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Scott Lincicome

As I mentioned when introducing Cato’s new Defending Globalization project two weeks ago, we’ll be publishing new multimedia content throughout the fall and into 2024. Today we have three new essays and our first piece of interactive content: a 20‐​question quiz on all things globalization.

You can find the quiz embedded on the main project page or at this direct link. We hope that it not only tests your knowledge of all things globalization, but also challenges a lot of conventional wisdom on international trade, supply chains, global development, and the United States’ experience in the global economy. Please be sure to play and share it widely.

Today’s new Defending Globalization essays are as follows:

The Problem of the Tariff in American Economic History, 1787–1934, by Phillip W. Magness
Digital Trade in Services: Globalization’s Exciting New Frontier, by Gary Winslett
The World Trade Organization: Myths versus Reality, by James Bacchus

Each coincidentally covers a topic that’s recently been in the news, so we hope that readers will find them particularly useful. Collectively, the essays also indicate the wide range of issues that our project will cover in the months ahead.

Plenty more to come. Stay tuned and enjoy.

Marc Joffe

As the Wall Street Journal recently reported, retirements and career changes are exacerbating a national shortage of Certified Public Accountants (CPAs). Those departing the profession could be replaced by new college graduates, but state licensing laws appear to be deterring some young people from pursuing an accounting career.

The Bureau of Labor Statistics projects continued growth in the demand for accountants and auditors due to the “complex tax and regulatory environment,” among other factors. Baby boomer retirements and burnout among younger accountants are constraining the supply of new professionals. A shortage of CPAs threatens to prevent local governments from completing timely audits, as required by some states and the federal government.

Although certification is not required for all accounting activities, a CPA is needed to conduct an external audit or defend a tax return before the IRS. Consequently, state laws affecting the entry of new CPAs are exacerbating the shortage of accountants.

All states require individuals seeking a CPA to pass a four‐​part, 14‐​hour exam maintained and scored by the American Institute of Certified Public Accountants (AICPA). As the accompanying chart shows, the number of individuals sitting for the CPA exam has declined sharply since 2016. Only about 67,000 people took the exam in 2022. Since many test‐​takers fail one or more portions of the test and retake them one or more times, the number of individuals obtaining the credential is much lower than the number of test‐​takers in any given year.

Many business undergraduates are avoiding the CPA track because states generally require five years of post‐​secondary education (which is usually expressed in law as 150 credit hours). This standard is part of the model legislation maintained by the National Association of State Boards of Accountancy (NASBA), whose members include accounting boards from all fifty states, the District of Columbia, Puerto Rico, the Virgin Islands, Guam, and the Northern Mariana Islands.

This means that it is generally impossible to get a CPA without attending at least one year of graduate school. For some students, this requirement may be too much given modest pay and long working hours in the accounting profession.

Policymakers in some states are considering liberalizing their CPA requirements, but the NASBA framework may be a constraint. Oklahoma passed a reform in 2023 that remained within NASBA limits. Previously, the state required candidates to complete all 150 of the required credit hours before taking the CPA exam. With the passage of SB 171 earlier this year, aspiring accountants can take the exam after completing their undergraduate degree, but they will still need to complete the additional 30 credit hours before being certified.

In Minnesota, the state’s society of CPAs (MNCPA) proposed legislation that would grant certification to individuals who pass the CPA exam, complete 120 credit hours of education, and have two years of relevant professional experience. Bills with bipartisan sponsors containing this language were filed in both the Minnesota State House (HF 1749) and Senate (SF 1660), but neither bill passed out of the committee to which it was referred. According to a blog post by MNCPA government relations director Geno Fragnito, the bills will be carried forward into the 2024 legislation when committee debates are expected.

The South Carolina Association of CPAs (SCAPA) is also working on reform legislation. Its draft bill would authorize the state Board of Accountancy “to approve up to thirty hours of educational credit derived from non‐​accredited sources, such as unaccredited courses, apprenticeships, certificates, experiential learning, or alternative educational programs.” So, an aspiring CPA would still have to complete a bachelor’s degree but would have multiple educational alternatives to a fifth year of graduate school.

The association’s bill contains other reforms such as expanding the time limit for passing all four CPA exam sections from 18 to 36 months, and giving the board the authority “to issue a reciprocal license to a CPA possessing an active certificate/​license/​permit to practice from any jurisdiction, regardless of that jurisdiction’s substantial equivalency status.”

As he researched CPA licensing requirements in other states, SCAPA Chair David Knoble found a couple of exceptions to NASBA’s 150‐​hour educational standard. New York State allows individuals to become CPAs if they pass the exam and have fifteen years of relevant work experience. Ohio provides a certification path that involves getting four years of relevant experience plus a score of at least 670 on the Graduate Management Admission Test (GMAT). Depending on their reciprocity requirements, other states may prevent New York and Ohio CPAs lacking 150 credit hours of education from practicing.

