping polemic against the market economy. A researcher at the UK’s Institute for Public Policy Research (IPPR), she has recently emerged as a forceful advocate for the “democratic socialism” associated with  both Jeremy Corbyn and Bernie Sanders in the US. Unlike these white-haired icons of the post-Soviet Left, however, Blakeley is a millennial, which furnishes her advocacy with a sense of the zeitgeist that they lack.</p> <p>But <em>Stolen</em> is not a good book. Its invective against capitalism cherry-picks the evidence and disregards the <a href="https://ourworldindata.org/economic-growth#gdp-growth-since-1950" rel="noopener" target="_blank">dramatic economic growth</a> of non-Western countries, home to 80% of the world’s population, since 1980. Furthermore, the book’s case for a state takeover of most capital allocation in the economy takes no account of the <a href="http://conversableeconomist.blogspot.com/2012/07/russian-economic-inefficiency.html" rel="noopener" target="_blank">gross mismanagement</a>, <a href="https://thediplomat.com/2014/10/how-the-soviet-union-created-central-asias-worst-environmental-disaster/" rel="noopener" target="_blank">environmental degradation</a>, and <a href="https://www.wsj.com/articles/100-years-of-communismand-100-million-dead-1510011810" rel="noopener" target="_blank">human suffering</a> associated with twentieth-century experiments with socialism, to which contemporary Venezuela is a particularly tragic sequel.</p> <p></p> </div> , <aside class="aside--right aside pb-lg-0 pt-lg-2"> <div class="pullquote pullquote--default"> <div class="pullquote__content h2"> <p>A star of the millennial left has some thoughts on capitalism — prepare to be unconvinced.</p> </div> </div> </aside> , <div class="text-default"> <p>Like other critics of the free market, Blakeley opposes “neoliberalism.” Unlike many of those critics, she offers a definition of sorts: neoliberalism is the process of globalisation that has accelerated since the collapse in 1971 of the Bretton Woods system of global monetary and financial regulations. Blakeley’s target is economic freedom in general, and capital mobility in particular. Why? Because “capital mobility ... gives those who own it veto power”.</p> <p>Capital mobility means savers can shield some of their assets from policies they believe would harm them. Blakeley resents this material counterpart of people’s ability to vote with their feet, which the French — for example — exercised when newly-elected President Mitterrand launched a <a href="https://www.nytimes.com/1982/02/15/world/france-begins-8-billion-takeover-of-private-industry-and-banking.html">major expansion</a> of the government’s role in the economy in the early 1980s. Blakeley blames “bond vigilantes” for the ensuing mass exodus out of French assets and Mitterrand’s eventual U-turn. But the sorry experience of similar programs of nationalisation and controls elsewhere, including across the English Channel, offers grounds for doubt that Mitterrand’s original plan could have succeeded. Investors certainly thought so.</p> <p><em>Stolen</em> is not the place to look for novel arguments against the free market. Instead, the reader will encounter familiar allegations such as the market’s promotion of income and wealth inequality, the short-term orientation of corporate shareholders, and their supposed inability to allocate funds for productive investment. Those unpersuaded by <a href="https://iea.org.uk/wp-content/uploads/2018/02/Socially-Useless-f1-web.pdf" rel="noopener" target="_blank">evidence</a> to the <a href="https://researchbriefings.parliament.uk/ResearchBriefing/Summary/CBP-7484" rel="noopener" target="_blank">contrary</a> will find their views confirmed. For the rest, <em>Stolen</em> will likely not prompt a Damascene conversion.</p> <p>The book abounds in assertions that will surprise the reader trained in economics. Blakeley tells us that “it is a fairly respected law of investing that the more capital you have ... the higher your returns,” when every standard model of production assumes that marginal returns <a href="https://democracyjournal.org/magazine/33/the-inequality-puzzle/" rel="noopener" target="_blank">decline</a> as one adds capital. Some hedge funds that cater to the rich may post higher returns than retail asset managers, but their superior performance, which is <a href="https://www.theatlas.com/charts/ByYxH-w8f" rel="noopener" target="_blank">rarely consistent</a> and <a href="https://www.investopedia.com/articles/investing/030916/buffetts-bet-hedge-funds-year-eight-brka-brkb.asp" rel="noopener" target="_blank">never certain</a>, comes at <a href="https://www.institutionalinvestor.com/article/b1g6gx17wdmbs3/Hedge-Funds-Still-Winning-the-Fee-Battle-With-Investors" rel="noopener" target="_blank">much higher fees</a> and usually at greater risk. Even Warren Buffett, a six-decade stock-picking outlier, has <a href="https://www.investopedia.com/articles/stocks/08/buffet-investing.asp" rel="noopener" target="_blank">found it harder</a> to outperform the market as his pool of capital has grown.</p> <p>Blakeley denigrates the “big tech monopolies,” which allegedly do not invest but rather grow “by merging or acquiring other firms.” Yet, in the first six months of 2019, Google’s parent company Alphabet <a href="https://abc.xyz/investor/static/pdf/20190725_alphabet_10Q.pdf?cache=6a9f26d">spent $12.2 billion</a> on research and development – 16 percent of gross revenue for the period. Even if Blakeley’s statement were true, are mergers and acquisitions not a form of investment? Am I not investing when I acquire shares in a public firm?</p> <p><em>Stolen</em> displays numerous instances of such incomplete reasoning. Share buybacks are “money that [isn’t] going to workers or being invested in future production.” So, where does the money go? Not to spending, it seems: Blakeley writes of a structural “demand deficit”, yet the proceeds from investment can either be spent or re-invested, within the same firm or in another venture. They cannot just vanish.</p> <p>The book gives a quaint interpretation of the financial crisis. While much of the world emerged sluggishly from the 2008 meltdown, “it was China that saved the day” with a stimulus program that has “supported high growth rates in China and its major trading partners ever since”, This contradicts the <a href="https://www.ft.com/content/0c7ecae2-8cfb-11e8-bb8f-a6a2f7bca546" rel="noopener" target="_blank">consensus</a> among China-watchers, who view the post-2008 growth spurt as short-lived and driven by <a href="https://www.ft.com/content/002a1978-7629-11e4-9761-00144feabdc0" rel="noopener" target="_blank">inefficient investments</a>. Perhaps more tellingly, the 40-year process of liberalisation that has <a href="https://qz.com/1498654/the-astonishing-impact-of-chinas-1978-reforms-in-charts/" rel="noopener" target="_blank">transformed</a> the Chinese economy, arguably the most notable example of “neoliberalism” at work, has no place in <em>Stolen</em>. The critical reader will leave the book with the impression that its goal is not to inform but to propagandise.</p> <p>There are also glaring contradictions. The owners of financial capital form “a parasitic rentier class”, but investment markets are inevitably unpredictable because of uncertain expectations. Perhaps, then, returns on invested capital do not simply amount to “financial extractivism” but are rather the reward for exposing oneself to an uncertain future? Blakeley has no time for that possibility.</p> <p>Indeed, both Blakeley and Shadow Chancellor John McDonnell overlook uncertainty when they advocate more stock-based compensation for workers: The typical worker is risk-averse and always prefers cash to stocks, because cash compensation is immediate and can buy anything (including stocks), whereas stock-based compensation is subject to deferral and potentially large changes in value.</p> <p><em>Stolen</em>’s policy recommendations, which include massive consumer debt forgiveness, a public option for retail banking that would invest in “socially desirable” projects, mandatory collective bargaining, and a state-owned investment bank that would pay for the UK’s version of the Green New Deal, are radical but standard fare for a “democratic socialist” pamphlet. It is worth noting, however, that her exposition of each in the last chapter is entirely devoid of cost estimates.