Minimum Wages: A Poor Way to Reduce Poverty (PDF)
Source: Cato Institute
In his 2014 State of the Union address, President Barack Obama endorsed a plan to raise the federal minimum wage from $7.25 to $10.10 per hour. Supporters of the increase argue that a $10.10 minimum wage is necessary to ensure that those who work hard and play by the rules do not live in poverty. While alleviating poverty is a widely shared goal, raising the minimum wage is a very inefficient means of achieving this objective and is likely to hurt many low-skilled workers.
Nobel Prize-winning economist Milton Friedman said, “one of the great mistakes is to judge policies and programs by their intentions rather than their results.”1 With regard to the minimum wage, the intentions and the results are usually different. This bulletin discusses the latest empirical evidence on the effects of minimum wage increases on poverty and employment. It also presents evidence on the likely effects of future minimum wage increases.
The bulletin concludes that minimum wage increases almost always fail to meet proponents’ policy objectives and often hurt precisely the vulnerable populations that advocates wish to help. The weight of the science suggests that policymakers should abandon higher minimum wages as an antiquated anti-poverty tool. Minimum wages deter employment and are poorly targeted to those in need.
The Economic Gains from Eliminating U.S. Travel Visas
Source: Cato Institute
The U.S. government requires most foreigners to obtain a travel visa if they wish to travel to America. The purported rationale for this requirement is to prevent unauthorized immigrants, terrorists, and other foreign-originated security threats from coming into the country disguised as tourists. The visa requirements also impose a substantial cost on the American economy by severely inhibiting tourism to the United States. Many sectors of the American economy are heavily dependent on tourist spending. By making it unnecessarily costly and difficult for foreigners to visit the country, the United States is impeding economic growth that would occur under a more sensible visa policy.
How States Talk Back to Washington and Strengthen American Federalism
Source: Cato Institute
Effective federalism requires that state officials be able to secure relief from national directives that impose undue burdens on state governments or improper constraints on state policy discretion. Many analysts focus on clearly legitimate and occasionally effective tactics such as lobbying or lawsuits. Some activists consider discredited tactics such as nullification that are a nonstarter in the 21st century. This policy analysis calls attention to various ways that states talk back to Washington using tactics that go beyond lobbying and litigation but fall short of nullification.
First, when state and federal governments both possess regulatory authority, states can enact measures decriminalizing certain practices, hoping federal executive officials will not enforce federal statutes in states with contrary policies. Second, states can decline to participate in federal programs and accept the designated penalties, hoping Congress will revise statutes or executive officials will issue rules or waivers that moderate the programs. Third, when federal judicial doctrine is uncertain or in flux, states can enact measures inconsistent with Supreme Court precedents, hoping the Court will reconsider and relax judicially imposed constraints on state policy discretion. Fourth, when federal judicial doctrine is uncertain or in flux, states can enact measures inconsistent with federal statutes, hoping the Supreme Court will invalidate or limit the reach of federal statutes. In recent years, state officials have relied on each of these tactics and with some success in responding to federal directives relating to marijuana, education, abortion, and health care, among other areas. State officials have resources to push back against national officials, thereby improving American federalism.
Privatizing the Transportation Security Administration
Source: Cato Institute
After the terrorist attacks in 2001, the federal government moved quickly to increase spending on aviation security and take control of passenger and baggage screening at U.S. airports. Congress created the Transportation Security Administration (TSA) in 2001, and then transferred the agency to the new Department of Homeland Security (DHS) in 2002.
TSA’s main activity is operating security screening at more than 450 commercial airports across the nation. The agency also runs the Federal Air Marshal Service (FAMS), analyzes intelligence data, and oversees the security of rail, transit, highways, and pipelines. TSA has 62,000 employees and an annual budget in 2013 of $7.9 billion.
After more than a decade of experience, it is clear that the creation of TSA and the federal takeover of airport screening was a mistake. Auditors have found that TSA’s screening performance has been no better, and possibly worse, than private screening. And TSA has become known for mismanagement, dubious investments, and security failures. Former TSA chief Kip Hawley noted last year that the agency is “hopelessly bureaucratic.” And recent congressional reports have blasted TSA for “costly, counter intuitive, and poorly executed” plans and for having an “enormous, inflexible and distracted bureaucracy.”
