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Travis Fisher

At the signing of the Inflation Reduction Act (IRA), President Biden said: “The Inflation Reduction Act invests $369 billion to take the most aggressive action ever — ever, ever, ever — in confronting the climate crisis and strengthening our economic — our energy security.” One year later, the Biden Administration reaffirmed the President’s statement by describing the IRA as “the most ambitious climate action in history.”

President Biden is certainly correct that spending $369 billion on anything is aggressive, even if that level of spending is projected over the next decade. That’s nearly ten times the amount Elon Musk paid for Twitter (now renamed X). However, the cost could be substantially higher than that, and taxpayers could be on the hook to provide that level of subsidy to electricity producers every few years in perpetuity or until the law is changed. That is because the energy subsidies in the IRA are enacted as permanent law, only to expire when specified emissions targets are met. This could mean that some provisions will last well beyond the 10‐​year budget window.

After the IRA was passed, the estimate of $369 billion for energy credits over a decade was revised upward. Now we have higher estimates of the cost of preserving the IRA credits for ten years. An April 26, 2023 estimate by the Joint Committee on Taxation (JCT) was $515 billion. An April 2023 Goldman Sachs report estimated that the IRA “will provide an estimated $1.2 trillion of incentives by 2032.”

Why the disparity? It depends on what’s included in the estimates. The report by Goldman Sachs estimated much higher spending on tax credits for electric vehicles than the JCT in part because it projected that more electric vehicles (EVs) would be eligible for the full credit. That is a theme throughout the IRA—eligibility for different amounts of credits depends on several factors (like labor requirements and thresholds for domestic content, etc.). The subjective nature of modeling the IRA’s fiscal cost highlights how little we know about what these energy credits will cost the taxpayer.

Time is Money (a lot of it)

Consider another variable: the amount of time the federal government (i.e., federal taxpayers) will continue to pay subsidies. If we limit estimates of the cost of IRA tax credits to a 10‐​year window (standard practice in budget assessments), we get a total of about $515 billion to $1.2 trillion. That is already a wide range, but it’s a lower bound because it fails to account for substantial costs down the road. If we look beyond the 10‐​year horizon, the cost of the IRA credits could increase and remain high for years, perhaps indefinitely.

The tax credit for producing electricity from non‐​GHG‐​emitting sources begins to phase down only when total GHG emissions from the electricity sector fall to 25 percent of the 2022 level (see PDF page 169 here):

(3) APPLICABLE YEAR.—For purposes of this subsection, the term ‘applicable year’ means the later of—

(A) the calendar year in which the Secretary [of Energy] determines that the annual greenhouse gas emissions from the production of electricity in the United States are equal to or less than 25 percent of the annual greenhouse gas emissions from the production of electricity in the United States for calendar year 2022, or

(B) 2032.

To be clear, a 75 percent reduction in GHGs from the electricity sector could take a very long time, especially since the IRA uses 2022 as the baseline year rather than a higher‐​emission year like 2005. The U.S. Energy Information Administration (EIA) analyzed electricity sector GHG emissions in the IRA reference case (and in the no‐​IRA case) and found neither case to bring electricity sector emissions down to 25 percent of the 2022 level by 2050.

So how long are taxpayers stuck with this tab, and what’s the final tally? One estimate that accounted for the cumulative cost of the IRA credits over a longer period came from the consulting firm Wood Mackenzie. In fact, a Wood Mackenzie blog post is the only source I have seen that explicitly stated that IRA energy credits could be indefinite. It said:

Based on the language in the IRA, our view is that these tax credits will be extended for substantially longer than 2032 – perhaps even 30–40 years. Absent IRA repeal, this means that instead of several hundred billion dollars in tax credits for new renewables and storage through 2032, the real money on the table is on the order of trillions of dollars over multiple decades.

With an expanded time horizon, Wood Mackenzie found the cumulative cost of IRA energy credits could reach $2.5 to $3 trillion, most of which would go to utility‐​scale solar energy projects. Of course, if EIA is right about the trajectory of GHG emissions from the electricity sector (that emissions will not fall to 25 percent of 2022 levels, even by the year 2050), the cumulative cost could be even higher.

In a forthcoming policy brief, I will analyze the total taxpayer liability in the IRA as established in the statute, and I provide a sensitivity analysis taking into account the key variables involved: 1) the level of the credits based on eligibility criteria, 2) the volume of credit‐​eligible electricity generation, and 3) the applicable time horizon (when the electricity sector reaches GHG emissions at or below 25 percent of 2022 levels, which itself depends on many variables such as growth in electricity demand).

Conclusion

The total cost of energy credits in the IRA is an unstable number with no reasonable cap. The energy credits are subject to a wide range of variables, and they could persist for decades. Understanding the implications of the IRA for tax and budget policy requires going beyond the typical 10‐​year budget window, as the IRA itself does. Did policymakers mean to subsidize low‐​GHG electricity production to the tune of $50–100 billion per year, ad infinitum—easily $2.5–3 trillion or more when all is said and done? Maybe not, but we’ll find out if policymakers want to keep accruing them when these costs start piling up.

Colleen Hroncich

Today’s education entrepreneurs are as unique as the learning environments they create. Many are parents seeking a better fit for their own children or teachers wanting the autonomy to teach the way they think is best. In the case of Dragonfly Academy in Las Vegas, it was a grandmother who stepped up to create a place where neurodivergent children could learn and thrive.

Anita Williams is a licensed clinical mental health therapist whose grandchildren have been diagnosed with Asperger’s Syndrome and ADHD. Because of her professional background, Anita was able to help her daughter find the right specialists. But even with her knowledge, it was difficult to navigate the system and get her grandchildren the help they needed. When Anita and her daughter met with her grandson’s teacher and principal, Anita could tell they weren’t equipped to meet his needs.