</p> <p>More original is Blakeley’s call for an asset price inflation target for the Bank of England. But the reason no-one else has proposed such a target before is probably that it would be difficult to implement and could undermine macroeconomic stability. If the policy target were house prices, as Blakeley has <a href="https://www.ippr.org/research/publications/on-borrowed-time" rel="noopener" target="_blank">previously advocated</a>, how could the Bank effectively respond to non-financial variables such as population growth and land-use restrictions? Were all assets to form the target, how could Bank policy be predictable if expected to counteract the fundamentally unpredictable short-term fluctuations of stock and bond prices?</p> <p>In <em>Stolen</em>, Blakeley sets out to expose the supposed failure of “finance-led growth,” the system of largely free trade and open capital markets that emerged from the mid-1970s. But her critique rests on evidence-free straw man arguments that will not persuade the educated layman, let alone any experts. This book may galvanise the vociferous minority of socialists in Britain and abroad — but it is unlikely to convert anyone else.</p> </div> Mon, 02 Sep 2019 11:26:00 -0400 Diego Zuluaga https://www.cato.org/publications/commentary/grace-blakeleys-stolen-tired-invective-against-market-capitalism What Jack Ma and John Maynard Keynes Get Wrong about Human Progress https://www.cato.org/publications/commentary/what-jack-ma-john-maynard-keynes-get-wrong-about-human-progress?utm_source=rss_topic&utm_medium=rss&utm_campaign=rss Ryan Bourne <div class="lead text-default"> <p>British economist John Maynard Keynes once said that “[p}ractical men who believe themselves quite exempt from any intellectual influence, are usually the slaves of some defunct economist.” It’s unclear whether Chinese tech billionaire Jack Ma is a Keynes disciple, or considers himself immune to economists’ musings. But in forecasting that technology and automation might deliver a 12-hour working week, Ma certainly echoes Keynesian thinking about economic progress.</p> </div> , <div class="text-default"> <p>Sharing a stage with U.S. entrepreneur Elon Musk in Shanghai, Alibaba founder Ma <a href="https://www.washingtonpost.com/world/asia_pacific/jack-ma-proponent-of-12-hour-work-days-foresees-12-hour-workweeks/2019/08/29/fd081370-ca2a-11e9-9615-8f1a32962e04_story.html" target="_blank">this week predicted</a> that artificial intelligence and automation will deliver unheard of gains to productivity. Offering an upbeat story of its effects, he suggested that producing more with fewer workers will reduce the desirable working time to just “three days a week, four hours a day.” Instead, we will be able to spend extra time enjoying “being human beings” and going to “karaoke in the evening.”</p> <p>In a 1930 essay entitled “Economic Possibilities for our Grandchildren,” Keynes made a similar prediction. Within a century, he believed we’d be four to eight times as rich. Such would be the technological advances in production driving more output with less labor input, our economic needs could be fulfilled by just working “three-hour shifts or a fifteen-hour week.” Even working that long would be reflective of our natural human desire to stay occupied, rather than out of necessity. Keynes even mused that people would have more time to sing too!</p> <p>As we contemplate the long hours we’ll spend at our desks this next week, it’s easy, in retrospect, to dismiss Keynes’ musing as a flight of fancy. But in fact, a lot of what he wrote was prescient. What he got wrong should make us think skeptically about Ma’s musings of what it means to be human.</p> <p>Keynes’ forecast of our prosperity boom was unnervingly accurate. With a decade to go, the U.S. is already <a href="https://www.multpl.com/us-real-gdp-per-capita" target="_blank">six times as rich</a> in real GDP per capita terms as on the eve of 1930.</p> <p>Improvements in the technology of domestic appliances has meant that traditional “household work” — the basics of laundry, cooking, and cleaning — have fallen time-wise from being a near full-time occupation (38 hours) in 1930 to just <a href="https://ourworldindata.org/working-hours" target="_blank">15 hours in 2015</a>. If Keynes’ prediction had been about chores, he hit the bullseye.</p> <p>What he got wrong was what technology and innovation would mean for paid working hours. Yes, full-time production workers’ average hours have fallen from <a href="https://ourworldindata.org/working-hours" target="_blank">48 hours to 40 hours</a> since 1930. Productivity improvements, in other words, delivered <a href="https://humanprogress.org/dwline?p=706&amp;yf=1950&amp;yl=2017&amp;high=0&amp;reg=3&amp;reg1=0" target="_blank">a whole extra day off</a>, as we saw the birth of the modern weekend. As a result of more part-time and flexible work, an average employed person’s working hours have fallen from 38 hours per week in 1950 to <a href="https://ourworldindata.org/working-hours" target="_blank">34 hours per week in 2014 too</a>. Yet we are clearly nowhere near the 15-hour work week he projected.</p> <p>Keynes severely underestimated that, when free to choose, most of us seek further material advancement and betterment, and value the inherent dignity that comes from productive labor in the service of others. As progress raises wages, the opportunity cost of leisure rises. Faced with this trade-off, we still maintain substantial hours of employment.</p> <p>This search for greater material well-being is not some moral failing, as Keynes implied. In fact, it’s precisely this yearning for a better life that has driven progress in the past 250 years. Most people are not content with modestly rising living standards driven by technological improvements producing slightly more with fewer and fewer workers, allowing us to “have fun.” They want to enjoy the best goods, services and experiences possible for their families. They want to feel the dignity of their services being needed. They want to see their living standards propelled.</p> <p>If predictions about automation are correct, then the next 30 years could well see rapid improvements in technology, as Ma implies. Service sector employment could be revolutionized, with lots of tasks currently undertaken by lawyers or doctors ripe for automation or being replaced with artificial intelligence or robotics. This will make us rich, and disrupt established occupations and work patterns. From a policy perspective, that will bring demands for jobs to be protected and innovations restrained. Predictions of “mass worklessness” will feed calls for huge social programs too, whether universal basic income us or government project jobs to give people meaningful purpose.</p> <p>But the past century shows we shouldn’t fear technological change, nor presume its labor market effects will have vast destructive social consequences or change who we are. As the opportunity for leisure time and greater comfort has risen, we’ve maintained our desire for betterment and meaningful labor. That shows there’s no discrepancy between employment and “being human beings.” Striving and toiling is part of who we are.</p> <p>Contra Ma and Keynes, then, I doubt increased productivity will result in mass karaoke singing. We will enjoy more comfort and the option of more family and leisure time, yes. But the recent past suggests that workers will shift into jobs delivering new entrepreneurial pursuits, into meaningful vocational activities, and new jobs where human contact and effort are highly prized by further enriched customers.