We would be better off without a monolithic federal agency that controls all major aspects of aviation security. Most airports in Europe and Canada use private companies for their passenger and baggage screening. That practice creates a more efficient and innovative security structure, and it allows governments to focus on gathering intelligence and conducting analysis rather than on trying to manage a large workforce.
Solving Egypt’s Subsidy Problem
Source: Cato Institute
Subsidies to consumer goods, including fuels and food, account for almost one third of Egypt’s public spending, or 13 percent of the country’s gross domestic product (GDP). Not only are subsidies highly ineffective in helping the poor, they are also an increasingly unsustainable drain on the country’s public finances and its foreign reserves. Yet reform remains a thorny issue in Egypt’s unstable political environment—mostly because subsidies are the main instrument of social assistance used by the government.
Subsidies to consumer goods and fuels have existed in the country since the 1920s. Various approaches are available for scaling them down or eliminating them altogether. However, most of the prior attempts to reform the subsidy system in Egypt have failed. Cash transfers targeted at the poor would be a superior policy relative to the status quo.
Eliminating subsidies and replacing them with cash transfers would produce significant savings and would be politically feasible. A successful reform of subsidies will have to be accompanied by a series of complementary reforms, which would reduce food insecurity in the country and improve supply chains in the areas of food and energy by introducing competition. Finally, prudent macro economic policies, including a reduction in inflation rates, will be necessary to contain the potential effects of food and energy price hikes on poorer households.
The Transatlantic Trade and Investment Partnership: A Roadmap for Success
Source: Cato Institute
The potential upside of a comprehensive Transatlantic Trade and Investment Partnership agreement to liberalize trade, investment, and regulatory barriers between the United States and the European Union is substantial. The economic benefits are estimated to be in the range of a $125 billion annual boost to GDP on each side of the Atlantic. Realistically, the benefits will depend on whether the enthusiastic rhetorical commitments to achieving a comprehensive agreement are matched by actual accomplishments on the ground. A comprehensive, ambitious agreement will require the resolution of differences in dozens of areas. On some issues, bridging the divides should be fairly straightforward, though not necessarily easy. On others, success will require copious amounts of determination, ingenuity, and political will.
Stakeholders will have to keep politicians and negotiators accountable to their goals and timetables. But too daunting an enterprise will render success elusive and cause negotiators to lose focus, interest, and, ultimately, the opportunity to achieve meaningful reforms. The TTIP negotiations must not be permitted to devolve into a decade-long, transatlantic cocktail party for negotiators, advisers, and lobbyists.
In the interest of avoiding that fate, this paper suggests a procedural roadmap for managing the negotiations in an orderly, constructive, politically digestible manner. It recommends that
- Negotiators identify and announce a discrete set of specific, achievable goals with realistic deadlines;
- The negotiations over regulatory processes and regulatory standards be better defined and made more manageable by employing a “negative list” approach, where issues deemed “off limits” to negotiation are specified at the outset so that they do not obscure what is achievable;
- The negotiators abandon the single undertaking principle and, instead, aim to produce three successive biennial agreements by harvesting the lowest hanging fruit once every two years.
Economic Freedom of the World: 2013 Annual Report
Source: Cato Institute
Global economic freedom increased modestly in this year’s report, though it remains below its peak level of 6.92 in 2007. After a global average drop between 2007 and 2009, the average score rose to 6.87 in 2011, the most recent year for which data is available. In this year’s index, Hong Kong retains the highest rating for economic freedom, 8.97 out of 10. The rest of this year’s top scores are Singapore, 8.73; New Zealand, 8.49; Switzerland, 8.30; United Arab Emirates, 8.07; Mauritius, 8.01; Finland, 7.98; Bahrain, 7.93; Canada, 7.93; and Australia, 7.88.
The United States, long considered the standard bearer for economic freedom among large industrial nations, has experienced a substantial decline in economic freedom during the past decade. From 1980 to 2000, the United States was generally rated the third freest economy in the world, ranking behind only Hong Kong and Singapore. After increasing steadily during the period from 1980 to 2000, the chain linked EFW rating of the United States fell from 8.65 in 2000 to 8.21 in 2005 and 7.74 in 2011. The chain-linked ranking of the United States has fallen precipitously from second in 2000 to eighth in 2005 to 19th in 2011 (unadjusted rating of 17th).