They decided to try homeschooling, which was difficult but did relieve some of the stress of dealing with the school district. Anita began learning more about autism and the autism spectrum. She and her husband eventually decided to open a learning center specifically for neurodiverse individuals. At Dragonfly, Anita says, “an individual education plan is actually an individual education plan. It’s not a copy and paste from one child to another. It’s giving them what they need and focusing on their interests.” If a child has speech therapy, occupational therapy, or any other therapies that the family is happy with, those therapies can take place right at Dragonfly.

Anita initially planned for Dragonfly Academy to be a private school, but after bumping into bureaucratic red tape she reconsidered her options. She’d met Don and Ashley Soifer of the National Microschooling Center, and they told her about microschools. “I’ve been sold on this innovative, non‐​traditional education movement ever since,” she says. Students who attend Dragonfly must register as homeschoolers with the state of Nevada.

Using the homeschool/​microschool model gives Anita a lot of autonomy and flexibility with Dragonfly Academy. This is essential because her goal is to create a learning environment that appeals to a variety of neurodiverse children. By incorporating play therapy, sandtray therapy, art, and music therapy, Dragonfly students can learn, develop, and thrive with their peers.

For this school year, Dragonfly Academy will meet Monday through Thursday from 10:00 a.m. until 2:30 p.m. Learners can attend all four days or just two days per week (Mon/​Wed or Tue/​Thu) with tuition adjusted accordingly. They plan to have field trips one or two Fridays a month. Parents can volunteer for 10 hours a month at Dragonfly in exchange for a lower tuition rate. Limited financial assistance is also available.

An occupational therapist who leases a room from Anita for her private practice also works with Dragonfly students. Each morning there is an optional 30‐​minute “Movement with Miss Mallory” session at 9:30. Then the kids have some self‐​directed time before they get together for a morning meeting. Anita wants the students to be active participants in their learning journey, so she gives them several options throughout the day for group activities in addition to the self‐​directed time.

“Therapeutic schools are not new; I haven’t reinvented the wheel,” Anita says. “But this model has a unique twist to it because a lot of times therapeutic schools are boarding schools—children may stay there months or weeks or Monday through Friday and go home on the weekends. My concept is for these needs to be met on a daily basis and then for the children to go home with their families.”

Anita wants to keep the learning environment at Dragonfly Academy small so she can continue to provide truly individualized learning for each student, but she can see having two or three locations so she can help more kids. Because while her motivation was initially to help her own grandchildren, Anita is passionate about taking what she’s learned and using it to help other neurodiverse children as well.

Jack Solowey

Washington policymakers are consumed with AI concern. Fears run the gamut from existential threats to humanity to chatbots fibbing. In recent weeks, AI entrepreneurs and policy thinkers have helped to frame one of AI’s principle risks as the possible threat posed to political stability and continuity. In a thoughtful multipart series on “AI and Leviathan,” for example, Samuel Hammond (senior economist at the Foundation for American Innovation) argues that “[d]emocratized AI is a much greater regime change threat than the internet” and “[t]he moment governments realize that AI is a threat to their sovereignty, they will be tempted to clamp down in a totalitarian fashion.”

It’s wise to expect that the prospect of dizzying changes threatening the established order will incline states toward aggressive counterreactions. Indeed, we already see early signs of this in financial regulators’ response to autonomous and self‐​executing financial tools (e.g., smart contracts on cryptocurrency blockchains). Notably, smart contracts and certain AI models share a common feature that, when paired with the ability to operate with limited human intervention, can be particularly disruptive to existing regulatory methods: open‐​source code that is freely reproducible.

Even if open‐​source AI models constitute the minority of key foundation models, the fact that enough relatively advanced AI models are readily copyable (not to mention portable and storable) poses a clear challenge to governments looking to exert control over AI. Consequently, there’s an emerging policy battle over the desirability of open‐​source AI.

Unfortunately, financial regulators have led the way in cracking down on novel, open‐​source technologies. In doing so, they risk creating dangerous precedents for the use of open‐​source software—AI-based and otherwise—in both financial applications and in tech innovation more broadly. Before continuing further down this fraught path, policymakers must carefully consider the potential benefits of open‐​source software development that will be lost to knee‐​jerk policy reactions.

Fundamentally, open‐​source software is an intellectual property question: whether the code’s authors will license the free use, copying, modification, and distribution of their software without the need to seek those authors’ permission (the authors themselves typically disclaim liability in the process). Open‐​source licenses facilitate creatively remixing software, as well as ecosystems that foster iterative improvements.

Importantly, open‐​source licenses also give code something of a life unto itself, as it can continue—through the work of developer communities—to evolve and multiply beyond the reach of the original authors.

Open‐​source software therefore can pose a challenge to government agencies accustomed to regulating products and services by regulating their providers. If the government has a problem with OpenAI’s software, they haul in OpenAI. But if they have a problem with any of the tens of thousands of open‐​source AI models, who (or what) gets named and blamed?

Open‐​source AI critics fear that averting and remediating any harms associated with AI models will be seriously hampered by a lack of namable and blamable developers with end‐​to‐​end control over the code or, in the financial services context, human professionals holding out a shingle and visibly shouldering a fiduciary duty. Yet others take precisely the opposite position on open‐​source AI, arguing that the ability to freely use, modify, and distribute AI models will be essential to tackling AI “safety” and fallibility problems. One way in which this could play out is open‐​source licenses simply allowing more minds to work on these challenges and, in turn, make the fruits of their research freely available.

Notwithstanding these hard and high‐​stakes questions, the financial regulatory leviathan already has charged headlong into criminalizing the use of certain open‐​source software when the existence of a sanctionable provider is, at the very least, contestable. The Treasury Department’s Office of Foreign Assets Control (OFAC) has been breaking new ground in sanctioning—i.e., prohibiting transactions with—open-source software itself.