</p> </div> Sun, 01 Sep 2019 12:47:00 -0400 Ryan Bourne https://www.cato.org/publications/commentary/what-jack-ma-john-maynard-keynes-get-wrong-about-human-progress Cato Institute event, Socialism Sucks, airs on C-SPAN 2 https://www.cato.org/multimedia/media-highlights-tv/cato-institute-event-socialism-sucks-airs-c-span-2?utm_source=rss_topic&utm_medium=rss&utm_campaign=rss Sun, 01 Sep 2019 11:04:00 -0400 Ian Vásquez, Matthew B. Kibbe, Benjamin Powell https://www.cato.org/multimedia/media-highlights-tv/cato-institute-event-socialism-sucks-airs-c-span-2 Martin Krause discusses populism at the Fundación para el Progreso https://www.cato.org/multimedia/media-highlights-tv/martin-krause-discusses-populism-fundacion-para-el-progreso?utm_source=rss_topic&utm_medium=rss&utm_campaign=rss Sun, 01 Sep 2019 11:01:00 -0400 Martin Krause https://www.cato.org/multimedia/media-highlights-tv/martin-krause-discusses-populism-fundacion-para-el-progreso Ben Powell on Socialism Sucks: Two Economists Drink their Way through the Unfree World https://www.cato.org/multimedia/cato-audio/ben-powell-socialism-sucks-two-economists-drink-their-way-through-unfree-world?utm_source=rss_topic&utm_medium=rss&utm_campaign=rss Sun, 01 Sep 2019 03:00:00 -0400 Benjamin Powell https://www.cato.org/multimedia/cato-audio/ben-powell-socialism-sucks-two-economists-drink-their-way-through-unfree-world Jonathan Blanks discusses his article, “The 1619 Project: Confronting the Legacies of American Slavery,” on Virginia Institute for Public Policy’s Freedom and Prosperity Radio with Joe Thomas https://www.cato.org/multimedia/media-highlights-radio/jonathan-blanks-discusses-article-1619-project-confronting?utm_source=rss_topic&utm_medium=rss&utm_campaign=rss Wed, 28 Aug 2019 10:14:00 -0400 Jonathan Blanks https://www.cato.org/multimedia/media-highlights-radio/jonathan-blanks-discusses-article-1619-project-confronting Rise of Bank Competition: Evidence from Banking Deregulation in China https://www.cato.org/publications/research-briefs-economic-policy/rise-bank-competition-evidence-banking-deregulation?utm_source=rss_topic&utm_medium=rss&utm_campaign=rss Haoyu Gao, Hong Ru, Robert Townsend, Xiaoguang Yang <div class="lead text-default"> <p>Banks are the most important financial intermediaries in many countries and play an essential role in economic growth. Banking sectors are often heavily regulated around the globe, and a central question is whether banking deregulation and the subsequent increased competition are desirable. Increased bank competition may be beneficial to borrowers by lowering borrowing costs but can also have negative consequences, such as increased risk taking and decreased efforts in information collection. Previous studies have shown mixed evidence on the aggregate effects of increased competition in the banking sector.</p> </div> , <div class="text-default"> <p>We use individual loan-level data to separate the costs and benefits of increased bank competition in China, the largest bank loan market worldwide. We find that following a deregulation in the form of geographically lowered bank entry barriers, banks entering into deregulated cities increased lending amounts significantly, as anticipated. But the impact was filtered through and altered by the local industrial organization of banks, and the potential benefits were mitigated adversely by a preference for lending to state-owned enterprises (SOEs) over more-productive private firms. In particular, the soft budget constraint of SOEs, with implicit government guarantees, makes new entrant banks prefer inefficient SOEs to contemporaneously opaque local private firms. That is, for private firms that did get funding, the entrant banks required more guarantees and higher internal loan ratings as indicators of quality. In the long run, entrant banks learned the characteristics of local private firms and lent more to them, but in some sense that we try to make precise, the quite sizable amount of money lent to SOEs in new markets was “lost.” Besides this loss, there were beneficial immediate impacts. The on-lending interest rates in deregulated cities decreased significantly following deregulation, and the private firms that received such credit achieved yet higher levels of growth and profitability. We describe this as a novel tradeoff of banking deregulation and in turn contribute to the ongoing debate.</p> <p>We study the impacts of the 2009 partial bank entry deregulation on bank competition and consequent economic activities. Five large state-owned commercial banks have dominated China’s banking system, with 51,557 branches covering 85 percent of the country. Twelve joint equity banks were suppressed severely in regard to competition, with only 4,161 branches covering 9 percent of the country in 2008. Before 2009, the China Banking Regulatory Commission (CBRC) restricted joint equity banks’ expansion by allowing such banks to open only one branch in one city at a time. In April 2009, the CBRC partially lifted this barrier and allowed joint equity banks to open branches freely in cities where they already had branches. Joint equity banks were also allowed to enter all cities in a province when they operated branches in the province’s capital city.</p> <p>This deregulation offers an opportunity to analyze competition and economic outcomes before and after the relaxation of entry barriers. In particular, banks in cities in which no equity banks have been allowed to expand are mostly immune to the deregulation shock and can serve as the control group. We identify and quantify the impacts of how joint equity banks compete, how “big five” banks respond, and how firms react across cities with different ex ante competition levels.</p> <p>Our primary data are from the CBRC, which records detailed loan-level information on the 17 largest commercial banks in China for 2006–2013. The loan-level data cover all borrowers with an annual credit line of more than RMB 50 million (approximately USD $8 million), which represent approximately 80 percent of the total bank loan market in China. The data allow us to trace out each loan that a firm borrowed and to study how firms react to deregulation in terms of their investment, employment, performance, and profitability trends.</p> <p>We first document how joint equity banks expand and compete with big-five banks. Joint equity banks have been growing substantially since the 2009 deregulation. Their market share increased from 24.5 percent in 2008 to 33.5 percent in 2010. The percentage of cities covered by joint equity banks increased from 9.5 percent in 2008 to 15.7 percent in 2010, while big-five banks increased their coverage by only 2 percent over the same period. When joint equity banks enter, expansion is mainly to existing borrowers; 88 percent of the loans of entrant banks go to firms that have been borrowing from incumbent banks. On the other hand, the 2009 deregulation has had insignificant effects on deposits. This is mainly due to the deposit interest rate cap imposed by the Chinese government. New entrant banks must offer the same interest rate to depositors as incumbent banks.</p> <p>Second, we study how deregulation affects loan contract terms and loan performance. Our analysis shows that the 2009 deregulation led to significantly lower interest rates, better internal loan ratings, more third-party guarantees, and lower default rates for joint equity bank loans in deregulated cities. These effects are mainly observed for private firms rather than for SOEs. In particular, the 2009 deregulation led to a 6.6 percent decrease in the interest rates of private firms but had no significant effects on SOEs’ borrowing costs. Deregulation also led to stronger screening standards applied by new entrant joint equity banks and, consequently, to a 77.7 percent decrease in the default rates of private-firm loans, while the default rates of SOEs did not change significantly. </p><p>Third, we explore the effects of the 2009 deregulation on firm activities. We restrict our sample to firms that have borrowed from banks, because such firms should be affected directly by loan contract term changes caused by deregulation. We find that the 2009 deregulation led to increases in growth rates of both fixed assets and the number of employees by 21.3 percent and 8.1 percent, respectively. In addition, deregulation also led to increases in firms’ net income growth and return on assets by 44.0 percent and 1.8 percent, respectively. The positive effects of deregulation on borrowers are more pronounced in cities with higher market concentration ex ante or in cities in which new entrant joint equity banks have greater total assets. Thus, deregulation was more effective in previously less-competitive areas or when entrant banks were more powerful.</p> <p>Next, we explore the negative consequences of deregulation. SOEs in China, similar to those in many other countries, are much less efficient than private firms and distort credit allocation. After the 2009 deregulation, joint equity banks made even more loans to SOEs. In particular, our analysis shows that SOE loans outstanding and shares of SOE loans made in deregulated cities increased by 39.3 percent and 5.3 percent, respectively. This pattern weakens in the two-year window following deregulation (i.e., 33.5 percent and 4.5 percent increases in SOE loan amounts and shares, respectively) and becomes insignificant in the three-year window. This suggests that although the distortion is large, it is short term (i.e., within two years). Among SOEs, joint equity bank branches in deregulated cities lent significantly more to less-efficient ones with lower productivity, which further distorted credit allocation. These less-efficient SOEs have greater assets on average and rank higher in the political hierarchy (e.g., central-government SOEs), which equips them with softer budget constraints (i.e., stronger implicit government guarantees).