The rankings (and scores) of other large economies in this year’s index are the United Kingdom, 12th (7.85); Germany, 19th (7.68); Japan, 33rd (7.50); France, 40th (7.38); Italy, 83rd (6.85); Mexico, 94th (6.64); Russia, 101st (6.55); Brazil, 102nd (6.51); India, 111th (6.34); and China, 123rd (6.22).
Nations in the top quartile of economic freedom had an average per-capita GDP of $36,446 in 2011, compared to $4,382 for nations in the bottom quartile in 2011 current international dollars. In the top quartile, the average income of the poorest 10% was $10,556, compared to $932 in the bottom quartile in 2011 current international dollars. Interestingly, the average income of the poorest 10% in the most economically free nations is more than twice the overall average income in the least free nations. Life expectancy is 79.2 years in nations in the top quartile compared to 60.2 years in those in the bottom quartile, and political and civil liberties are considerably higher in economically free nations than in unfree nations.
The terrorist attacks of September 11, 2001, inflicted enormous losses on the insurance industry and businesses. In the wake of the disruptions occurring in the insurance market at the time, the government enacted the Terrorism Risk Insurance Act of 2002 to create a “temporary” federal backstop against catastrophic losses. This program subsidized private risk with public funds through a cost-sharing program for which the government does not receive any compensation.
The compelling need for the program was unclear even in the smoldering aftermath of 9/11. Yet in response to effective lobbying by the insurance industry and business interests, Congress has twice extended the program. The program is now scheduled to sunset at the end of 2014, 12 years after this supposedly temporary program was instituted.
If there was some ambiguity about the program’s need before, there is none now. Terrorism risk is not more severe than other insurable risks such as natural catastrophes, and a federal backstop stakes public money to protect the insurance industry, and subsidize the terrorism risk insurance premiums for commercial policyholders. The private market is capable of underwriting this risk. This policy analysis suggests that the program should sunset as scheduled in 2014, thus ending this form of corporate welfare.
Money, Markets, and Government: The Next 30 Years
Source: Cato Institute
By studying the past, one can learn how to avoid future crises. The financial crises in the United States and Europe, and the problems that face China as it internationalizes the renminbi, deserve close attention. The new issue of Cato Journal specifically addresses the links between money, markets, and government, and how those links might evolve in the future. “The choice of monetary and fiscal policy regimes,” says editor James A. Dorn, “will determine whether economic and social harmony will spontaneously emerge or government power will continue to grow.”
No country has been a stronger magnet for foreign direct investment than the United States. Valued at $3.5 trillion, the U.S. stock of inward foreign direct investment accounted for 17 percent of the world total in 2011, more than triple the share of the next largest destination.
Foreign direct investment is ultimately a judgment by the world’s value creators about a country’s institutions, policies, human capital, and prospects. As the world’s largest economy, the United States has been able to attract the investment needed to produce the innovative ideas, revolutionary technologies, and new products and industries that have continued to undergird its position atop the global economic value chain.
But the past is not necessarily prologue. Indeed, while the U.S. claim to 17 percent of the world’s stock of foreign direct investment is impressive, the share stood at 39 percent as recently as 1999. It has been 12 years since the annual value of U.S. inward FDI set a record high of $314 billion, and since then, annual flows have failed to establish an upward trend. The most recent figures show a decline of 35 percent, from $227 billion in 2011 to $147 billion in 2012.
To a large extent, these trends reflect the emergence of new, viable destinations for investment resulting from inevitable demographic, economic, and political changes. However, some of the decline is attributable to a deteriorating U.S. investment climate, as reflected on a variety of renowned business surveys and investment indices measuring policy and perceptions of policy.
The current U.S. business environment conspires to deter inward investment and to encourage companies to offshore operations that could otherwise be performed competitively in the United States. A proper accounting of these policies, followed by implementation of reforms to remedy shortcomings, will be necessary if the United States is going to compete effectively for the investment required to fuel economic growth and higher living standards.
Cracking the Books: How Well Do State Education Departments Report Public School Spending?
Source: Cato Institute
Public schools are usually the most costly item in state and local budgets. Yet despite tremendous and persistent spending growth in the last half-century, the public vastly underestimates the true cost of public education.
To better understand the source of this misperception, this report examines the spending data that all 50 state education departments make available to the public on their websites. It reveals that very few state education departments provide complete and timely financial data that is understandable to the general public.