Specifically, in August 2022, the OFAC added the Ethereum blockchain addresses of Tornado Cash—a tool for enhancing cryptocurrency transaction privacy—to the sanctioned persons list in connection with the tool’s alleged use by North Korean state‐​sponsored hackers to launder funds.

Tornado Cash users sued the Treasury Department to vacate the sanctions designation. They contended, among other things, that the Tornado Cash developers and token holders were not properly considered a sanctionable “entity” and that the decentralized, open‐​source, and immutable Tornado Cash software was not properly considered sanctionable “property” under relevant law. On August 17, 2023, the court found in favor of the Treasury Department on these issues.

Regardless of whether one thinks the court got it right in the case before it (plaintiffs faced challenging deference standards on interpretive questions), Tornado Cash shows an emerging government suspicion of open‐​source software, with financial regulators at the forefront.

For regulators to continue down this path would risk creating further dangerous precedent. Indeed, the Tornado Cash plaintiffs noted the chilling effect the sanctions designation had on software development. Policymakers should be wary of this chilling effect and the potential lost benefits when it comes to open‐​source financial technology, as well as open‐​source software more broadly.

In the financial context, increasing the risks of publishing open‐​source tools undermines privacy‐​enhancing technologies and the broader use of autonomous financial services that mitigate traditional intermediary risks. In addition, where the suppression extends to open‐​source AI, the potential foregone benefits include the ability of both financial institutions and individuals to run open‐​source AI models on their own hardware to improve processing speed, maintain the confidentiality of personal data, and achieve greater interoperability and customizability.

Notably, the use of more bespoke open‐​source AI models in finance could help to address regulators’ fears of herding behavior due to mono‐​models. Moreover, leveraging experimental tools for autonomous task performance (e.g., an AI agent that could help to organize one’s financial life) thus far is largely a matter of using open‐​source projects. None of this is to say that open‐​source software is always the right tool for the job, and there may ultimately be market forces that make open‐​source models less competitive. But that’s no reason for regulators to put their thumbs on the scale.

As for cutting‐​edge software more broadly, policymakers should consider the role that open‐​source software development may play in discovering and disseminating standards for better aligning AI models (i.e., averting existential risks like civilizational collapse, or worse). Policymakers must steelman the arguments for an open‐​source approach to alignment, including the example of high security standards achieved by community vetting in other open‐​source ecosystems, such as that of the Linux operating system. And even if after careful analysis it’s found that the risks of open‐​source tinkering on sufficiently advanced AI models exceed the benefits at a given moment (given the limits of alignment knowledge at that point), policymakers should not parlay that into a reason to blanket ban open‐​source AI models including those short of the technological frontier.

There are good reasons to expect advances in AI to have transformative impacts on society, including states themselves. And it should come as no surprise that incumbent authorities will react aggressively when perceiving threats to business as usual; indeed, we’ve already seen this in financial regulators sanctioning disintermediated financial tools. But fear of disruption does not justify overreaction in the financial regulatory context or elsewhere.

Notably, when Hammond identified democratized AI as a “greater regime change threat than the internet,” he highlighted that the Chinese Communist Party is already proceeding on that basis. Liberal democracies can and must do better and should have greater confidence in their adaptability to technological change. Reactive policy that targets open‐​source software development carries its own risks. And tilting against open‐​source software without careful deliberation on where that leads is one of the riskiest options of all.

If you’re interested in further discussion on these issues, please join the Cato Institute’s Center for Monetary and Financial Alternatives for a conversation on open‐​source financial technology and broader questions of crypto regulation and competitiveness next Thursday, September 7, 2023.

Scott Lincicome

These days, much of Official Washington has turned its back on freer trade, and China is their reason why. According to the Washington Post, for example, President Biden has “reject[ed] the trade liberalization doctrine that held sway for nearly three decades after the Cold War’s end,” and when asked about the president’s motivations, an anonymous “senior U.S. official” pointed to a Reuters/​Ipsos survey showing that “66 percent of respondents said they were more likely to back a presidential candidate in 2024 who favored ‘additional tariffs on Chinese imports.’ ”

On the other side of the aisle, the Wall Street Journal reported this week that China has motivated several GOP presidential candidates’ turn against new trade agreements and their nationalist support “for boosting domestic manufacturing, even through government subsidies.” Former President Trump has even gone so far as to propose a tariff “ring” on all imports.

As my Cato colleague Clark Packard and I argued in a recent paper, there’s surely a better approach to U.S.-China relations than the clumsy bellicosity both political parties have recently embraced. But it’s especially wrongheaded for U.S. policymakers to let China — which does raise unique challenges — dictate overall U.S. trade policy, given that the vast majority of U.S. trade is conducted with people in countries other than China.

In particular, the latest data from the U.S. Bureau of Economic Analysis show that less than 11 percent of all U.S. trade — imports and exports, goods and services — was with China in 2022.

The numbers for goods trade (i.e., what would get caught up in a global tariff war started by Trump’s “ring”) are a little different, but tell the same general story: China is a big U.S. trading partner but the vast majority of U.S. trade in goods in 2022 involved non‐​China countries.

Even for just U.S. imports of goods, these other countries accounted for more than 83 percent of the total last year:

As I explained in a new column at The Dispatch, Trump’s global tariff is a bad idea for lots of reasons, and the starting point for that analysis is the fact that it would mainly hit countries other than China. (If recent experience is any guide, in fact, a global tariff could give Chinese imports a leg up in the U.S. market.) The same goes for broad‐​based protectionism that President Biden and other policymakers are pushing, which is no more “China policy” than Trump’s (very bad) tariff idea.