</p> <p>The distortion to SOEs requires elaboration, and we gain additional insights from the data to which we have access. On the one hand, it is well documented that SOEs enjoy soft budget constraint with explicit or implicit government guarantees. Moreover, we find that less-efficient SOEs have greater assets on average and rank higher in the political hierarchy (e.g., central-government SOEs), which equips them with softer budget constraints (i.e., stronger implicit government guarantees). On the other hand, new entrant joint equity banks typically lack sufficient information on local borrowers, especially for those contemporaneously opaque local private firms, and tend to reduce what would be credit risks in the short run by lending to SOEs with that soft budget constraint. Consistently, we find that when these entrant banks accumulate more information on local firms, they start to increase lending to more productive ones in the long run (e.g., in three years). To further support this hypothesis, we use the monthly internal ratings of each loan in the sample to measure banks’ information on borrowers — that is, banks’ ability to downgrade the internal loan ratings before delinquency. We find that banks can predict approximately 22.6 percent of the delinquency events within two years after branch opening, while this ratio increases to 42.3 percent after the third year, suggesting that new entrant banks indeed lack sufficient information on local borrowers at the beginning but accumulate more information over time.</p> <p>In addition to entrant joint equity banks’ preferences for SOEs with soft budget constraints, incumbent big-five banks did not alter their lending to SOEs significantly after deregulation. Consequently, more credit flowed to SOEs following deregulation. Because we find that private firms can benefit from deregulation significantly more than SOEs can in terms of growth and profitability, credit should have been granted to more-productive private firms.</p> <p>These results emphasize the potential unintended adverse consequences of banking deregulation in China. Deregulation improved firm growth and profitability for individual private firms with bank credit access, especially in previously less-competitive banking areas. However, the worsening of credit allocation to inefficient SOEs undermined the positive effects of deregulation. Performing back-of-the-envelope calculations, we find that the total amount of credit misallocation to SOEs following the deregulation is approximately RMB 684 billion, equivalent to 2 percent of China’s GDP in 2008.</p> <p>This unintended adverse consequence has broad implications beyond China. The core of the first and second welfare theorems is that market competition can be beneficial, while under the theory of second best, this might not be the case with market frictions. Fixing one friction (e.g., bank entry restrictions) can introduce unintended adverse effects arising from other frictions (e.g., the soft budget constraints of SOEs). These results suggest that policymakers should consider the interaction of different frictions in reform policies. Governments should optimally sequence reforms to minimize risks and maximize benefits.</p> <p><strong>NOTE:</strong><br />This research brief is based on Haoyu Gao, Hong Ru, Robert Townsend, and Xiaoguang Yang, “Rise of Bank Competition: Evidence from Banking Deregulation in China,” NBER Working Paper no. 25795, May 2019, <a href="http://www.nber.org/papers/w25795" target="_blank">http://www.nber.org/papers/w25795</a>.</p> </div> Wed, 28 Aug 2019 03:00:00 -0400 Haoyu Gao, Hong Ru, Robert Townsend, Xiaoguang Yang https://www.cato.org/publications/research-briefs-economic-policy/rise-bank-competition-evidence-banking-deregulation Pro-Market Chinese Think Tank to Close https://www.cato.org/blog/pro-market-chinese-think-tank-close?utm_source=rss_topic&utm_medium=rss&utm_campaign=rss Jeffrey Miron <p>I was sad to read this <a href="https://www.wsj.com/articles/china-finally-snuffs-out-a-beacon-of-liberal-thought-and-democracy-11566886519?mod=hp_lista_pos2">news</a>:&#13;<br /> &#13;</p> <blockquote><p>BEIJING—An independent Chinese think tank that has served as a rare bastion for liberal economic thought will shut down, citing government pressure as President Xi Jinping ’s campaign to silence dissent rolls on.</p> </blockquote> <p>This is bad for China and bad for the world.&#13;<br /> &#13;<br /> I feel a particular connection to Unirule because, at Tom Palmer's suggestion, I once nominated Mao Yushi -- one of Unirule's founders, and a Cato Friedman prize recipient -- to receive an honorary degree from Harvard. So far, the committee has not selected him.&#13;<br /> &#13;<br /> Here is that nomination statement (which, true confessions, Tom wrote):&#13;<br /> &#13;</p> <blockquote><p>Nomination Mao Yushi&#13;<br /> &#13;<br /><strong>Areas of Expertise</strong>&#13;<br /> &#13;<br /> Mao Yushi was originally trained in railroad engineering and developed an interest in the economics of markets in socialist China.  He was punished in the 1950s for suggesting that if there is no pork for sale, the price should be allowed to rise.  His support for rational economic policies did not waver and he was punished severely during the various waves of economic chaos and repression.  In 1981 when working at the China Academy of Railway Sciences he published a paper on the foundations of optimal resource allocation, which laid a mathematical foundation for the use of prices to allocate scarce resources among competing uses. That led to greater work and efforts to institute economic reforms based on sound economics.  To continue that work, in 1993 he co-founded Unirule Economic Research Institute, which has since published many papers on the Chinese economy, including such sensitive subjects as the reliability of economic data from the government and the unprofitability, when calculating implicit subsidies, of the large state owned enterprises.  In addition to pioneering the science of applied economics in China, he has been one of China’s most effective public educators and his book <em>Economics in Everyday Life</em> became a major bestseller in China. He tirelessly explains and applies the fundamental insights of economics to everyday life.&#13;<br /> &#13;<br /><strong>Suggested one-sentence degree citation</strong>&#13;<br /> &#13;<br /> This degree has been awarded in recognition of Mao Yushi’s contributions to the economics of resource allocation and his pioneering role in applying economic science to illuminate and guide the transition from central planning to market allocation.&#13;<br /> &#13;<br /><strong>An impartial summary of the nominee’s accomplishments</strong>&#13;<br /> &#13;<br /> Mao Yushi is widely considered one of the most important figures in the development of modern China. His own writings played an important role, but his establishment of a number of institutions has had far reaching impact.  In 1993 he co-founded the Unirule Economic Research Institute, which has transformed economic discourse in China and published a vast array of detailed studies on economic transformation, municipal finance, trade policy, state subsidized industries, and many other topics. He has also pioneered non-state charitable and mutual aid practices in China, including his work co-establishing the Fuping Development Institute, which helps mainly rural and inland Chinese people to acquire skills and training to succeed economically and transform the more remote provinces of China. His work establishing and promoting those institutions led to many others that have proliferated across China.  More recently Mao established the Society for Humanistic Economics to spread public education about economics and to promote an open and tolerant society. His widely read essays frequently combine universal economic principles with well known Chinese cultural themes to explain the importance of the prices, economic residuals, and non-tuistic economic behavior.