Half of all states report a “per pupil expenditures” figure that leaves out major cost items such as capital expenditures, thereby significantly understating what is actually spent. Alaska does not even report per pupil expenditure figures at all.
Eight states fail to provide any data on capital expenditures on their education department websites. Ten states lack any data on average employee salaries and 41 states fail to provide any data on average employee benefits.
When the state education departments provide incomplete or misleading data, they deprive taxpayers of the ability to make informed decisions about public school funding. At a time when state and local budgets are severely strained, it is crucial that spending decisions reflect sound and informed judgment.
The table below provides summary grades on financial transparency for state department of education websites. A description of how these grades were derived is presented in the Grading Criteria section, and detailed ratings appear on the individual pages for each state.
Arms and Influence in Syria: The Pitfalls of Greater U.S. Involvement
Source: Cato Institute
In the midst of growing public wariness about large-scale foreign interventions, the Obama administration has decided to arm the Syrian rebels. Those who call for increasing the scope of U.S. aid to the Syrian rebels argue that (1) arming the rebels is the cheapest way to halt a humanitarian catastrophe, hasten the fall of the Assad regime through a rebel military victory or a negotiated settlement, and allow the Obama administration to influence the broader direction of Syrian politics in a post-Assad world; (2) failure to step up U.S. involvement will damage America’s credibility and reputation in the eyes of our allies and adversaries; and (3) U.S. objective scan be accomplished with a relatively small level of U.S. commitment in Syria.
These arguments are wrong on all counts. There is a high risk that the decision to arm the Syrian rebels will drag the United States into a more extensive involvement later, the very scenario that the advocates for intervention claim they are trying to avoid. The unique characteristics of alliances between states and armed non state groups, in particular their informal nature and secrecy about the existence of the alliance or its specific provisions, create conditions for states to become locked into unpalatable obligations. That seems especially likely in this case.
The specific way the administration has chosen to increase the scope of its support to the rebels sets the stage for even greater U.S. commitment in Syria in the future. The Obama administration, therefore, should not have decided to arm the Syrian rebels.
Looking ahead, it is important for policymakers to understand the nature of alliances between states and armed non state groups even after the Syria conflict is resolved. Given that Americans are unwilling to support large-scale interventions in far-flung reaches of the globe, policymakers looking for military solutions to political problems may conclude that arming proxy groups may be an attractive policy choice. They should instead, however, avoid committing to conflicts that don’t threaten core national security interests.
High Frequency Trading: Do Regulators Need to Control this Tool of Informationally Efficient Markets?
High Frequency Trading (HFT) is a form of algorithmic trading where firms use high-speed market data and analytics to look for short term supply and demand trading opportunities that often are the product of predictable behavioral or mechanical characteristics of financial markets. Often called “equity market making,” HFT firms usually hold their positions for less than a minute while perpetually looking for opportunities to buy and sell. These transactions happen thousands of times a day, take microseconds, and often net less than a penny in profit per share traded.
Concerns have been raised in recent years about the potential market risks associated with HFT and algorithmic trading in general. Some opponents have argued that these practices create risk and require aggressive regulation. Purported risks to the stability and integrity of financial markets created by HFT include the creation of a two-tiered market system as a result of asymmetric information, potential volatility, “noise” and informational distortions, out-of-control algorithms, and “flash crashes.” However, many of these concerns are neither new nor exclusively related to HFT.
HFT is, quite simply, a contemporary tool that facilitates informational market efficiency and, as such, is capable of being regulated by the market and market participants—indeed, there is significant evidence to indicate HFT activity is already being regulated by the market. At the same time, HFT improves market efficiency by lowering the costs to investors, controlling volatility, and improving liquidity. Many of the concerns raised by those calling for increased regulation predate the emergence of HFT, and thus those concerns are not particular to HFT. There are, however, opportunities for regulators, HFT firms, and exchanges to continue to work together to monitor and develop internal and external “circuit breakers” and consolidated audit trails to ensure continued market stability and integrity.
The Rise and Fall of the Gold Standard in the United States
Source: Cato Institute
There is, in informal discussions and even in some academic writings, a tendency to treat U.S. monetary history as divided between a gold standard past and a fiat dollar present. In truth, the legal meaning of a “standard” U.S. dollar has been contested, often hotly, throughout U.S. history, and a functioning (if not formally acknowledged) gold standard was in effect for less than a quarter of the full span of U.S. history.