NASBA’s legislative framework and states’ adherence to it is attractive because it provides an interstate licensing environment akin to universal licensing recognition. But NASBA is setting a universally high bar. As NASBA CEO Ken Bishop told the Journal of Accountancy:

Should any state or jurisdiction lower the licensure requirement to 120 hours, their CPAs would no longer be automatically substantially equivalent and would no longer enjoy the mobility and reciprocal practice privileges they currently are afforded. Lowering the bar to 120 hours is only one of the alternatives we have heard that has been discussed and considered. Others, including lowering the cut score for passing the CPA Exam, have the potential and risk of creating the perception of dumbing down the profession. No one is talking about, for example, lowering the bar to become an attorney, and they’re also suffering from lack of entry.

But the legal profession is not experiencing the kind of acute shortage confronting accountancy. Indeed, Wells Fargo’s Legal Specialty Group found that in 2022 top law firms billed 1.9% fewer hours than they did in 2021. And the number of individuals taking the bar exam has remained fairly steady in recent years.

While the U.S. does not need more lawyers, it does need more CPAs. Minnesota and South Carolina are leading the way toward needed reform of the CPA licensing regime. Accounting societies and legislators in other states should take notice.

Daniel Raisbeck and Gabriela Calderon de Burgos

In a recent article, The Economist assures that inflation‐​ridden Argentina should not and cannot dollarize. The publication’s anti‐​dollarization stance is part of a broader warning against free market economist Javier Milei, who gained a surprise victory in last month’s primary elections and vows to dollarize the Argentine economy if he wins the presidency later this year.

The Economist misunderstands the most fundamental aspects of Milei’s plan to dollarize Argentina and shut down its central bank. This is, in fact, the best thought‐​out and most urgent part of his political platform. It affirms, for instance, that “Argentine banks and households would need a float of dollars to get up and running, which Mr. Milei has no way of providing.”

Dollarization and Available Dollars

As we explain in our recent policy brief, Argentina’s central bank might lack dollars, but Argentine citizens and companies do not. Private sector actors do try to shield themselves from the country’s frequent bank runs by holding dollars in other jurisdictions or under their mattresses. At the end of 2022, Argentines held over $246 billion in foreign bank accounts, safe deposit boxes, and mostly undeclared cash, according to Argentina’s National Institute of Statistics and Census. This amounts to over 50 percent of Argentina’s GDP in current dollars for 2021 ($487 billion). Hence, the dollar scarcity pertains only to the Argentine state.

To dollarize, Argentina needs to replace the peso‐​denominated monetary base with the equivalent in U.S. dollars at — or slightly above — the free market rate of exchange. Dollarizing at a rate far above that of the free market would be counterproductive because it would produce even higher inflation levels for a prolonged period. On the other hand, dollarizing at a rate below the free‐​market exchange rate would lead to a bank run because depositors would act to protect their savings from a forced devaluation.

In Argentina’s particular case, there is an official exchange rate—currently ARS $365—which most people cannot access. Hence, the black market exchange rate, known locally as the “blue dollar,” is the closest approximation to what a free‐​floating peso would be worth in dollar terms. At the moment, ARS $740 will buy you one blue dollar.

In Argentina’s case, economist Iván Carrino argued in May that, while the central bank’s liabilities amounted to ARS $18.8 trillion, dollarizing overnight at ARS $470, the blue dollar exchange rate at the time, would have required around USD $40 billion (the result of dividing the central bank’s liabilities by the exchange rate). The central bank’s total assets, meanwhile, were worth $34.5 billion. In theory, therefore, the government would have lacked around $5.5 billion—or around 1.1 percent of GDP— to dollarize at the market rate.

Nevertheless, the aforementioned imbalance is not as significant as it may seem at first. The last two dollarization processes in Latin American countries prove that “purchasing” the entire monetary base with U.S. dollars from one moment to the next is not only impractical, but it is also unnecessary.

The Mechanics of Dollarization

In both Ecuador and El Salvador, which dollarized in 2000 and 2001 respectively, dollarization involved parallel processes. In both countries, the most straightforward process was the dollarization of all existing deposits, which can be converted into dollars at the determined exchange rate instantly.

As Argentine economist Nicolás Cachanosky explains, when you dollarize deposits, the danger of a bank run is minimized insofar as dollarization takes place at the market rate and monetary transactions continue to take place within the banking system.

Crucially, in both Ecuador and El Salvador, dollarization not only did not lead to bank runs; it led to a rapid and sharp increase in deposits, even amid economic and political turmoil in Ecuador’s case. With the mere announcement of dollarization in January 2000, Ecuadorians began to deposit their dollars in banks even though the latter were so beleaguered they were paying negative interest rates.

The tendency held. Between January and December of 2000, Ecuador’s total deposits increased by $733 million, whereas the total amount of international reserves in December of 1999 stood at a mere $872 million. Also, whereas deposits accounted for just around 15 percent of GDP in 1999, they had increased to 19.1 percent of GDP at the end of 2000.