&#13;<br /> &#13;<br /> Mao has made a mark on China as an outspoken advocate of intellectual openness. He was an early signer of the Charter 08. Liu Xiabo, who was imprisoned for his role in Charter 08 and later received the Nobel Peace Prize in 2010, wrote of Mao, his “bravery is worthy of our respect.” He was named one of China’s 50 most distinguished citizens by Southern People’s Weekly in 2004 and is widely considered one of the most influential living intellectuals in China. In 2012 he was awarded the Milton Friedman Prize for Advancing Freedom by the Cato Institute. His essay “Returning Mao Zedong to Human Form” was published in the influential journal <em>Caixing</em> and set off a major debate in China about Mao’s legacy. It was taken down and later published in a shorter version in the <em>Wall Street Journal</em>. He is known for his public criticism of what he calls “privilege rights” and his insistence that a just and prosperous society requires a strong foundation of legal equality and the rule of law.</p> </blockquote> <p>I will nudge the honorary degree committee to consider Mao Yushi again!</p> Tue, 27 Aug 2019 11:49:00 -0400 Jeffrey Miron https://www.cato.org/blog/pro-market-chinese-think-tank-close Ilya Shapiro participates in the event, “The Rise of the Administrative State,” hosted by the Steamboat Institute’s 11th Annual Freedom Conference & Festival https://www.cato.org/multimedia/media-highlights-tv/ilya-shapiro-participates-event-rise-administrative-state-hosted?utm_source=rss_topic&utm_medium=rss&utm_campaign=rss Sun, 25 Aug 2019 10:12:00 -0400 Ilya Shapiro https://www.cato.org/multimedia/media-highlights-tv/ilya-shapiro-participates-event-rise-administrative-state-hosted Remembering David Koch https://www.cato.org/blog/remembering-david-koch?utm_source=rss_topic&utm_medium=rss&utm_campaign=rss Robert A. Levy, Peter Goettler <p>The directors and staff of the Cato Institute, and indeed friends of liberty throughout the world, are saddened by the passing of David Koch.&#13;<br /> &#13;<br /> David’s accomplishments as a businessman and philanthropist are estimable. But we most remember and admire him for his efforts to advance liberty in the United States and around the world, and his steadfast dedication to libertarian principles.&#13;<br /> &#13;<br /> David is a director emeritus of Cato, having joined our board of directors in 1986 and serving for nearly 30 years. Over this time, the Institute, the Cato community, and our work benefited greatly from his service, insight, generosity, and example. We will not forget the many ways in which he contributed to our mission.&#13;<br /> &#13;<br /> Because the quality of our civil discourse has deteriorated in recent years, David’s dedication to our principles often earned him unfair criticism and excoriation in the public arena. But like us, he was motivated by a firm belief that liberty is the means to human flourishing, through which every individual is able to live a prosperous, meaningful life in a country and world at peace. He also believed strongly that the rights granted to us by nature and protected by the Constitution cannot be denied to any American for any reason. That he bore such unwarranted public criticism with dignity, and that it did not deter him from his work in advancing freedom, merits great respect from all of us.&#13;<br /> &#13;<br /> We have no doubt that David’s partnership will be missed by so many of the causes to which he dedicated himself, not least of which is the cause of liberty. But of course, he will be missed most of all by his family, to whom we extend our heartfelt sympathy and to whom we turn our thoughts at this difficult time.&#13;<br /> &#13;</p> <table> <tbody> <tr> <td>Robert A. Levy&#13;<br /> Chairman of the Board of Directors&#13;<br /> Cato Institute</td> <td>Peter N. Goettler&#13;<br /> President and Chief Executive Officer&#13;<br /> Cato Institute</td> </p> </tr> </tbody> </table> Fri, 23 Aug 2019 15:01:00 -0400 Robert A. Levy, Peter Goettler https://www.cato.org/blog/remembering-david-koch Ilya Shapiro discusses several topics on KOA's The Mandy Connell Show https://www.cato.org/multimedia/media-highlights-radio/ilya-shapiro-discusses-several-topics-koas-mandy-connell-show?utm_source=rss_topic&utm_medium=rss&utm_campaign=rss Fri, 23 Aug 2019 12:03:00 -0400 Ilya Shapiro https://www.cato.org/multimedia/media-highlights-radio/ilya-shapiro-discusses-several-topics-koas-mandy-connell-show A Bigger Welfare State Makes the Wealth Inequality Labour Bemoans Worse https://www.cato.org/publications/commentary/bigger-welfare-state-makes-wealth-inequality-labour-bemoans-worse?utm_source=rss_topic&utm_medium=rss&utm_campaign=rss Ryan Bourne <div class="lead text-default"> <p>In a speech in Corby this week, Jeremy Corbyn made reducing inequality central to his pitch to be the next prime minister. Certain polling emboldens the Labour leader. When asked in the abstract, the UK public expresses strong concern about the gap between rich and poor.</p> </div> , <div class="text-default"> <p>Brexit, the NHS and now crime, remain more important concerns. But US evidence during the last crash suggests inequality rises in the public consciousness in a weakening economy. It spiked here last year too when the economy slowed. A messy Brexit or the threat of Corbyn’s agenda slowing growth further could produce fertile ground for egalitarian sentiment in a coming election.</p> <p>A reawakening of this age-old debate though provides opportunity to highlight inconvenient truths for the Left about the trends and causes of inequality. Contra claims it’s spiralling out of control, <a href="https://www.telegraph.co.uk/business/2019/02/26/income-inequality-grew-last-year-poorest-hit-benefits-cut/" target="_blank">UK income inequality has been pretty much unchanged for a quarter of a century</a>. Wealth inequality — an aggregated measure comprising physical, financial, housing and private pension wealth– has risen somewhat over longer periods, but likewise has been near-flat for at least a decade.</p> <p>Labour retorts that both are still too high. Wealth inequality is the bugbear de jour, being (as it always is given the life cycle) more unequally distributed than income. Scary-sounding data from the Office for National Statistics (ONS) suggest the richest 10pc of Britons hold 44pc of aggregate private wealth, while the bottom 10pc own nothing. In Corbyn’s world, this justifies more “Robin Hood policies” that take from the rich and spend on the poor.</p> <p>Yet there’s another unhelpful observation you won’t find Corbyn and Co admitting. Heaps of evidence around the world shows the sort of big welfare state he favours actually widens the same wealth inequality measures he deems obscene.</p> <p>How can “progressive” programmes make countries more unequal? Quite simply, taxpayer-funded state pensions, health and social care spending, housing subsidies, unemployment benefits and subsidised student loans, all reduce our need to save or build up personal financial assets. Broad-based higher taxes to finance them also reduce the means for ordinary households to save and invest for themselves. Across time and countries, these government programmes and transfers have therefore crowded out private savings disproportionately for those of modest means.</p> <p>Unlike private wealth, the resources for government programmes are not heritable either. Contrary to popular belief, inheritance tends to be wealth-equalizing. While the wealthy can save and invest in business and financial assets to pass on to their heirs, a big welfare state means poorer households have less need or means for saving, and less often see unexpected windfalls. The welfare state thus widens wealth inequality, and Corbyn’s plans to expand it further would exacerbate this effect.</p> <p>That’s why Scandinavian economies, <a href="https://www.telegraph.co.uk/business/2018/07/26/inequality-falls-low-earners-wage-growth-outstrips-rich/" target="_blank">despite low income inequality</a>, have wide wealth distributions. Denmark is held up by Corbynistas as a country to emulate on social spending. Yet consider some striking OECD statistics: the bottom 60pc of Danish households have negative net wealth (ie combined, are in debt), while the top 10pc hold 64pc of all wealth. The figures for the UK under these calculations (different from the ONS) are 12.1pc and 52.5pc wealth shares for the bottom 60pc and top 10pc, respectively. In other words, UK wealth is more equally distributed.