Stock

Norbert Michel

In the wake of the March 2023 failures of Silicon Valley Bank (SVB) and Signature Bank, federal agencies released a flurry of reports on April 28. The Federal Reserve (Fed), the Government Accountability Office (GAO), and the Federal Deposit Insurance Corporation (FDIC) each released their own reports to explain what happened.

Just days later, the FDIC released another report. It was unsolicited, but it offered Congress multiple options for reforming federal deposit insurance.

In a previous Cato at Liberty post, I discussed the Fed and GAO reports. Today’s post focuses on the two FDIC reports. (I’ll have at least one more post after I digest the FDIC’s special assessment proposal.) As the primary federal regulator for Signature Bank, the FDIC took some of the blame for supervisory failures while also blaming Signature’s management. (The Fed was the primary federal regulator for SVB, and they basically took the same approach.) The FDIC’s report says that:

The root cause of [Signature Bank’s] failure was poor management. [Signature Bank’s] board of directors and management pursued rapid, unrestrained growth without developing and maintaining adequate risk management practices and controls appropriate for the size, complexity and risk profile of the institution.

The trouble with this statement, of course, is that the FDIC is supposed to be making sure that these sorts of problems don’t occur. And unlike the Fed, the FDIC doesn’t have the (incredibly weak) excuse that Congress rolled back regulations, making it more difficult to address problems at Signature. Even worse, as the GAO report points out, the FDIC has a long history of failing to remediate management and liquidity problems at Signature.

Worse, in 1991, Congress explicitly charged the FDIC with taking “prompt corrective action” to “resolve the problems of insured depository institutions at the least possible long‐​term loss to the deposit insurance fund.” This legislation was inspired by the regulatory failures that led to the Savings and Loan crisis when approximately 3,000 federally insured institutions failed. The statute gives the FDIC a great deal of discretion to determine – and then to act based on that determination – whether a bank is “engaging in an unsafe or unsound practice.” (In fact, Congress gave the FDIC broader authority to stop banks from engaging in unsafe or unsound practices in 1966.)

So, it’s a bit audacious for the FDIC to blame anyone other than their own agency for Signature’s alleged managerial failures. Even if Signature’s management took too many improper risks, for instance, it’s still on the FDIC because they allowed that activity to take place.

Audacity doesn’t quite describe what it takes, though, for the FDIC to release another report, just days later, essentially asking for even more regulatory authority and an expansion of the agency’s coverage. And to also suggest – in that report – that Congress consider reviving something like Regulation Q, the interest rate controls that contributed mightily to the Savings and Loan crisis as interest rates and inflation took off, is almost beyond comprehension.

Regardless of what they decide to do, Congress should always start with this basic fact: The FDIC is promoting an expansion of deposit insurance after a so‐​called banking crisis tied to a handful of large uninsured deposits.

And it simply isn’t the case that the typical person, business, or even payroll service business, relies solely on the ability to use uninsured deposits. Even the FDIC report acknowledges that less than one percent of all accounts are above the FDIC insurance limit, and that everyone has access to tools to skirt that limit. (The report even acknowledges that some of those uninsured deposits may not really be uninsured. They could, for example, be part of cash management tools that use sweep accounts.)

But that’s still not enough for the FDIC. According to the logic in their report, it’s unsafe for anyone – or any business – to have uninsured deposits. Uninsured depositors are dangerous to the financial system, supposedly, because those account holders are the most likely to move their money out of a bank (i.e., to run) they fear might fail. Yet, somehow, these supposedly super sensitive information gathering deposit holders are incapable of taking advantage of all the existing alternatives to get around the FDIC caps, or to protect themselves using other methods.

If members of Congress fall for that logic, all Americans will pay for it, just as they pay for the existing FDIC insurance system.

Mustafa Akyol

Today, I have new a piece in National Review: “Turkey’s Election Scenarios: The Good, the Bad, and the Scary.”

It is about the fateful elections that Turkey will have this Sunday. (Which we will also discuss tomorrow at a Cato Institute Policy Forum: “Turkey’s Centennial Election: What Is at Stake?”)

Despite the dramatic deterioration in Turkey’s freedoms and rule of law, I explain, the elections are still real and competitive:

Turkey is not a Russia, China, or Turkmenistan, where free elections have never been held; Turks have lived under a decently competitive, free electoral system since 1950. All votes are counted openly in the presence of opposition‐​party representatives and independent observers, so it is not easy to cheat. That is why Erdogan’s ruling AK Party grudgingly lost the country’s two biggest cities, Istanbul and Ankara, to opposition mayors in 2019.