Deposits continued to increase over the following decades. At the end of 2022, Ecuador’s deposits amounted to 37.9 percent of GDP. By way of comparison, Argentina’s deposits reached a meager 22.5 percent of GDP at the end of last year.

Dollarizing the Circulating Currency

The other, parallel dollarization process involves turning the national currency in circulation into U.S. dollars. Critics who claim that Argentina cannot dollarize due to an insufficient amount of dollars assume that the government must count with the entire dollar amount necessary to buy all pesos in circulation on day one. Nevertheless, this was not the case in either Ecuador or El Salvador.

In Ecuador, the sucres in circulation were dollarized within a nine‐​month period mandated by the government, which had to rely on the Coca‐​Cola Company’s supply network to exchange dollars for sucres in remote rural areas.

According to Miguel Dávila, the president of Ecuador’s central bank when dollarization took place, the monetary authorities only had to back the central bank’s liabilities that needed to be liquid on day one of dollarization. These included all sucre coins and bills in circulation, banking reserves deposited at the central bank, and central bank deposits from state entities that were likely to require immediate withdrawals. The rest of the central bank’s liabilities were not available for withdrawal immediately. Rather, they were restructured.

This seemed like a risky bet. In December 1999, the central bank’s liabilities in dollars amounted to $1.25 billion, a figure that far surpassed the country’s international reserves. Experts thus claimed that dollarization was only viable at the extremely high exchange rate of 40,000 sucres. The market rate on the streets, meanwhile, was at or above 25,000 sucres. So who provided the dollars?

Ecuadorians did. Dollarization was announced on January 9, 2000, at a near‐​market rate of 25,000 sucres per dollar. By September of that year, 97 percent of all sucres in circulation—equivalent then to $577 million— had been exchanged for dollars. In other words, new dollar deposits had matched and even surpassed the dollar amount of the circulating national currency.

Emilio Ocampo, the Argentine economist whom Milei has put in charge of plans for Argentina’s dollarization should he win the presidency, summarizes Ecuador’s experience thus:

People exchanged their dollars through the banks and a large part of those dollars were deposited in the same banks. The central bank had virtually no need to disburse reserves. This was not by design but was a spontaneous result.

The Salvadoran Model

Dollar deposits also increased spontaneously in El Salvador, a country that dollarized in 2001. By the end of 2022, the country’s deposits amounted to 49.6 percent of GDP—in Panama, another dollarized peer, deposits stood at 117 percent of GDP.

El Salvador’s banking system was dollarized immediately, but the conversion of the circulating currency was voluntary, with citizens allowed to decide if and when to exchange their colones for dollars. Ocampo notes that, in both Ecuador and El Salvador, only 30 percent of the circulating currency had been exchanged for dollars four months after dollarization was announced so that both currencies circulated simultaneously. In the latter country, it took over two years for 90 percent of the monetary base to be dollar‐​based.

Cachanosky explains that, in an El Salvador‐​type, voluntary dollarization scenario, the circulating national currency can be dollarized as it is deposited or used to pay taxes, in which case the sums are converted to dollars once they enter a state‐​owned bank account. Hence, “there is no need for the central bank to buy the circulating currency” at a moment’s notice.

The corollary is that, although it is important for Argentina’s new government to announce dollarization as quickly as possible, the actual process of dollarizing the circulating currency can and should be drawn out. The region provides two relatively recent and successful examples of dollarization, one of which (Ecuador) was achieved fully in nine months, the other (El Salvador) in roughly 24.

The Remaining Stage of Dollarization in Argentina

The most difficult stage of dollarizing Argentina involves a particular feature of that country’s recent and tremendous inflationary build‐​up: namely, the $30 billion in LELIQ liquidity notes that, as we explain in our policy brief, are a fiscal time bomb:

The central bank issues LELIQs to mop up pesos from the market in an attempt to revive domestic demand for the local currency. Despite their constant escalation, nominal LELIQ interest rates—the current rate is 97 percent, versus 38 percent in early January 2022—have not kept up with what is now triple‐​digit inflation. The effective rate, on the other hand, stands at an astronomical 155 percent per annum.

The central bank has only been able to pay for such drastic interest rate hikes by expanding the monetary base aggressively, thus boosting inflation further. Since higher inflation leads to greater demand for hard currency, the use of LELIQs as a means to strengthen the peso has become counterproductive.

Ocampo and Cachanosky, who co‐​wrote a book titled Dollarization: A Solution for Argentina, propose to defuse the LELIQ bomb without defaulting or taking on further debt. The plan, which we summarize, involves swapping the central bank’s assets—namely, its loans to the Argentine treasury—for bonds in a foreign jurisdiction. As we summarize, the latter would then be deposited

In a new trust with the ability to issue asset‐​backed commercial paper with short‐​term maturities. The trust, which would be supported by an underwriting backstop facility … would swap LELIQs for dollar‐​denominated commercial paper, which would be paid off with proceeds from the trust’s assets until the entirety of LELIQ debt is liquidated.