</p> <p>Denmark is not just some outlier either. A 2015 European Central Bank study across the eurozone found that “an increase in welfare state spending goes along with an increase — rather than a decrease — of observed wealth inequality”. France has high social spending and low wealth among less well-off households, for example, while Luxembourg and Spain have relatively low social spending and high wealth holdings for the poor.</p> <p>Now, this alone doesn’t mean the welfare state is inherently “bad”. Most programmes or transfers are introduced to achieve ends other than affecting inequality. Facilitating the poor to worry less about precautionary savings and granting them confidence to spend through their lifetimes may still improve well-being. There are, naturally, other important economic phenomena that shape wealth distributions.</p> <p>The point here is that Corbyn and others use measures of wealth inequality “worsened” by the welfare state as justification for further expanding it. They risk us getting stuck in a loop whereby more social spending leads to more private wealth inequality, which is then used to justify additional social spending.</p> <p>There are two potentially honest, rational responses to this evidence. One would be to give up on or augment wealth inequality statistics. Many economists believe a better proxy for well-being would be lifetime consumption, inclusive of private and government-provided services. Alternatively, we could adjust wealth statistics to account for the present value of promised government benefits as if they were “real” wealth. Accounting for government and state pensions for the UK alone has been found to reduce measured wealth inequality by almost a third. Adding more services might reduce it further.</p> <p>Acknowledging that “lived” inequality is far less dramatic than quoted wealth figures suggest <a href="https://www.telegraph.co.uk/business/2019/05/17/jeremy-corbynsnarrow-focus-solving-inequality-misses-point/" target="_blank">would probably be an ask too far for Corbyn</a>, undercutting as it does his whole economic narrative. Yet the alternative response is equally awkward. For if he insists private wealth inequality is society’s premier problem, he might be forced to reconsider some of the welfare state drivers of it.</p> <p>Could one imagine Corbyn campaigning for privatisation of the state pension or for replacing the NHS with individual health savings accounts to quell this wealth inequality scourge? Probably not. That itself reveals a great deal. Deep down, even the Labour leader would spurn reducing the measured private wealth gap in favour of other priorities.</p> </div> Fri, 23 Aug 2019 10:49:00 -0400 Ryan Bourne https://www.cato.org/publications/commentary/bigger-welfare-state-makes-wealth-inequality-labour-bemoans-worse Ilya Shapiro's appearance at Steamboat Institute's Freedom Conference & Festival is promoted on KOA's The Mandy Connell Show https://www.cato.org/multimedia/media-highlights-radio/ilya-shapiros-appearance-steamboat-institutes-freedom-conference?utm_source=rss_topic&utm_medium=rss&utm_campaign=rss Wed, 21 Aug 2019 10:58:00 -0400 Ilya Shapiro https://www.cato.org/multimedia/media-highlights-radio/ilya-shapiros-appearance-steamboat-institutes-freedom-conference The Founders Were Flawed. The Nation Is Imperfect. The Constitution Is Still a 'Glorious Liberty Document' https://www.cato.org/publications/commentary/founders-were-flawed-nation-imperfect-constitution-still-glorious-liberty?utm_source=rss_topic&utm_medium=rss&utm_campaign=rss Timothy Sandefur <div class="lead text-default"> <p>Across the map of the United States, the borders of Tennessee, Oklahoma, New Mexico, and Arizona draw a distinct line. It's the 36º30′ line, a remnant of the boundary between free and slave states drawn in 1820. It is a scar across the belly of America, and a vivid symbol of the ways in which slavery still touches nearly every facet of American history.</p> </div> , <div class="text-default"> <p>That pervasive legacy is the subject of a series of articles in <em>The New York Times</em> titled <a href="http://pulitzercenter.org/sites/default/files/full_issue_of_the_1619_project.pdf">"The 1619 Project."</a> To cover the history of slavery and its modern effects is certainly a worthy goal, and much of the Project achieves that goal effectively. Khalil Gibran Muhammad's portrait of the Louisiana sugar industry, for instance, vividly covers a region that its victims considered the worst of all of slavery's forms. Even better is Nikole Hannah-Jones's celebration of black-led political movements. She is certainly correct that "without the idealistic, strenuous and patriotic efforts of black Americans, our democracy today would most likely look very different" and "might not be a democracy at all."</p> <p>Where the 1619 articles go wrong is in a persistent and off-key theme: an effort to prove that slavery "is the country's very origin," that slavery is the source of "nearly everything that has truly made America exceptional," and that, in Hannah-Jones's words, the founders "used" "racist ideology" "at the nation's founding." In this, the <em>Times</em> steps beyond history and into political polemic—one based on a falsehood and that in an essential way, repudiates the work of countless people of all races, including those Hannah-Jones celebrates, who have believed that what makes America "exceptional" is the proposition that all men are created equal.</p> <p></p> </div> , <aside class="aside--right aside pb-lg-0 pt-lg-2"> <div class="pullquote pullquote--default"> <div class="pullquote__content h2"> <p>As part of its ambitious "1619" inquiry into the legacy of slavery, The New York Times revives false 19th century revisionist history about the American founding.</p> </div> </div> </aside> , <div class="text-default"> <p>For one thing, the idea that, in Hannah-Jones' words, the "white men" who wrote the Declaration of Independence "did not believe" its words applied to black people is simply false. John Adams, James Madison, George Washington, Thomas Jefferson, and others said at the time that the doctrine of equality rendered slavery anathema. True, Jefferson also wrote the infamous <a href="https://docsouth.unc.edu/southlit/jefferson/jefferson.html#p138">passages</a> suggesting that "the blacks…are inferior to the whites in the endowments both of body and mind," but he thought even that was irrelevant to the question of slavery's immorality. "Whatever be their degree of talent," Jefferson <a href="http://www.let.rug.nl/usa/presidents/thomas-jefferson/letters-of-thomas-jefferson/jefl191.php">wrote</a>, "it is no measure of their rights. Because Sir Isaac Newton was superior to others in understanding, he was not therefore lord of the person or property of others."</p> <p>The myth that America was premised on slavery took off in the 1830s, not the 1770s. That was when John C. Calhoun, Alexander Stephens, George Fitzhugh, and others offered a new vision of America—one that either disregarded the facts of history to portray the founders as white supremacists, or denounced them for not being so. Relatively moderate figures such as Illinois Sen. Stephen Douglas twisted the language of the Declaration to say that the phrase "all men are created equal" actually meant only <em>white</em> men. Abraham Lincoln effectively refuted that in his debates with Douglas. Calhoun was, in a sense, more honest about his abhorrent views; he scorned the Declaration precisely because it made no color distinctions. "There is not a word of truth in it," <a href="https://teachingamericanhistory.org/library/document/oregon-bill-speech/">wrote</a> Calhoun. People are "in no sense…either free or equal." Indiana Sen. <a href="https://en.wikipedia.org/wiki/John_Pettit">John Pettit</a> was even more succinct. The Declaration, he said, was "a self-evident lie."</p> <p>It was these men—the generation after the founding—who manufactured the myth of American white supremacy. They did so against the opposition of such figures as Lincoln, Charles Sumner, Frederick Douglass, and John Quincy Adams. "From the day of the declaration of independence," wrote Adams, the "wise rulers of the land" had counseled "to <em>repair</em> the injustice" of slavery, not perpetuate it. "Universal emancipation was the lesson which they had urged upon their contemporaries, and held forth as transcendent and irremissible [<em>sic</em>] <em>duties</em> to their children of the present age." These opponents of the new white supremacist myth were hardly fringe figures. Lincoln and Douglass were national leaders backed by millions who agreed with their opposition to the white supremacist lie. Adams was a former president. Sumner was nearly assassinated in the Senate for opposing white supremacy. Yet their work is never discussed in the <em>Times</em> articles<em>.