Daniel Raisbeck and Gabriela Calderon de Burgos

When we published our Cato Institute Policy Brief (“Argentina Should Dollarize, Pronto,”) on July 27, few outside of Argentina were paying attention to the dollarization debate. This changed on August 13, when Javier Milei, the only pro‐​dollarization candidate taking part in the primary elections, won a surprise victory, thus unleashing a barrage of commentary about the supposed dangers of dollarizing the Argentine economy. Many commentators, however, appear to rely on theories that do not reflect the actual experience of dollarization in three Latin American countries: Panama, Ecuador, and El Salvador. In this post, we attempt to refute some of the most salient myths about dollarization in Latin America.

1. Dollarization leads to a loss of competitiveness and weak growth.

False: The main advantages of dollarization are a) it ends currency devaluation / depreciation b) it prevents the political class from monetizing the debt and causing high inflation à la Argentina.

Those advantages do not take away from a dollarized country’s ability to be economically competitive and maintain above‐​average growth. See the case of Panama, which dollarized in 1904. In recent decades, Panama’s economic growth has been among the highest in the region, and its current level of per capita GDP far exceeds those of non‐​dollarized peers such as Brazil and Colombia.

Source: World Bank

While some argue that Panama’s success is due to the Panama Canal, the proceeds from the Canal’s activity as a percentage of GDP has been less than what other countries in the region obtain by exporting a single commodity. Rather, Panama’s economic strength is based on its open, internationalized banking system, which allows the country to attract foreign capital and guarantees liquidity in the economy.

A country does not become competitive via currency devaluation or depreciation. Were that the case, Argentina today would be extremely competitive, but it is not. Conversely, if an economy became competitive by devaluing its currency in real terms, then Japan would have become significantly less competitive while its currency appreciated by 176 percent versus the U.S. dollar between 1960 and 2004. However, the Japanese economy enjoyed an export boom during said period. On the other hand, the Colombian peso depreciated by 48 percent between 1960 and 2004, yet its exports grew half as fast as those of Japan.

As Manuel Hinds, a former finance minister in El Salvador, explains, Japan succeeded not by devaluing its currency, but rather by “shifting from lower‐ to higher‐​value‐​added production when the currency appreciated in real terms. Germany did the same [in the post‐​war period]. That is true competitiveness.” Hinds adds that devaluation merely favors the profitability of current, lower‐​value‐​added production and deters a shift towards higher‐​value‐​added production.

2. Because growth has been slow in Ecuador and El Salvador, dollarization has not succeeded there.

False: Ecuador has not put in place the right supply‐​side policies to generate Panama‐​like economic growth, and El Salvador has backtracked in this respect since the 2000s. Dollarization is not a silver bullet. It needs to be accompanied by other pro‐​growth policies that have been absent in Ecuador and El Salvador, thus their mediocre growth since they dollarized in 2000 and 2001 respectively.

Nonetheless, dollarization has succeeded in both countries because their dollar regimes prevented fiscally profligate, hard left‐​wing governments from de‐​dollarizing, re‐​introducing weak currencies, and monetizing the debt (Rafael Correa in Ecuador and the FMLN in El Salvador).

As a result, both Ecuador and El Salvador have faced fiscal crises in the last few years. However, said problems have not affected the average citizen, who has maintained a sound currency and some of the lowest inflation levels in Latin America.

Also, as citizens of dollarized countries, Ecuadorians and Salvadoreans benefit from far lower interest rates and longer loan periods than under “monetary sovereignty” regimes. Plus, dollarization imposes an intrinsic hard budget constraint on both their governments and parliaments. Hence, those countries’ fiscal situation likely would have been much worse under a national currency.

3. Dollarization failed in Argentina in the 1990s.

False. In the 1990s Argentina had a currency board that exchanged dollars for pesos, a system and that is sometimes confused with dollarization. In fact, equating that exchange‐​rate system with dollarization is misleading. As Professor Steve Hanke explains, “There are three distinct types of exchange rate regimes: floating, fixed, and pegged—each with different characteristics and different results” (see the table below).

Source: Steve H. Hanke, “A Money Doctor’s Reflections on Currency Reforms and Hard Budget Constraints,” in Public Debt Sustainability: International Perspectives, eds. Barry W. Poulson, John Merrifield, and Steve H. Hanke (Lanham, MD: Lexington Books / Rowman & Littlefield, January 2022), pp. 139–69.

Given the differences between exchange rate regimes, it is incorrect to ascribe the main characteristics of dollarization to a currency peg, which can be changed or done away with. This is not the case with dollarization, whereby a country replaces its currency with the U.S. dollar at a given rate and grants the latter legal tender (de‐​dollarization is most feasible under a totalitarian regime such as Robert Mugabe’s in Zimbabwe). A peg also leaves a country with monetary policy faculties, a partly domestic source of the monetary base, and, hence, the possibility of a balance of payments crisis. None of these factors are present under dollarization.

An orthodox currency board provides an alternative version of a fixed exchange rate regime. Once in place, it sets the exchange rate but carries out no monetary policy, so that the foreign‐​based monetary base remains, as Hanke writes, “on autopilot.” Under a currency board—as with dollarization— the balance of payments determines the monetary base as it moves “in a one‐​to‐​one correspondence” with any changes in foreign reserves. This prevents monetary policy and exchange rate policy from colliding, thus precluding balance of payment crises (as is the case in floating rate systems).

Had Argentina implemented an orthodox currency board in the 1990s, it would have carried out a fixed exchange rate policy but no monetary policy (such a currency board acts as a straitjacket on the local monetary authorities). Under official dollarization, the dollar would have had legal tender, the peso would have ceased to circulate, and the central bank would have become obsolete in terms of monetary policy. Neither was the case.