Which is why the presidential race between President Erdogan and the opposition candidate Kemal Kilicdaroglu is very tight. I see three possible scenarios — the good, the bad, and the scary:

The good scenario is that the opposition wins decisively, and Erdogan has no choice but to concede.

The bad scenario is that Erdogan wins decisively, as he has won every other election in the past two decades.

The scary scenario is a dispute over the results, which could escalate unpredictably in a country that is already extremely tense. This is possible especially if Kilicdaroglu wins with a very small margin, and Erdogan responds by taking a page from Donald Trump’s 2020 playbook. His hawkish interior minister has already prepared the way for this by calling the election “the West’s political coup attempt.”

Read more in National Review.

Ryan Bourne and Sophia Bagley

On May 3, 2023, the Securities and Exchange Commission adopted a rule to update stock buyback disclosures, igniting the debate over the economics of stock buybacks once again.

The rule would require certain stock issuers to provide disclosures of daily repurchase activity on a quarterly or semi‐​annual basis. The U.S. Chamber of Commerce is vexed by the narrative surrounding this decision and has threatened to pursue litigation. They posit that disincentivizing buybacks will, “hurt the retirement savings of millions of Americans and result in slower economic growth—hurting the wages of working Americans.”

The Chamber is right to be wary of this anti‐​buyback drumbeat. Stock repurchases occur when public companies buy shares of their own stock—distributing money to shareholders in exchange for reclaiming company ownership. As I have noted before, critics claim they come at the expense of productive investment and that they enrich executives by manipulating the earnings per‐​share ratio. Combined, these effects are said to represent capitalism’s worst features: a short‐​term unwillingness to invest driven by rampant executive self‐​interest.

Such criticisms are misguided. When existing shareholders are compensated for their shares, these funds do not simply disappear. As my colleague Adam Michel noted earlier this year, one paper estimates that 95 percent of funds used for stock buybacks are reinvested elsewhere in the economy. What’s more, if critics are right that firms engaging in buybacks are leaving lucrative investment opportunities on the table, we’d expect the long‐​run share price and earnings per share to be lower after buybacks. A recent poll conducted by Chicago Booth’s Kent A. Clark Center for Global Markets demonstrates that 40 top financial economists are baffled by anti‐​buyback hysteria too. The survey asked if respondents agreed that:

Large‐​scale stock buybacks by public corporations provide short‐​term rewards for shareholders and senior executives at the expense of potentially higher‐​return corporate investments.

When weighted for expert confidence, just 5 percent agreed, while 42 percent disagreed and 36 percent strongly disagreed. John Campbell from Harvard, for example, stated, “It is not true that keeping profits inside corporations is necessarily the highest‐​value use of those funds. Corporations should pass profits back to shareholders, potentially for investment elsewhere, unless they have unusually attractive investment opportunities.”

The survey later asked whether the experts agreed that:

The proposed higher tax on corporate stock buybacks would generate a substantial increase in corporate investment.

Again, just 6 percent agreed, whereas 43 percent of respondents strongly disagreed, 31 percent disagreed, and 21 percent were uncertain. Michael Roberts of Wharton added that even “if it does it is more likely that that investment is lower quality.”

The political narrative about buybacks therefore continues to be completely at odds with the views of expert financial economists.

Daniel Raisbeck

Back in August of 2022, I wrote about how a small band of sanctimonious, sophomoric malcontents had—astoundingly—taken over the Chilean state. President Gabriel Boric, who was elected to his country’s highest office in 2021 at the age of 35, had assembled a team of former student activists. Since the early 2010’s, their main contribution to Chilean society had consisted of leading numerous protests against the country’s soi disant “neoliberal” model. First, it was against school choice and profit in the education sector. Then it was against the private pension system. Finally, in 2019, mild fare hikes for the Santiago metro led to some of the most violent riots in Latin America’s recent history, euphemistically labeled a “social outburst” in the media.

With 80 metro stations partially or fully destroyed, dozens of toll booths incinerated, and even churches set on fire, then president Sebastián Piñera, nominally of the center‐​right, capitulated. He met with left‐​wing parliamentarians, Boric among them, and agreed to hold a referendum on whether to summon a new constitutional assembly. When the vote was held in October of 2020, the option to get rid of Chile’s current constitution won with an overwhelming 78 percent of the vote.