</em></p> <p>In 1857, Chief Justice Roger Taney sought to make the myth into the law of the land by asserting in <a href="https://www.law.cornell.edu/supremecourt/text/60/393#writing-USSC_CR_0060_0393_ZO"><em>Scott v. Sandford</em></a> that the United States was created as, and could only ever be, a nation for whites. "The right of property in a slave," he declared, "is distinctly and expressly affirmed in the Constitution." This was false: the Constitution contains no legal protection for slavery, and doesn't even use the word. Both <a href="https://teachingamericanhistory.org/library/document/speech-on-the-dred-scott-decision/">Lincoln</a> and <a href="https://teachingamericanhistory.org/library/document/speech-on-the-dred-scott-decision-2/">Douglass</a> answered Taney by citing the historical record as well as the text of the laws: the founders had called slavery both evil and inconsistent with their principles; they forbade the slave trade and tried to ban it in the territories; nothing in the Declaration or the Constitution established a color line; in fact, when the Constitution was ratified, black Americans were citizens in several states and could even vote. The founders deserved blame for not doing more, but the idea that they were white supremacists, <a href="https://teachingamericanhistory.org/library/document/what-to-the-slave-is-the-fourth-of-july/">said Douglass</a>, was "a slander upon their memory."</p> <p><a href="https://teachingamericanhistory.org/library/document/speech-on-the-dred-scott-decision/">Lincoln</a> provided the most thorough refutation. There was only one piece of evidence, he observed, ever offered to support the thesis that the Declaration's authors didn't mean "<em>all</em> men" when they wrote it: that was the fact that they did not free the slaves on July 4, 1776. Yet there were many other explanations for that which did not prove the Declaration was a lie. Most obviously, some founders may simply have been hypocrites. But that individual failing did not prove that the Declaration excluded non-whites, or that the Constitution guaranteed slavery.</p> <p>Even some abolitionists embraced the white supremacy legend. William Lloyd Garrison denounced the Constitution because he believed it protected slavery. This, Douglass replied, was false both legally and factually: those who claimed it was pro-slavery had the burden of proof—yet they never offered any. The Constitution's wording gave it no guarantees and provided plentiful means for abolishing it. In fact, none of its words would have to be changed for Congress to eliminate slavery overnight. It was slavery's defenders, he argued, not its enemies, who should fear the Constitution—and secession proved him right. Slaveocrats had realized that the Constitution was, in Douglass's <a href="https://teachingamericanhistory.org/library/document/what-to-the-slave-is-the-fourth-of-july/">words</a>, "a glorious liberty document," and they wanted out.</p> <p>Still, after the war, <a href="https://en.wikipedia.org/wiki/Lost_Cause_of_the_Confederacy">"Lost Cause"</a> historians rehabilitated the Confederate vision, claiming the Constitution was a racist document, so that the legend remains today. The United States, writes Hannah-Jones, "was founded…as a slavocracy," and the Constitution "preserved and protected slavery." This is once more asserted as an uncontroverted fact—and Lincoln's and Douglass's refutations of it go unmentioned in the <em>Times</em>.</p> <p>No doubt Taney would be delighted at this acceptance of his thesis. What accounts for it? The myth of a white supremacist founding has always served the emotional needs of many people. For racists, it offers a rationalization for hatred. For others, it offers a vision of the founders as arch-villains. Some find it comforting to believe that an evil as colossal as slavery could only be manufactured by diabolically perfect men rather than by quotidian politics and the banality of evil. For still others, it provides a new fable of the fall from Eden, attractive because it implies the possibility of a single act of redemption. If evil entered the world at a single time, by a conscious act, maybe it could be reversed by one conscious revolution.</p> <p>The reality is more complex, more dreadful, and, in some ways, more glorious. After all, slavery was abolished, segregation was overturned, and the struggle today is carried on by people ultimately driven by their commitment to the principle that all men are created equal—the principle articulated at the nation's birth. It was precisely because millions of Americans have <em>never</em> bought the notion that America was built as a slavocracy—and have had historical grounds for that denial—that they were willing to lay their lives on the line, not only in the 1860s but ever since, to make good on the promissory note of the Declaration.</p> <p>Their efforts raise the question of what counts as the historical "truth" about the American Dream. A nation's history, after all, occupies a realm between fact and moral commitments. Like a marriage, a constitution, or an ethical concept like "blame," it encompasses both what actually happened and the philosophical question of what those happenings mean. Slavery certainly happened—but so, too, did the abolitionist movement and the ratification of the Thirteenth, Fourteenth, and Fifteenth Amendments. The authors of those amendments viewed them not as changing the Constitution, but as rescuing it from Taney and other mythmakers who had tried to pervert it into a white supremacist document.</p> <p>In fact, it would be more accurate to say that what makes America unique isn't slavery but the effort to abolish it. Slavery is among the oldest and most ubiquitous of all human institutions; as the <em>Times</em> series' title indicates, American slavery predated the American Revolution by a century and a half. What's unique about America is that it alone announced at birth the principle that all men are created equal—and that its people have struggled to realize that principle since then. As a result of their efforts, the Constitution today has much more to do with what happened in 1865 than in 1776, let alone 1619. Nothing could be more worthwhile than learning slavery's history, and remembering its victims and vanquishers. But to claim that America's essence is white supremacy is to swallow slavery's fatal lie.</p> <p>As usual, Lincoln said it best. When the founders wrote of equality, he explained, they knew they had "no power to confer such a boon" at that instant. But that was not their purpose. Instead, they "set up a standard maxim for free society, which should be familiar to all, and revered by all; constantly looked to, constantly labored for, and even though never perfectly attained, constantly approximated, and thereby constantly spreading and deepening its influence, and augmenting the happiness and value of life to all people of all colors everywhere." That constant labor, in the generations that followed, is the true source of "nearly everything that has truly made America exceptional."</p> </div> Wed, 21 Aug 2019 09:31:00 -0400 Timothy Sandefur https://www.cato.org/publications/commentary/founders-were-flawed-nation-imperfect-constitution-still-glorious-liberty The Use and Misuse of Income Data and Extreme Poverty in the United States https://www.cato.org/publications/research-briefs-economic-policy/use-misuse-income-data-extreme-poverty-united-states?utm_source=rss_topic&utm_medium=rss&utm_campaign=rss Bruce D. Meyer, Derek Wu, Victoria R . Mooers, Carla Medalia <div class="lead text-default"> <p>There are reasons to be simultaneously concerned and skeptical about recent reports of high and rising rates of extreme poverty in the United States. Several distinguished scholars have argued that millions of Americans — many of them children — live on less than a few dollars per day. Other researchers have reported high rates of “disconnected” people, defined as those with neither earnings nor government benefits. Relying predominantly on survey reports of income, both groups claim that these problems have been rising sharply over time. On the other hand, researchers have long contended that survey reports in the tails of the income distribution have a disproportionate share of errors. Some of these scholars have pointed to evidence of increased underreporting of income in household surveys or conflicting evidence from consumption data.