As we explain in our policy brief, Argentina’s convertibility system of the 1990s, which fixed the peso to the U.S. dollar, had several characteristics that made it, in Professor Hanke’s terms, an “unorthodox currency board.” Namely, the central bank still controlled the impact of capital inflows and outflows on the money supply (through sterilization and neutralization), it carried out monetary policy, and it acted as a lender of last resort. The convertibility system even came under a dual currency regime, with different official exchange rates for imports and exports. Each of these features made the convertibility system incompatible with both an orthodox currency board system and official dollarization,

Despite its inherent defects, Argentina’s convertibility system did cause the inflation rate to drop from over 2,600 percent in 1989–1990 to less than 1 percent in 1998. Due to its design flaws, however, the Argentine peso began to lose parity with the dollar in 2001, when currency market speculators smelled blood. In January 2002, Argentina carried out a chaotic exit from its fixed exchange rate.

4. The loss of monetary sovereignty leaves a country at a disadvantage due to the inability to counter external shocks with monetary policy.

False. As Hinds writes, Panama, Ecuador, and El Salvador have all “calmly endured the 2008 and COVID-19 crises with much lower interest rates than in the rest of Latin America.”

Besides, dealing with a crisis by devaluing the local currency might bring the mirage of (very) short‐​term relief, but this is offset by the necessary consequences of devaluation: the loss of purchasing power, higher inflation and interest rates (than in a dollarized scenario), and the strong incentive to maintain low‐​value‐​added production.

In extreme circumstances, finance ministers of developing countries—both formally dollarized and non‐​dollarized— head to Washington looking for the same thing: a loan in U.S. dollars from the IMF, the repayment of which becomes more onerous with a weakening currency. As Hinds explains, the IMF’s power lies in its ability to allow developing countries to access dollars, particularly in times of crises and when the market shuts out funding for particular governments.

Consider, moreover, the effects of devaluation. As Andrei Levchenko and Javier Cravino found in the case of Mexico’s 1994 “Tequila crisis,” “the consumers in the bottom decile of Mexican income distribution experienced cost of living increases about 1.25 times larger than the consumers in the top income decile” during the two following years. Hence, the authors conclude that the distributional effects of large devaluations are “anti‐​poor”. In Professor Hanke’s words, “when the currency loses value, you import inflation.”

Maintaining a weak national currency might appeal to certain central bankers, who would remain employed and could still act as protagonists in times of crisis, when, according to theory, currency devaluation or depreciation is in the national interest. The very rich are largely unaffected, not least because a large portion of their assets tends to be held already in U.S. dollars or other hard currencies.

For the bulk of the population, however, maintaining purchasing power is of the utmost importance. In fact, as we have seen, a sharp loss in a currency’s value is most detrimental to the poorest segments of the population.

5. Dollarization can lead to very high unemployment levels because of external shocks, while flexible exchange rate regimes can withstand such shocks far better.

False: Panama and Ecuador have proved that dollarized countries in Latin America can maintain low unemployment levels compared to non‐​dollarized peers, even those with independent central banks such as Brazil and Colombia.

Source: World Bank

A depreciating currency hinders economic growth in the long term, all things being equal. While a weakening currency might reduce the price of labor, thereby stimulating growth and employment in the short term, it raises the cost of capital in the form of higher interest rates. This discourages investment, which is the source of job creation in the long run.

6. The Federal Reserve oversees all monetary policy for dollarized countries.

False. Although dollarization does take away a country’s ability to set its own interest rates and print its own national currency, while dollarized countries’ inflation rates tend to merge with those of the United States, liberalization of the banking system can grant an important degree of independence.

As economist Juan Luis Moreno‐​Villalaz argued in the Cato Journal in 1999, Panama’s banks, which have been integrated to the global financial system after a series of liberalization measures in the 1970s, allocate their resources inside or outside the country without major restrictions, adjusting their liquidity according to the local demand for credit or money. Hence, changes in the money supply—which arise from the interplay between local factors and the specific conditions of global credit markets—and not the Federal Reserve, determine Panama’s monetary policy. Fed policy affects Panama only to the same extent that it does the rest of the world.

7. Dollarization is a U.S. imperialist policy.

False. No official institution in Washington supports or promotes dollarization. The White House and the U.S. Congress are usually disinterested in the monetary policy of Latin American countries. On the other hand, the large multilateral organizations, namely the World Bank and especially the International Monetary Fund (IMF), tend to oppose dollarization initiatives. For instance, when former Ecuadorean president Jamil Mahuad dollarized in early 2000, he did so against the express wishes of the IMF and the World Bank. Unsurprisingly, current and former IMF economists now oppose Argentina’s potential dollarization.

In part, the IMF’s resistance to dollarization can be explained from a public choice perspective. As part of its mission, the IMF provides member countries with “capacity development, which is technical assistance and training of government officials” in different areas, including “monetary and exchange rate policies.” If a country dollarizes, it no longer carries out such policies. Nor does it employ central bank officials for the IMF to train in terms of monetary and exchange rate policies. This is problematic not only for the IMF. In Latin American countries, economists have strong incentives to work for the local central bank. As Professor Hanke argues, a stint at a Latin American central bank has become the equivalent of holding an advanced university degree. Moreover, central bank economists in Latin America often aspire to an eventual post at the IMF itself. In a dollarized country, no such career path exists for economists. In part, this also explains the opposition to dollarization that is often voiced by local macroeconomists.

Another frequent argument against dollarization is that it is economically harmful due to the loss of seigniorage, the price paid to a currency’s issuer. As we explain in our policy brief, however, the so‐​called loss involved is small and, ultimately, a minimum price to pay for an end to high inflation. Especially in countries with poor monetary policy, the cost of giving up seigniorage is the equivalent of an insurance premium paid for protection against the higher risks of maintaining a local currency.

Jeffrey Miron

This article appeared on Substack on August 31, 2023.

Many policies have good intentions and aim to address real problems in the economy or society. A standard concern, however, is that government attempts to fix such problems generate backlash, meaning heightened antipathy toward an intervention’s goal. Affirmative action or sexual harassment policies, for example, might increase resentment toward minorities and women.