At the time, it seemed that Chileans had needlessly committed an absurd act of self‐​harm. After all, the constitution was originally ratified in 1980, under the Pinochet regime, but it was amended numerous times since, most thoroughly under the social‐​democratic administration of former president Ricardo Lagos (2000 to 2006). The constitution’s unequivocal respect for property rights and basic economic liberties—something exceptional in Latin America—helps to explain the Chilean economy’s outstanding performance during the better part of four decades.

In 2019, the International Monetary Fund calculated that Chile was on track to reach levels of GDP per capita at purchasing power parity that would match those of Portugal and Greece. To approximate southern European standards of wealth was quite an achievement given that, between 1950 and 1970, Chile’s economy was “the poorest among Latin America’s large and medium‐​sized countries” according to a Library of Congress country study.

While the current constitution ushered in an extraordinary run of economic success, its proposed replacement was almost certain to do the opposite. In May of 2021, leftist parties won the elections to choose a constitutional assembly by a landslide. They proceeded to draft a new constitution that The Economist described as “a fiscally irresponsible left‐​wing wish list.” With its 54,000 words, it was a somniferous, exceedingly long blend of old‐​fashioned statism and the type of social engineering that is so in vogue among first‐​world progressives.

As I wrote at the time, the draft sought to ban “job insecurity,” expand welfare programs, mandate gender parity in all public institutions, and create “social” rights that would expand the role of the state in health care, education, and housing. The document would have allowed property and asset seizures by legislative decree without compensation for rightful property owners. It sought to constrain the mining industry, eliminate school choice, and to disband the Senate, making it easier for the executive branch to circumvent the opposition and enact its agenda. Alas, it all proved a bridge too far for a majority of Chileans.

Last September, 62 percent of voters rejected the constitutional draft in a national plebiscite. It was a serious political blow for President Boric, who had won the 2021 presidential election as the head of a coalition assembled specifically to introduce a new, left‐​wing constitution. Boric’s plebiscite defeat forced him to steer his government away from the far left and negotiate with other political parties. According to the new agreement, there would be a new constitutional convention, to which the parties with seats in the Senate could appoint legal experts. This commission of experts proposed a framework of 12 basic rules that, they suggested, should not be breached in the drafting process. Plus, a new election would be held on May 7th, 2023 to choose a Constitutional Council responsible for drafting yet another constitution.

Held last Sunday, the election’s results amounted to a political upheaval. The Republican Party led by José Antonio Kast, a pro‐​free‐​market conservative who lost to Boric in the 2021 presidential election’s run‐​off, came in first place among all parties with an impressive 35 percent of the vote. With their potential allies, the Republicans will be able to control the necessary three fifths of the Constitutional Council to veto any proposal that arises. Better yet, says Chilean lawyer Ricardo Meno, since the right holds two thirds of the Constitutional Council, it can reject the proposals of the Expert Commission, for instance the point that declares the “social rule of law” (Estado social de derecho) for Chile.

This is a crucial point since the “social rule of law” is a dangerous, positivist spin on the rule of law proper. In other countries, it has paved the way for outsized public spending and utter fiscal recklessness. As Chilean writer Axel Kaiser points out, Hugo Chávez applied the “democratic and social rule of law” to his 1999 constitution of Venezuela, a formerly rich country in relative terms that, thanks to Chavismo, became Latin America’s poorest. In Colombia, where the 1991 constitution also stipulates the social rule of law, the high‐​level spending necessary to maintain a “social democratic” model has led to chronic fiscal deficits, constant tax increases, and an over‐​reliance on oil revenues to cover current spending. Which is to say that when social rights take no heed of taxpayers’ real‐​world capacity to pay for promised services, you have no rights at all. There is merely exploitation.

On a more amusing note, Mr. Meno comments that Chile’s new Constitutional Council could, in theory, come up with a draft that is both more economically liberal and more socially conservative than the 1980 constitution. In which case the hard left’s monumental struggle to get rid of Chile’s current, moderate constitution would backfire spectacularly. However, the Republicans have to consider that the new draft they will oversee still has to be approved in a plebiscite. This might motivate them to proceed with some moderation. Likewise, since Kast has his eye on the presidency, it is likely that he will look to build a pragmatic coalition that can carry him over the finish line in 2025.