</p> </div> , <div class="text-default"> <p>We address these questions by bringing to bear a combination of previously underutilized survey data and newly linked administrative data. These data allow us to reexamine rates of extreme poverty and shed light on other issues, including the targeting of in-kind transfers, the effects of welfare reform, and the measurement of poverty.</p> <p>Focusing on 2011 data from the Survey of Income and Program Participation (SIPP), we show that more than 90 percent of the 3.6 million households with survey-reported cash income below $2 per person per day are misclassified. Our methodology first implements a series of adjustments using only the survey data. We begin by reclassifying households as not in extreme poverty if they received sufficiently high amounts of in-kind transfers, including Supplemental Nutrition Assistance Program (SNAP); the Special Supplemental Nutrition Program for Women, Infants, and Children; and housing assistance. We then account for those who either reported hours worked for pay but underreported earnings (failing to report any earnings in the vast majority of cases) or possessed substantial assets. To further examine households not captured by the survey-only adjustments, we replace survey reports of earnings; asset income; retirement distributions; Old-Age, Survivors, and Disability Insurance (OASDI); Supplemental Security Income (SSI); SNAP; and housing assistance with values from linked administrative tax and program data and also account for the Earned Income Tax Credit (EITC).</p> <p>In the end, our best estimate of the extreme poverty rate is 0.24 percent among households and 0.11 percent among individuals, with 90 percent of the remaining extreme-poor households made up of single individuals. We suspect the true extreme poverty rate is lower, given the evidence of survey underreporting for many income sources — including unemployment insurance, Temporary Assistance for Needy Families, workers’ compensation, veterans’ benefits, and informal earnings — for which we have not been able to incorporate administrative data.</p> <p>Our results are robust to a number of modifications. For example, few households with survey-reported incomes of over $2 per person per day fall below $2 per person per day after applying the administrative data and removing imputed earnings. Excluding imputed hours from the corrections for underreported earnings also yields trivial impacts. In addition, according to the administrative data alone, nearly 80 percent of the misclassified households overall are initially categorized as extreme poor because of errors or omissions in cash reports of earnings, asset income, retirement income, OASDI, SSI, or the EITC. As a result, in-kind transfers play a secondary role. Replicating the analysis with the 2012 Current Population Survey Annual Social and Economic Supplement, we estimate that only 0.18 percent of households and 0.13 percent of individuals are in extreme poverty for the 2011 calendar year. These estimates from the two surveys are remarkably similar to rates that researchers have calculated using consumption data, suggesting that improved measures of income can reconcile past inconsistencies between income and consumption measures of poverty.</p> <p>One of our key methodological advances is the use of multiple sources of administrative and survey data to validate the survey-only adjustments. As the survey-only adjustments alone can account for 78 percent of the total decrease in extreme poverty that we calculate, showing that they are confirmed by other sources makes the evidence compelling. For the groups reclassified because of underreported earnings and substantial assets, we find that 72–93 percent of these households have incomes from the administrative data above the extreme poverty threshold and 47–65 percent have incomes above the poverty line, depending on the subgroup. Using detailed information from SIPP topical modules, we find that these groups have material well-being levels (based on measures of material hardship, appliance ownership, and housing quality) that are similar to the U.S. average. They are also comparable to the average household on a host of other survey-reported dimensions, such as years of education, health insurance coverage (especially private coverage), and occupation.</p> <p>Accordingly, the preponderance of evidence suggests that the households reclassified by underreported earnings and substantial assets have survey incomes that are likely to be gross errors. These results provide a potential explanation for the lack of a strong correlation between income poverty and material hardship found by several studies. In contrast, the households reclassified because of receipt of in-kind transfers appear to be significantly worse off than the official poor on multiple dimensions of well-being, implying that these benefits are well targeted to the needy. These results are consistent with past findings that individuals excluded from the poverty rolls under the Census Bureau’s Supplemental Poverty Measure (which incorporates in-kind transfers into income and raises some recipients above the poverty line) appear worse off, on average, than the official income poor.</p> <p>It is important to keep in mind that our best estimate of the extreme poverty rate is not necessarily a final estimate for the population. The SIPP excludes homeless individuals and institutionalized populations (such as those living in nursingcare facilities and prisons) from its survey frame, meaning our estimates of extreme poverty are understated if substantial numbers of the homeless and institutionalized populations are in extreme poverty. We should emphasize, however, that the literature reporting high rates of extreme poverty has also relied on survey data that exclude the homeless and institutionalized. If anything, these caveats further highlight the imperfect ability of most survey data alone, when taken at face value, to identify the extreme poor.</p> <p>While we demonstrate that the rate of extreme poverty in the United States is substantially lower than what has been reported, we do not contend that there is little deprivation in the United States. Rather, we argue that focusing on such low-income thresholds as $2 per person per day in the United States is likely to yield a group filled with more gross errors than households that are truly impoverished. For instance, nearly 50 percent of the households classified as extreme poor based on survey-reported cash have incomes above the poverty line in our administrative data sources (which we know to be incomplete). Moreover, almost all the households receiving means-tested in-kind transfers — who appear to be among the most materially deprived Americans — are not in extreme poverty simply by virtue of the extreme-poverty income thresholds being lower than benefit amounts. Among the households that appear to be truly extreme poor, and therefore disconnected from work or the safety net, the vast majority consist of a single childless individual. Contrasting sharply with the focus in the literature on extreme poverty among households with children, this finding is consequential from a policy perspective, as eligibility for programs is often dependent on household composition.</p> <p><strong>NOTE:</strong><br />This research brief is based on Bruce D. Meyer, Derek Wu, Victoria R. Mooers, and Carla Medalia, “The Use and Misuse of Income Data and Extreme Poverty in the United States,” NBER Working Paper no. 25907, May 2019, <a href="http://www.nber.org/papers/w25907" target="_blank">http://www.nber.org/papers/w25907</a>.</p> </div> Wed, 21 Aug 2019 03:00:00 -0400 Bruce D. Meyer, Derek Wu, Victoria R . Mooers, Carla Medalia https://www.cato.org/publications/research-briefs-economic-policy/use-misuse-income-data-extreme-poverty-united-states Veronique de Rugy discusses freedom and economics on the Way of the Renaissance Man podcast https://www.cato.org/multimedia/media-highlights-radio/veronique-de-rugy-discusses-freedom-economics-way-renaissance-man?utm_source=rss_topic&utm_medium=rss&utm_campaign=rss Tue, 20 Aug 2019 10:57:00 -0400 Veronique de Rugy https://www.cato.org/multimedia/media-highlights-radio/veronique-de-rugy-discusses-freedom-economics-way-renaissance-man