A recent paper provides evidence of backlash in a different context:

The 1965 Voting Rights Act (VRA) paved the road to Black empowerment. How did southern whites respond? Leveraging newly digitized data on county‐​level voter registration rates by race between 1956 and 1980, and exploiting pre‐​determined variation in exposure to the federal intervention, we document that the VRA increases both Black and white political participation. Consistent with the VRA triggering counter‐​mobilization, the surge in white registrations is concentrated where Black political empowerment is more tangible and salient due to the election of African Americans in county commissions. Additional analysis suggests that the VRA has long‐​lasting negative effects on whites’ racial attitudes.

And, backlash seems to occur widely:

Do laws affect the beliefs and attitudes held by the public? Using data from [American National Election Surveys], the [General Social Survey], and Gallup …, I find robust evidence that virtually every major U.S. social policy law of the past half‐​century has induced significant backlash. That is, the public moved in the opposite ideological direction of each law.…

The Civil Rights Acts of the 1960s, the legalization of abortion in the 1970s, the relaxation of gun control beginning in the 1980s, the Defense‐​of‐​Marriage Acts of the 1990s, the legalization of marijuana beginning in the 2000s, the legalization of gay marriage in the 2010s, and more – across various categories of social policy and across the ideological spectrum, backlash has time and time again been the consequence.

The fact that laws can generate backlash does not, by itself, make them undesirable; benefits might still exceed costs. The possibility of backlash, however, should give pause about imposing “good things” on the citizenry. Sometimes the treatment is worse than the disease.

Marc Joffe

The City and County of San Francisco are fighting a court injunction against the removal of tent encampments from city streets. Instead of battling the injunction in court, officials should consider meeting the judge’s criteria for restarting these removals by providing space and shelter beds for the local homeless.

A Ninth Circuit judge ordered the city to stop dismantling homeless camps in response to a suit from an advocacy group, the Coalition on Homelessness (case 4:22-cv-05502). The court concluded that because the city lacks available shelter beds, forcing homeless individuals off the street violates the Eighth Amendment’s prohibition of cruel and unusual punishment.

Government officials expressed frustration with the injunction as they face public criticism over street conditions and hope to make a favorable impression on visitors attending November’s Asia‐​Pacific Economic Cooperation (APEC) Leader’s Summit. Mayor London Breed participated in an unusual demonstration in front of the courthouse on Aug. 23 where the case is being heard. She told protestors:

We are compassionate, we are supportive, we continue to help people. But this is not the way. It is not humane to let people live on our streets in tents, use drugs. We have found dead bodies, we found a dead body in these tents. We have seen people in really awful conditions and we are not standing for it anymore. The goal here is to make sure that the court of appeals understands we want a reversal of this injunction that makes it impossible for us to do our jobs.

California Governor Gavin Newsom told the San Francisco Chronicle that the court order was “preposterous” and “inhumane.”

But rather than fight the injunction, the government could simply provide an adequate number of shelter beds and thereby meet the court’s main condition for removing encampments. There is a lot of unused and underused space around the city that could be pressed into service.

As I pointed out in a previous post, there are 400,000 square feet of available space in two subterranean levels of the Salesforce Transit Center. These levels were built to accommodate future train service, but the required rail extension has yet to be funded and would take years of construction once funding is secured. So, this space could be used as shelter for an extended period.

When I previously suggested this idea readers expressed concern that it would concentrate too many homeless people in one place and that the facility lacked natural light. But there are alternatives.

The city has a large volume of vacant office and retail space that could serve as temporary shelter. CBRE, a commercial real estate firm, recently estimated San Francisco’s office vacancy rate at 31.6%, a record high. This translates into more than 27 million square feet of available space. Many of the empty offices are in older, less desirable buildings that will likely be vacant for many years, even if the local office market rebounds. The city should be able to rent many of these older offices for use as shelter.

While converting offices to permanent housing is costly, the same should not be the case for temporary shelter. Repurposing offices as apartments requires substantial construction and demolition but temporary shelter occupants do not need all the costly improvements, like private bathrooms, included in permanent apartments. Shelter dwellers do need showers, and offices typically lack them, but portable showers can be installed at a reasonable cost.

In nearby San Rafael, CA, a private social services organization converted a floor of an older office building to a shelter for up to 45 people in 2020. The group, Homeward Bound of Marin, outfitted the office floor “with beds, lockers and storage for residents as well as a dining and sitting area”. San Francisco should be able to adopt and scale up this approach.

The city also has hundreds of vacant storefronts that could each house a smaller number of individuals. City College of San Francisco suffered a catastrophic enrollment drop before and during the pandemic, so it could also make space available for shelter purposes.

Although plenty of space is available in San Francisco, it remains a densely populated, high‐​cost area. For this reason, the city government might consider working with the state and nearby counties to implement a regional solution to sheltering the city’s homeless. But implementing that idea would require flexibility from the plaintiff and the judge in San Francisco’s case.

Unfortunately, homeless advocates like those who filed suit often have a fixed idea about what a “right to housing” should look like: permanent, supportive apartment units in the city proper. But as Los Angeles and other California cities have found, building this type of housing is both time‐​consuming and expensive.

San Francisco, other California cities, and the state government have collectively spent billions of dollars on homelessness, but tens‐​of‐​thousands are still living on city streets creating unsafe and unsanitary conditions. Rather than continuing to overspend without solving the problem, California governments should implement more cost‐​effective albethey less idealistic approaches, either on their own or with private organizations more accustomed at focusing on the bottom line.

Walter Olson

Election reform does not appear among the 25 planks in Vivek Ramaswamy’s published policy plan. This makes it all the more surprising to learn that the GOP presidential candidate has a four‐​point plan to reform elections in the United States, absent the enactment of which he does not think former president Donald Trump should have been required to acknowledge defeat and leave office.

To make matters even worse, if that’s possible, the four‐​point plan is both unimpressive and heedless of the states’ historic role in elections.