Whether or not LELIQ debt is dollarized and restructured in this fashion, the issue at stake is not whether Argentina now has enough dollars to do so. The issue is that the central bank has no liquid assets with which to back this rapidly growing liability. With or without dollarization, the next government, which will take office in December, will have to deal with the LELIQ problem. After all, LELIQs are a fiscal liability of the Argentine state which will have to be restructured with or without dollarization and even without a central bank.

If done correctly, dollarization can provide a positive confidence shock that can help the new government steer Argentina away from the fiscal cliff. In fact, adopting a sound currency and reaching single‐​digit inflation levels as soon as possible are prerequisites for all the other supply‐​side reforms that Argentina needs. Dollarization is the surest and fastest way to achieve that. Furthermore, restructuring any fiscal obligation, including the LELIQs, becomes far easier with lower interest rates, another proven benefit of dollarization.

Is There a Realistic Alternative to Dollarization?

In fact, the burden of proof falls on dollarization’s critics, many of whom reveal a Panglossian belief in the sudden emergence of a responsible and independent central bank in Argentina, to show how they intend to stabilize the Argentine economy without granting legal tender to a hard currency. As Cato Senior Fellow Lawrence White explained with regard to Ecuador, “the relevant alternative to dollarization is thus not an imagined regime in which precisely calibrated depreciations of the local currency’s exchange rate are administered by experts to adjust wages.”

That is, the purported costs of losing the ability to depreciate the local currency with utter precision should be compared with the actual, massive costs of the central bank’s excessive money creation, spurred as it is by the fiscal profligacy of Argentina’s political class. It is true that ipso facto, dollarization will not turn Argentine politicians into fiscal conservatives. However, adopting the dollar will separate fiscal policy from monetary policy, which will no longer respond to local political pressure. Hence, dollarization in Argentina will significantly limit the scope of the damage that reckless fiscal policy can wreak. This brings us to another of The Economist’s mistaken assumptions

The Point of Dollarization

In its article on Milei, The Economist also argues that dollarization would make any future default “even more painful, since there would be no lender of last resort if Argentina’s central bank disappeared with the peso.” Argentina, however, already has no effective lender of last resort at the national level. Instead, its governments turn recurrently to the IMF (International Monetary Fund) as a de facto lender of last resort that provides them with—what else?—U.S. dollars.

The Economist adds that, even with dollarization, Argentine politicians “would still try to borrow too much, and there would be no central bank to inflate the debt away.” This fully misses the essential point behind the adoption of the dollar, which is to protect ordinary people’s purchasing power from the excesses of chronically profligate politicians and often subservient—or simply incompetent—central bankers. As we have mentioned, by depriving the local political class of all ability to manipulate the currency, dollarization separates fiscal policy from monetary policy.

This is why, as Manuel Hinds, a former finance minister in El Salvador, has explained, solvent Salvadorans in the private sector can borrow at rates of around 7 percent on their mortgages while international sovereign bond markets will only lend to the Salvadoran government at far higher rates. As Hinds writes, under dollarization, “the government cannot transfer its financial costs to the private sector by printing domestic money and devaluing it.”

This is yet another lesson of dollarization’s actual experience in Latin American countries. It is also a reason why the vast majority of the population in the dollarized nations has no desire for a return to a national currency. The monetary experiences of daily life have taught them that dollarization’s palpable benefits far outweigh its theoretical drawbacks.

Colin Grabow

In an ambitious move to promote coastal shipping, India’s government reportedly plans to abolish cabotage restrictions that prevent foreign vessels from transporting goods between the country’s ports. The rationale is easy to understand. With India’s merchant fleet comprising less than one percent of the world’s deadweight tonnage (essentially, carrying capacity), the existing cabotage law places the vast majority of the world’s shipping off‐​limits for transportation within India. That means fewer options, higher prices, and added pressure on other transport modes such as trucking and rail.

If India proceeds with the planned opening of its domestic maritime market, it will continue something of a recent international trend. In 2021 China relaxed its protectionist maritime measures on a trial basis to allow the transshipment of international cargo via Chinese ports on foreign‐​flagged ships. And last year Brazil eased its cabotage laws to bolster competition and the use of domestic shipping. Canada, meanwhile, extended limited cabotage privileges to European Union vessels as part of a trade agreement with the EU that took effect in 2017.

Past decades have seen other notable examples of cabotage restrictions being pared back. In 1993–2004 the European Union liberalized maritime cabotage among EU members, and in 1993 New Zealand allowed foreign vessels visiting the country in the course of conducting international trade to engage in limited domestic transport. In the latter case, even this relatively modest step appeared to produce significant benefits, correlating with a 20–25 percent decline in freight rates from 1994–2000 and improved service.