U.S. monetary policy was initially founded upon a bimetallic dollar, convertible into either gold or silver. Although officially committed to bimetallism, from 1792 to 1834 the United States was functionally on a silver standard. From the Civil War until 1879, a fiat “greenback” standard predominated with the exception of a few states, such as California and Oregon, where a gold standard continued to operate.
Between 1870 and 1879 numerous countries embraced gold monometallism. France ended the free coinage of silver in 1873, while the rest the Latin Monetary Union followed in 1876. But it was above all Germany’s switch to gold that prompted the United States to demonetize silver and embrace gold. Thus began the era of the Classical Gold Standard in the United States.
The Classical Gold Standard Era lasted until about War World I, when as common in times of war countries abandoned their commitment to convertibility. What followed World War I was the Gold Exchange Standard, whose failure resulted from its dependence upon central bank cooperation. Post World War II, the Gold Exchange Standard was replaced by the Bretton Woods System and its reliance on a fiat dollar. Bretton Woods finally came to an end when President Nixon closed the “gold window” on August 15, 1971.
This paper reviews the history of the gold standard in the United States, explaining both how that standard came into being despite having been neither formally provided for nor informally established at the nation’s inception, and how it eventually came to an end. It concludes that the conditions that led to the gold standard’s original establishment and its successful performance are unlikely to be replicated in the future.
Liberalization or Litigation? Time to Rethink the International Investment Regime
Source: Cato Institute
Private investment is the great driver of economic growth. Despite this positive economic impact, however, there are sometimes objections to investment when it comes from foreign sources. These objections are misguided. Aside from occasional national security concerns, foreign investment offers all the same benefits as investment from domestic sources. A liberal and open policy toward foreign investment is clearly the optimal one. Governments should allow foreign companies to invest in the domestic market and should also allow domestic companies to invest abroad.
The United States has used international trade and investment agreements to promote foreign investment. However, if we examine the actual obligations in these agreements, we find the rules are not always about liberalization as it is usually understood. Rather than simply encouraging and welcoming foreign investment, and treating it like domestic investment, many of the rules are designed to give special legal protections to American companies that invest abroad.
The United States is in the process of negotiating investment rules in several of its trade initiatives and is also considering new investment treaties. This recent activity in the area of investment rules provides an opportunity for reevaluation.
The current rules are not well calibrated to liberalizing foreign investment. Instead of offering a simple and direct policy of liberalization, they incorporate vague legal principles that provide numerous opportunities for litigation, and in doing so they undermine the more basic principle of treating foreign and domestic investment equally. If international rules are to be used at all in this area, a focus on nondiscrimination, and a more flexible legal framework, would be preferable to the existing system.
Source: Cato Institute
The global financial crisis reinforced a sense that the world is "shifting East"—to Asia. The essential story of modern Asia is its unprecedented expansion of economic freedom, enabled by market liberalization. Economic freedom, however, remains substantially repressed across the region.
There are three key policy challenges to expanding economic freedom in Asia today. The first is to open up financial markets, which remain backward and repressed by command economy controls. The second is to renew trade and foreign-investment liberalization, which has stalled since the Asian crisis of the late 1990s. And the third is to open up energy markets, which, even more than financial markets, are throttled by government interventions.
Increasing Asian consumption of fossil fuels will increase carbon emissions. Mainstream advocacy of carbon reduction in Asia should be met with skepticism, given its potential to lower growth substantially. A far better approach is one based on adaptation to global warming through market-based efficiency measures.
Asia’s poorer economies should concentrate on "getting the basics right" for "catch-up" growth. These are "first-generation" reforms of macroeconomic stabilization and market liberalization. Asia’s middle- and high-income economies need to focus also on "second-generation" reforms—more complex structural and institutional reforms to boost competition and innovation. Diverse political systems can deliver catch up growth. But autocracies are badly fitted to deliver second-generation reforms for productivity- led growth. The latter demands a tighter link between political and economic freedoms.
The Asian miracle is not the product of superior technocratic minds who concocted successful industrial policies. Rather, freedom and prosperity bloomed on Asian soil because government interventions were curtailed and markets unleashed. Classical liberalism, however partially implemented, has worked in Asia. It is a system to which Asians should aspire.