For those coming in late to this controversy, on Meet the Press, Aug. 27, the biotech‐​entrepreneur‐​turned‐​presidential‐​candidate gave an astounding response to a question about Vice President Mike Pence’s options on Jan. 6. He said that, as Pence, he would have certified the election results only if Congress agreed to enact a package of national election reforms, including single‐​day voting, paper ballots, and the verification of voter identity through government ID. (Later clarification, with Andrea Mitchell on MSNBC, didn’t help.)

Ramaswamy, whose ideas on the franchise include a role for the passage of civics tests, apparently thinks the vice president can coerce Congress into passing laws on threat of “otherwise we get to stay in power, see?” Confusion about the veep’s powers aside, it is the fantasy of a would‐​be caudillo to suspend the constitutional transition of power following an election held under the actually existing rules, in favor of a notional do‐​over held under other electoral rules imposed by threat of autocoup.

And all for what? What are the reforms so crucial that an election result obtained without them can be dismissed as illegitimate and not the lawful basis for a change in administrations?

To the three conditions for allowing democratic elections to proceed he recited on Meet the Press — paper ballots, voter ID, and same‐​day voting — Ramaswamy added a fourth in a tweet later Sunday, the designation of Election Day as a national holiday.

Let’s take the four one at a time.

* There are legitimate, well‐​taken security objections to the use of paperless ballot systems. Does Ramaswamy realize that the pro‐​security side won this debate some years back, and that only a few states, none of them swing, have yet to phase out the old paperless technology? Andy Craig points out (source) that the great majority of states have already stopped using the old systems, if they ever did, and that includes every presidential swing state and every state contested by Trump.

* Strict voter ID verification may be a good idea for other reasons such as administrative convenience, and progressive commentators have unfairly attacked its use. But as Cato readers know, a study in the Quarterly Journal of Economics found that“strict ID requirements have no effect on fraud, actual or perceived.” There is no evidence that toughening voter ID procedures in 2020 would have altered the outcome in any state.

* Ramaswamy soon retreated from his talk of abolishing all absentee and mail voting, since deployed military and the like need *some* way to vote. Note that he also demands the abolition of in‐​person early voting, which even paranoiacs don’t tend to view as a threat to election integrity. As a practical matter, most voters, including GOP‐​leaning retirees, value having some of the new options, which is one reason states have expanded them aside from the incentives created by the COVID-19 pandemic.

* Although unions and liberal elected officials often favor making Election Day a national holiday, many election administrators quietly oppose the idea, suspecting its effects on both turnout and smooth operation of the process will be other than advertised.

To sum up: Among Ramaswamy’s four election reform planks, one is years behind the times; one doesn’t have the advertised effect; one would take away convenience valued by the public; and one is a dubious wish list item of unions and liberal pols. All four, by imposing a uniform national standard, would override states’ discretion to adopt policies reflecting local preferences and circumstances, even though Article 2, Section 1 of the Constitution is careful to reserve almost entirely to the states the key steps in electing the president. There is no evidence that any of the four measures, or all four together, would have changed the result in the 2020 presidential election, or in any one state.

Let’s be frank about the politics here. Ramaswamy is obliged to humor the #StopTheSteal delusion because that’s where a large mass of GOP primary votes are. To the extent there are legitimate conservative reform ideas in the mix, they are sure to get lost in the shuffle.

As states and their governors have shown, there are definitely some legitimate conservative ideas about election reform in circulation, on topics from ballot privacy to speedy tabulation. I spoke with Caleb Brown in 2021 at the Cato podcast about how to disentangle these ideas from the stolen election nonsense. It has gotten no easier since then.

Anastasia P. Boden

The Constitution literally made an appearance at the first Republican presidential debate last Wednesday. When Doug Burnham was asked whether he supported a federal abortion ban, the pro‐​life governor whipped out his pocket Constitution and waved it around in the air, noting that whatever his policy preferences, he believes enacting a federal ban is beyond Congress’s enumerated powers. This was the first of nearly two dozen times the candidates mentioned the Constitution.

But for all of their claims of fidelity to the Constitution, the candidates sure got a lot wrong about it. Vivek Ramaswamy, for instance, said in his closing remarks that the Constitution (ratified in 1788), is “what won us the American Revolution” (which ended 5 years earlier, in 1783). A slip of memory, perhaps, but it was notable given his suggestion that the voting age be raised to 25 for 18‐​to 24‐​year‐​olds that can’t pass a civics test. It’s also notable that such a voting requirement would violate the 26th Amendment.

For his part, Ron DeSantis emphasized Florida’s dedication to teaching constitutional history in schools, but many of his own measures have lost against constitutional challenges. The governor has garnered a reputation for reining in “wokeness,” but in furtherance of that goal some of his actions have sacrificed private businesses’ and individuals’ constitutional freedom to make their own choices. Courts have enjoined his ban on vaccination requirements as applied to private cruise lines, his ban on private social media companies’ ability to moderate user content, and provisions of the STOP WOKE Act that prohibit discussion of Critical Race Theory in universities and private businesses.

The most glaring misapprehension the candidates had about the Constitution was its limits on their own power should they become president. Take their remarks on the administrative state. Many candidates supported scaling back the myriad agencies that govern everything “from gas stoves to Greek yogurt” largely free of congressional (and sometimes even executive) oversight. Ramaswamy, for example, said “[t]he only war that I will declare as US President will be the war on the federal administrative state that is the source of those toxic regulations acting like a wet blanket on the economy.” Asa Hutchinson used similarly war‐​laden language, pledging “to reduce … 10 percent our federal nondefense workforce. That’s a specific pledge … that attacks the administrative state.”