In stark contrast, the United States clings to the 103‐​year‐​old Jones Act, described by the World Economic Forum as the world’s “most restrictive example” of a cabotage law. The title is well deserved. A 1991 U.S. Maritime Administration summary of the world’s cabotage laws, for example, found the United States was one of just six countries—Brazil, Egypt, Indonesia, Peru, and Spain being the others—that required vessels used in domestic trade to be constructed in that same country. Since then, Spain has discarded its prohibition on foreign‐​built vessels, Brazil has liberalized its cabotage law, and the other countries have requirements significantly less severe than those of the Jones Act.

Numerous other countries, including neighboring Canada and Mexico, also already have commonsense waiver provisions allowing the use of foreign vessels if no domestic vessel is available. The United States, meanwhile, only allows Jones Act waivers—rarely issued—for reasons of national defense, and in recent years has made it even more difficult to obtain them.

Unwillingness to reform or repeal the Jones Act is particularly unfortunate given the significant gains the United States stands to reap from liberalization. That approximately 40 percent of the U.S. population—including over 5.5 million Americans in Alaska, Guam, Hawaii, and Puerto Rico who heavily rely on marine transport—lives in coastal areas speaks to the opportunity costs stemming from inefficient (or non‐​existent) domestic shipping. Even modest reforms would still pay considerable dividends.

When confronted with the Jones Act’s costs, supporters of the law typically attempt to justify maritime protectionism as a national security imperative. Such claims should be met with considerable skepticism. Indeed, that both China and India—countries that hardly regard national security considerations as an afterthought—have targeted their cabotage laws for reform further undermines such arguments.

Recent efforts at cabotage liberalization around the world suggest an increasing appreciation of the costs of existing maritime transport restrictions and the potential efficiency gains from their removal or relaxation. Given its maritime disposition, the United States stands to similarly benefit should it follow in these other countries’ footsteps by repealing or reforming its own highly restrictive cabotage law.

Thomas A. Berry

Virginia Tech has instituted a “bias‐​related incidents” policy, under which students may be referred to a “Bias Response Team.” Under the policy, students can be referred for violating a standard as vague as “words or actions that contradict the spirit of the Principles of Community.” Students can also run afoul of the policy for “unwelcome jokes” or for even being present when jokes are made and failing to report them.

Students are encouraged to report each other while speculating on the “bias” that may have motivated their peers’ opinions. The school has given itself jurisdiction over activities and speech both on and off campus, as well as on students’ social media and other digital platforms.

Speech First sued Virginia Tech on behalf of several current Tech students, arguing that this policy chilled their freedom to express sincere but controversial views and thus violated the First Amendment. Yet a federal district court declined to enjoin the policy, holding that the students did not suffer any First Amendment injury because the bias response teams could not themselves impose formal discipline.

The Fourth Circuit affirmed that holding, and Speech First has now asked the Supreme Court to take the case. Cato has joined the Liberty Justice Center in an amicus brief supporting Speech First’s petition.

In the brief, we recount the history of bias response teams on many campuses across the country and how such teams do in fact chill the free expression and exchange of ideas. Whether or not bias response teams can impose formal discipline, the imbalance of power inherent in their proceedings and the ability of such teams to potentially refer students for formal discipline unquestionably lead students to self‐​censor.

That is the case here: students at Virginia Tech have muffled their own controversial political and social views because they feared the very real consequences of being referred to the bias response teams. Students know that if they are referred, the university will log the allegation in its records, share the “biased” speech with others, call the students in for educational and restorative “interventions,” and possibly refer their case to disciplinary authorities.

Virginia Tech’s policy is strikingly reminiscent of a state law struck down by the Supreme Court in Bantam Books v. Sullivan (1963). In that case, Rhode Island had created a “Commission to Encourage Morality in Youth,” which investigated books deemed potentially obscene or indecent. If the Commission found a book to be “objectionable,” it mailed a notice to the publisher thanking it in advance for quashing the book. Although the Commission had no authority to actually punish a publisher, the Supreme Court held that it nonetheless suppressed speech and violated the First Amendment. As the Court noted, “people do not lightly disregard public officers’ thinly veiled threats.”

When Virginia Tech students find themselves called before a bias response team, they too face thinly‐​veiled pressure to stifle their expression. As Bantam Books explained, that is enough to establish a First Amendment injury. The Supreme Court should take the case, reverse the Fourth Circuit, and vindicate the speech rights of Virginia Tech students.

Walter Olson

Following elections in which former President Donald Trump denounced alternate voting methods as fraud‐​ridden and encouraged Republicans to save their votes for Election Day, both Trump and the Republican Party now generally have shifted gears to encourage GOP campaigns and voters to use the full gamut of alternate balloting methods, from vote by mail through early in‐​person voting to the use of drop boxes. That’s mostly welcome news — but with one bipartisan exception that merits continued scrutiny.

The shift by itself isn’t likely to alter election outcomes much, since the adoption of alternate voting methods probably has only minor effects at most on partisan results. While Democrats are heavier users of in‐​person early voting, for instance, it’s mostly a method used by persons who would have cast votes anyway. What exceptions there may be are not always predictable: it’s been argued, for example, that severe Election Day weather in 2022 in Nevada worked to the disadvantage of Republicans, who were relying on Election Day turnout.