Often branded “far‐​right” in the Chilean and international media, Kast is a social conservative who broadly favors free market policies. As Chilean economist José Luis Daza noted, Kast’s Republicans merely stuck to bread‐​and‐​butter issues that the traditional Christian democrats had deemed too controversial to even mention: law and order, control over the borders, support for the popular gendarmerie (which Boric’s allies sought to eliminate) and the market economy, as well as a defense of the revered national symbols that the extreme left continually vilified, the Chilean flag being a case in point. By filling this large political void, the Republicans became Chile’s main conservative party. In the eyes of many voters, the Christian democrats had become indistinguishable from the center‐​left parties, which, in turn, had subjected themselves to Boric and his extremist allies.

If the far left decides to reject the draft of the Republican‐​controlled Constitutional Council—and it likely will—this will leave Boric’s coalition in the hilarious conundrum of having spent years assuring voters that Chile desperately needs a new constitution, only to campaign against the new constitution in offer. However, if the “reject” side wins the next plebiscite, Mr. Meno says, the 1980 constitution will remain in force. Cue years, or perhaps decades, of intra‐​leftist squabbling over who is to blame for blowing a once‐​in‐​a‐​lifetime opportunity to ditch Chile’s wicked, “neoliberal,” Pinochet‐​tinged, prosperity‐​producing project.

Leave the comedic aspect aside, and you will find that, paradoxically, all the most recent political uproar can only assuage the fears of the many Chileans concerned with what might have been the end of their nation’s astonishing success story. After four tumultuous years, it is time for Chileans to leave the constitutional nonsense behind. They should continue to build the first fully developed country in Latin American history.

.find_in_page{background-color:#ffff00 !important;padding:0px;margin:0px;overflow:visible !important;}.find_selected{background-color:#ff9632 !important;padding:0px;margin:0px;overflow:visible !important;}

Jai Kedia

Recent Gallup polls have found that public confidence in Fed chair, Jerome Powell, is at an all‐​time low, with only 36% of respondents indicating a “great deal” or “fair amount” of confidence that the Fed chair would right the economy. This low point follows waves of criticism from ex‐ and potential Presidents along with current President Joe Biden placing the Fed at the forefront of combating the post‐​Covid inflationary spike. Combined with a 2022 survey that shows 74% of U.S. voters believe the Fed has “a lot of control” or “some control” over inflation, it is clear why the Fed has found itself in the center of the political crossfire from all directions. Most people believe the Fed controls inflation, so they’re upset with the Fed.

But does the Fed have as much control as everyone seems to think? It could be the case that other factors, largely out of the Fed’s control, have more influence on inflation than the Fed. These include demand factors such as increased fiscal stimulus or supply factors that raise input prices or supply chain issues that cause shortages. Or, perhaps, the Fed would have to drastically tighten credit markets, thus harming the broader economy, in order to exert the control it does have over inflation. Admittedly, this issue is not easy to address. A basic regression analysis, for example, would be insufficient because it is difficult to control for the cross‐​dependence of macro indicators on each other and because many economic outcomes occur simultaneously. For these reasons, a standard macroeconomic tool to address such policy questions is the Vector Auto Regression (VAR).

While even a VAR analysis has its limitations, as our new Cato working paper demonstrates, the Fed has not exercised significant control over inflation. Specifically, the paper uses a VAR framework to study changes to the Fed’s preferred measure of prices, the Personal Consumption Expenditure (PCE) index (and its components), for various periods from 1960 to 2019.

The paper shows that in response to unanticipated tightening to the policy rate, a so‐​called positive “monetary policy shock,” inflation often increases. This change, of course, is in the opposite direction the Fed is trying to achieve. Put differently, in response to the Fed’s tightening, inflation rarely falls and when it does, it falls minimally.

The paper also shows that supply factors – not monetary policy – dominate the overall changes (variability) in inflation. Supply factors account for over 70% of inflation variability in all scenarios, often accounting for more than 80%. Monetary policy, on the other hand, usually contributes between 5% and 10% to inflation variability. In fact, at long‐​term horizons (5 years after the initial rate hike), even demand‐​side factors become more important than monetary policy. These findings are robust to sample selection, model specification, and when incorporating financial sector effects.

While the Fed was undoubtedly slow in responding to inflation after the COVID crisis, it is important for policymakers to consider both the supply‐​side and demand‐​side causes at play during and after the COVID crisis. Simply put, the evidence suggests these factors far outweigh what the Fed can normally do to control inflation. Anti‐​inflationary policies necessitate a wholistic approach and cannot merely rely on timely changes to the Fed’s policy rate.