Reducing the administrative state is a pro‐​Constitution sentiment. Federal agencies often unconstitutionally wield the powers of all three branches, making rules and regulations, enforcing them against violators, and adjudicating guilt before in‐​house judges. And when individuals go to court to challenge the agencies’ power, deference doctrines require judges to defer to the agencies’ interpretations of statutes and regulations—even if there’s an objectively better interpretation. In short, administrative agencies now act as judge, jury, and executioner, in violation of the Constitution’s promise of separation of powers.

But what can the president do about any of this? A few of the candidates seem to think they can simply get rid of entire departments with a snap of their fingers. Ramaswamy, DeSantis, Burgum, and Pence all vowed to abolish the Department of Education. But even assuming the DOE or other agencies are unconstitutional or a bad idea, there are limits on the president’s ability to scale them back. A president could refuse to make appointments, get rid of executive department‐​created boards, spend less than Congress has appropriated (through a process called “rescission”), or eradicate specific abusive practices, but they’ve historically sought authority to make more sweeping changes to agencies and departments via reorganization legislation.

In other words, eliminating DOE is going to require support from Congress. Maybe what the candidates mean is that they’d seek congressional authority to eliminate various departments. But form matters.

The candidates also seemed to misunderstand the scope of presidential power when they suggested they’d invade Mexico as a response to rising opioid abuse, which they blame on Mexican cartels. DeSantis said he’d “send troops” into Mexico to take out fentanyl labs and drug cartel operations. Pence referred to “partner[ing] with the Mexican military” to “hunt down and destroy the cartels.” And Ramaswamy, Hutchison, and Tim Scott all alluded to using military resources to stop the flow of fentanyl at the border.

The president can’t just invade other countries. Congress, not the president, has the power to make or declare war. As James Madison wrote, “In no part of the Constitution is more wisdom to be found, than in the clause which confides the question of war or peace to the legislature, and not to the executive department.” This allocation of powers prevents the “temptation” that would arise for one person to make such a weighty decision. “War,” he concluded, is “the true nurse of executive aggrandizement.”

The president does, however, have the power to repel attacks. Perhaps that’s why some of the candidates used language suggesting that the flow of fentanyl constitutes an “invasion” of the United States. Ramaswamy alluded to “the invasion of our own southern border,” DeSantis said he would declare the situation a “national emergency,” and Chris Christie said China was engaging in “an act of war” by sending chemicals to Mexico to be used in creating fentanyl. This is the same rhetoric the state of Texas is using to justify putting buoy‐​barriers in the Rio Grande, potentially in violation of federal law and Mexican‐​American treaties. But as law professor (and Cato’s B. Kenneth Simon Chair) Ilya Somin argues, neither immigration nor drug smuggling are an “invasion” in the constitutional sense.

As Justice Robert Jackson famously said, emergency powers “tend to kindle emergencies.” If the last few years have taught us anything, it’s that we should take care before calling something a crisis that requires executive intervention. Since COVID, we’ve seen politicians suggest there’s a student loan crisis, a climate crisis, a gun violence crisis, a border crisis, and a drug crisis. The president, say the candidates, can save us from all of these problems.

This is just the demagoguery our Founders were worried about and it’s why they imagined an office that would resist the “transient impulse[s] of the people,” not one that would egg those impulses on by calling everything an emergency.

The candidates aren’t the only ones with an exaggerated sense of the president’s importance in our constitutional structure. One of the debate’s moderators asked each candidate how they’d “inspire us.” But as Federalist 69 notes, compared to English monarchs, American presidents have “no particle of spiritual jurisdiction.” That is, Americans don’t need a spiritual leader. We need a president who will respect the Constitution and the modest role it creates for the federal government—including the executive.

Jeffrey A. Singer

Bloomberg News is reporting that U.S. Department of Health and Human Services Assistant Secretary for Health Rachel Levine has sent a letter to Drug Enforcement Administrator Anne Milgram asking her agency to reclassify marijuana (cannabis) as a Schedule III drug. The DEA defines Schedule III drugs as “drugs with a moderate to low potential for physical and psychological dependence.” The agency currently classifies marijuana as Schedule I: a drug “with no currently accepted medical use and a high potential for abuse.” Of course, that definition begs the question, “Currently accepted by whom?” But an even more important question is, “Why should a plant people have been growing and using recreationally for millennia be scheduled as a drug when alcohol is not?”

When Congress authorized the law enforcement agency to judge the clinical applications, efficacy, and potential dangers of drugs, it authorized cops to practice medicine. And they have been engaging in malpractice. For example, no serious person would argue that marijuana has “no currently accepted medical use.” As far back as 1916, Sir William Osler, the so‐​called “father of modern medicine,” recommended cannabis as the “drug of choice” for treating migraines. But cannabis’s history of “accepted medical use” dates back to at least 2800 B.C.

The DEA also schedules diamorphine (brand‐​named “heroin” by Bayer, its manufacturer in the 19th century) Schedule I even though it is legally used in the U.K. and much of the developed world to treat pain and is employed for medication‐​assisted treatment of opioid use disorder (OUD) in Switzerland, the Netherlands, Germany, Canada, the U.K, Denmark, and Spain.

And even though a bipartisan consensus is emerging that psychedelics may be extremely helpful in treating post‐​traumatic stress disorder, depression, addiction, and compulsive disorders, and in end‐​of‐​life care, the DEA placed them on Schedule I, depriving researchers, clinicians, and patients of these tools for 50 years.

In her letter to the DEA, Assistant Secretary Levine wrote that her request was based upon the Food and Drug Administration’s review of marijuana’s classification. If the law enforcement agency reschedules marijuana as Schedule III, it will undoubtedly make it easier for clinical researchers to conduct high‐​quality studies on the plant’s clinical uses and effectiveness. But it still means that the millions of people who use marijuana recreationally rather than medicinally are committing a federal crime. It also ensures that a black market in the prohibited plant will continue to thrive.

Instead of deferring to administrative agencies to reschedule marijuana, Congress can and should de‐​schedule it.