A more systematic benefit is that campaigns can save money and target their resources more effectively if supporters vote early. If a household is already recorded in the state database two weeks before Election Day as having voted, there’s no need to bombard it with last‐​minute mailings and phone calls.

There is also reason to believe that mail and drop box voting appeals to many constituencies among whom Republicans tend to do well, such as retirees and homemaking moms. In fact, until Trump chose to impose a different narrative, Republicans in many states were thought to be more skillful users of mail voting.

Partisan interest aside, there are two ways in which the interest of the nation as a whole is likely to be well served by the GOP’s return to course on this point. First, it abets distrust, polarization, and gamesmanship for one voting method to be seen as somehow “belonging to” one side. If early in‐​person voting is no longer perceived as a Democratic specialty, it will be easier for states to weigh impartially how much of it to schedule (from election administrators’ perspective, there are potential burdens in providing either too little or too much of it). Likewise for other methods.

The second ground for renewed optimism is that allowing voters to sort themselves more evenly between ballot channels will tend to dissipate the “red mirage” phenomenon in which one party jumps off to an early lead based on an early counting of votes that were cast its favored way, only to see that lead diminish and reverse as votes from the other party’s favored channels get counted.

It is hard to exaggerate how much damage the “red mirage” did in setting up the conditions for much of the public to be misled about the 2020 presidential election.

Two‐​and‐​a‐​half cheers, then, for the news. I withhold a full third cheer because news reports suggest (albeit sometimes ambiguously) that many Republicans also intend to adopt paid ballot collection (“ballot harvesting”) in states where it is legal, presumably sending out paid operatives to collect ballots by the hundred and drop them off (perhaps after bringing them back to headquarters for a while).

But as I’ve argued, third‐​party ballot collection poses real dangers to voter privacy, security, and freedom from improper pressure, especially when there is no feasible way to keep collectors from seeing how a ballot was marked or even helping the voter mark it. Convenience in voting is decidedly a good thing — but not so good as to be worth a wholesale sacrifice of the secret ballot.

Clark Packard

Between the establishment of the People’s Republic of China in 1949 and the 1970s, China’s economy was centrally planned. It engaged in little commerce and extreme poverty was widespread. Beginning in the late 1970s, China began a series of market‐​oriented reforms. This policy correction paid dividends; it is estimated that 800 million people were lifted out of extreme poverty over time.

In 1992, after Deng Xiaoping’s famous southern tour, China began downsizing the role State‐​Owned Enterprises (SOEs) played in the economy, particularly by subjecting SOEs to more market competition. In 1998 at the 15th Party Congress, Beijing’s SOE reform was turbocharged as many smaller and medium size SOEs were forced to close, privatize, or merge, which “led to a substantial downsizing of the SOE labor force.”

A new National Bureau of Economic Research (NBER) paper by Drs. Hanming Fang, Ming Li, Zenan Wu, and Yapei Zhang finds that the downsizing of SOEs (SOE employment peaked at about 110 million in 1995 but fell to less than 75 million by 2001) “significantly improved the quality of entrepreneurship” in China because “some high‐​skilled SOE employees were reluctantly unleased into entrepreneurship.” The authors found “layoff‐​induced entrepreneurs outperformed other comparable entrepreneurs.”

A 2021 paper from the International Monetary Fund (IMF) estimates that between 1998 and 2005, the share of SOEs in industrial output fell from around 50 percent to about 30 percent, and that this “transition coincided with rapid aggregate productivity growth, which came in part from the growth of the private sector at the expense of less productive SOEs. This was a welcomed development in China and for the global economy more broadly.

In recent years, however, Beijing is turning its back on the very policy reforms that helped propel it to greater economic growth. Maoist socialism is on the rise under the leadership of Xi Jinping and the role of SOEs in the economy has increased. As a result, dynamism in China is waning.

As the IMF recently noted in its Article IV report on China’s economy in 2022, “SOEs are being tasked to make advances in strategically important sectors and technologies affected by growing geoeconomic fragmentation, further burdening them with responsibilities.” But these “strategic” decisions have costs.

Indeed, it is estimated that China’s SOEs are about 20 percent less productive than private firms operating in the same sector and “the decline in business dynamism is particularly pronounced in sectors and regions with large SOE presence.”

In a forthcoming essay for Cato’s new Defending Globalization project, I will highlight a number of short‐ and long‐​term headwinds facing China’s economy, including the increasing role of SOEs. The history of China is not yet written, but policymakers in Beijing should learn from successful policy reforms of the past and begin (re)downsizing the role of SOEs in the economy.

Jeffrey Miron

This article appeared on Substack on September 22, 2023.

The White House recently announced the granting of Temporary Protected Status (TPS) to Venezuelans who arrived in the US before July 31st, a special designation allowing them to stay and work for 18 months.

The announcement comes in large part as a reaction to the tens of thousands of migrants currently overwhelming New York City’s taxpayers, who have been paying $8 million a day to house asylum seekers.

The root of the problem is a provision of a 1996 immigration bill that requires asylum seekers to wait 180 days before receiving work authorization. This provision was likely meant as a deterrent to migration, but that is not happening.

Unfortunately, TPS may not resolve the problem because the current processing time for immigrant work visas is around 10 to 18 months. A real solution, changing the 1996 law, would require congressional legislation at a time when neither party is willing to touch immigration reform. The Biden administration is trying to shorten wait times for visas, but that attempt faces political and practical difficulties.

Given the choice, most asylum seekers would jump at a chance to work and would have no trouble finding jobs. The increased labor pool would be an economic boon to the city. Instead, under current policy, the immigrants that do find work illegally have to participate in an underground market subject to exploitation and abuse.

In short, we have a textbook situation where a prohibition on labor supply causes shortages, black markets, and losses for both business and labor. That New York City taxpayers have to pay millions to support these immigrants is ironic given that immigrants are normally a net fiscal gain, provided they are allowed to work.

TPS may ease the problem eventually, but more fundamental reform—legalization of more immigration—is a far better approach.

John Mueller

Regardless of how it ends, Russian President Vladimir Putin’s war in Ukraine is likely to go down in history as a massively counterproductive failure, and he may well be remembered as Vladimir the Fool, or, to update an infamous fifteenth century moniker, as Vlad the Self‐​Impaler.

To many commentators, this disastrous trajectory suggests that Putin’s days are numbered. However, there is a serious possibility that Putin will remain in office during any settlement period over the war and that he will still be there afterward.

In fact, history provides numerous examples of politicians, especially in autocracies, who have survived military debacles. And the chance of overthrow, whether by popular rebellion or by elite insider coup, is likely reduced if, as in this case, there doesn’t seem to be a viable alternative waiting in the wings or in the trenches.

The most pertinent parallel with Putin’s misadventure in Ukraine may be the Chechen war of 1994–96 under Boris Yeltsin. When that venture turned into a disaster, Yeltsin desperately worked out an agreement for withdrawal under which Chechnya might eventually have been able to formally secede. These humiliating events played out during Yeltsin’s 1996 reelection campaign, yet he was reelected.

Thus, Putin may well be able to repress any temptation to escalate the war catastrophically, and it is not at all clear that he needs to be given much in the way of face‐​saving concessions to retreat from his debacle and to withdraw from Ukraine.

In fact, if Putin needs an excuse—or talking point—he can simply double down on the major justification he advanced for the war at its outset, one that, however bizarre, seems to have been substantially accepted in Russia. Comparing the situation in Ukraine with the one that led to the German invasion of Russia in 1941, he argued that his attack was designed to prevent NATO from establishing a military presence in Ukraine from which it would eventually invade Russia. That is delusory of course, but it can be fashioned into a victory claim that might well be readily embraced by the war‐​weary and war‐​wary Russians.

For a more extended commentary on this issue, see my essay that originally appeared in Foreign Affairs.

Travis Fisher

A previous post showed that the total cost of the Inflation Reduction Act’s (IRA’s) energy subsidies could reach $3 trillion. Subsidies so large cause a lot of problems—one being that advocates of a robust electricity infrastructure, like me, are now skeptical of using federal policy to expand the transmission system, which is the network of high‐​voltage wires and substations that make up the backbone of the power grid.

Before committing to large‐​scale transmission expansion, Congress should eliminate the open‐​ended generation subsidies in the IRA. Energy producers can’t capture the IRA’s lucrative production tax credits until they connect their new energy projects to the grid, so more transmission without amending the IRA means more subsidies at enormous cost to taxpayers.

The Green Transition Requires Transmission

Experts across the electricity industry argue that we need more transmission—bigger networks and massive transmission development—and we need it immediately. For example, the U.S. Department of Energy under President Biden and academic advocates of “net zero” policies are calling for aggressive expansion of the transmission system. Proponents of aggressive transmission expansion have a catchphrase: “There is no transition without transmission.” That is certainly true in the case of a transition to generation resources like wind and solar energy, which tend to be located far from demand centers.

However, heeding their call without first addressing the potential to spend $3 trillion on electricity generation subsidies is not a conservative or free‐​market approach. Congress should remove the IRA subsidies for mature generation technologies like wind and solar to encourage smart transmission investments that leave electricity customers and federal taxpayers better off. If the IRA subsidies remain in place through a period of rapid transmission expansion, the cost to American taxpayers and electricity customers will escalate.

The required amount of transmission is not small or cheap. Transmission advocates at Americans for a Clean Energy Grid cite the Princeton Net Zero report, which indicates that “high voltage transmission will need to double by 2030, at a cost of $360 billion, and triple by 2050, at a cost of $2.2 trillion, to achieve a zero‐​carbon future by 2050.” Keep in mind this estimated cost of $2.2 trillion is in addition to the $2.5 to $3 trillion in subsidies for generators.

Some investment is necessary to maintain the existing transmission system. However, calls to double or triple the high‐​voltage transmission are a far cry from the $15–20 billion spent annually by utilities on operating and maintaining the grid. Further, transmission spending has already been on a steep upward trend for several years, not just from increased operations and maintenance costs but also from an increase in spending on new projects, as illustrated by data from the U.S. Energy Information Administration below.

Source: https://​www​.eia​.gov/​t​o​d​a​y​i​n​e​n​e​r​g​y​/​d​e​t​a​i​l​.​p​h​p​?​i​d​=​47316

Major Transmission Expansion Will Increase the Burden on Taxpayers

Policymakers need to understand that transmission expansion can have serious costs because it is the missing link between subsidy‐​hungry developers of generation projects and the $3 trillion pot of cash from Congress.

Today, the lack of available transmission is a barrier to new generation technologies eligible for the tax credits in the IRA—for example, generators can only claim the Production Tax Credit (PTC) if they are able to produce energy and deliver it to the grid. Further, the IRA subsidies for electricity production all become PTCs beginning in 2025, so the pressure to expand transmission will only grow in the coming years. But “removing” that barrier by expanding the transmission system would be bad for taxpayers because it would put the PTC on steroids, at taxpayers’ expense. This fits with Ludwig von Mises’ observation that government intervention in markets begets more intervention—in this case, subsidies for generation beget federal intervention in transmission.

The subsidy flood would be substantial. At the end of 2022, the United States had more solar and wind energy projects vying to connect to the grid (1,247 gigawatts) than the total generating capacity of the existing system (1,199 gigawatts). Expanding the transmission system and giving these resources access to the grid will expose taxpayers to trillions in generation subsidies.

Source: https://​emp​.lbl​.gov/​q​ueues

Given this backlog of subsidy‐​eligible projects, the consumer‐ and taxpayer‐​friendly approach to transmission expansion hinges on whether Congress can remove the IRA’s subsidies for electricity generation first. Commissioner James Danly of the Federal Energy Regulatory Commission (FERC) summarized the issue during a House Energy and Commerce Committee hearing in May of this year [at 33:15]:

“There’s been this move afoot in which markets have become something closer to a mechanism by which to harvest these subsidies, rather than what they were intended to do, which is ensure least cost dispatch of available resources and to incentivize new investment. And the largest barrier at the moment to the harvesting of those subsidies is the physical interconnection of what are typically remotely located resources to the markets. You can’t get, for example, the production tax credit if you aren’t connected to a market and you don’t sell. And so there has been this concomitant effort to either mandate or speed the development of transmission… . It would be a shame if we removed and socialized the cost of the development of this transmission because, at the moment at any rate, the cost of interconnecting to the electric system is one of the few disciplining factors remaining in the development of infrastructure… .[emphasis added]”

Commissioner Danly is right to be skeptical of subsidy harvesters. In addition to the existing subsidies for electricity generation, there is also a debate about whether Congress should subsidize transmission itself, as with a federal investment tax credit. But Congress could also inflict harm by simply mandating that utilities build more transmission. One example is the Big Wires Act, which would require a large increase in interregional transmission without first addressing IRA subsidies. With the IRA subsidies in place, such a mandate should be a non‐​starter for anyone concerned about federal spending, impacts on taxpayers, and the overall cost of the electricity system (which consumers always pay, either in retail electricity bills or in taxes).

The Federal Energy Regulatory Commission (FERC) could also get involved in transmission expansion. The agency has explored the question of requiring a minimum level of interregional transmission, and it could move forward with a rulemaking on the issue at any time. In addition to establishing minimum levels of interregional transmission, FERC could also socialize the cost of transmission upgrades by allocating the costs widely in the form of higher prices for all ratepayers.

So‐​called “cost allocation”—which boils down to spending other people’s money—has long been a priority for those who want to rapidly expand the transmission system. If the cost of transmission expansion falls on all ratepayers, Americans could pay trillions in generation subsidies through federal taxes in addition to trillions in transmission expansion costs through higher retail electricity prices.

Congress and FERC should set aside transmission reform efforts until lawmakers address the staggering costs of the IRA’s generation subsidies. Only after reining in the IRA’s energy subsidies should policymakers debate how to expand the transmission system, and the policy goal should be to provide reliable electricity at the lowest total cost to consumers and taxpayers.

Conclusion

Before committing to large‐​scale transmission expansion, Congress should eliminate the open‐​ended generation subsidies in the IRA. There is a legitimate need for transmission expansion when and where it can reduce the total cost of electricity service or increase reliability. However, policymakers in Congress and at FERC should be careful not to run headlong into transmission expansion schemes that only serve the interests of IRA subsidy harvesters and leave U.S. taxpayers with a $3 trillion tab.