David J. Bier

With the sunsetting of the public health emergency this week, Border Patrol will lose its ability to expel some immigrants at the border under Title 42. Under Title 42, Border Patrol could quickly remove someone from the United States, sending them back to Mexico or, in some cases, their home country without allowing them the ability to request asylum in the United States. President Biden’s plan to replace Title 42 involves more legal immigration and an asylum ban for those who cross illegally paired with deportations to Mexico for eight nationalities.

Title 42 has failed on its own terms. Crossings have increased. Illegal crossings have increased. Evasions of Border Patrol have increased. The outcomes speak for themselves. Unfortunately, the president’s plan now involves largely recreating those failed conditions by banning asylum and deporting more people to Mexico where they will have little option but to attempt to cross illegally again.

How important was Title 42?

From March 2020 to March 2022, the United States Border Patrol carried out 2.7 million expulsions—about half the time the person being expelled was previously expelled. In March 2022, the Border Patrol expelled people 85,466 times at the U.S.-Mexico border. About half of all the people arrested at the U.S.-Mexico border for crossing illegally in March were already not being processed under Title 42 but rather under Title 8 (immigration law). This is higher than the 23 percent in January but lower than the 65 percent in May 21 or the 91 percent in October 2020. This means that ending Title 42 will have few effects on the group not already being expelled.

Adults traveling without children from Mexico and the Northern Triangle of Central America (El Salvador, Guatemala, and Honduras) have accounted for 83 percent of all expulsions under Title 42 from March 2020 to March 2022; 9 percent were families from those countries; 5 percent were “single adults” from other countries; and 2 percent were families from other countries. These proportions were quite like those in the month of March 2022. The United States has deported about 300,000 parents with children and 2.4 million adults without children. Biden plans to try to continue to remove those being expelled to Mexico after Title 42 on May 11 if subject to the asylum ban.

A migrant’s probability of being expelled is highly dependent on the person’s country of origin and demographic group. From March 2020 to March 2023, 93 percent of adults traveling without children from the Northern Triangle and Mexico were expelled, compared to 52 percent of families from those countries, 11 percent of other single adults, and 7 percent of other families. Mexico has always agreed to accept back people from the Northern Triangle and Mexico, but in January, it agreed to accept Cubans, Haitians, Nicaraguans, and Venezuelans, which has led to higher expulsions for those countries but also far fewer came during those months.

This means that Title 42 is mainly a policy that targets single adults—adults without children—from the Northern Triangle and Mexico who are expelled at a rate of 93 percent. Yet despite this high likelihood of being expelled, if caught, the number of arrests for this demographic has increased threefold from the time before Title 42 was used. In March 2023, single adults from the targeted countries accounted for 49 percent of all Border Patrol arrests. There were nearly as many arrests by this group (80,335) in March 2023 as there were for all groups in all of March 2019 (92,833), which was considered high at the time.

Title 42 does not deter single adults from Mexico and the Northern Triangle from crossing the border. Further evidence is that Title 42 has led to significant increase in recidivism—that is, the share of immigrants who were previously arrested the same year. The recidivism rate surged from about 20 percent in 2019 to 49 percent in 2022—meaning nearly half of single adults arrested under Title 42 from Mexico and the Northern Triangle were previously arrested under this policy. The remain in Mexico policy—which also involved sending people back to Mexico—also led to an increase in recidivism prior to the Title 42 policy.

The primary reason that Title 42 is not a good deterrent for this population is that they are not likely to be seeking to apply for asylum but rather to enter the country without being arrested, so that they can find jobs. Previously, single adults were likely to be incarcerated for an extended period after their arrest and possibly prosecuted criminally and sent to a U.S. prison. “They are sending back people very quickly, in hours,” said one Mexican seeking to cross. “The rumor is that chances of crossing undetected are higher, as you can try and try again without much consequences.”

As a result of the increasing number of attempts, the number of detected successful illegal entries (known as “gotaways”) increased dramatically during the Title 42‐​era to a level not seen since before the Great Recession. Under Title 42, the number of known gotaways—that is, detected crossers who were not arrested—grew from an average of about 12,500 per month in 2019 to an average of more than 50,000 in 2022. In fiscal year 2023, the average has been nearly 70,000 per month, according to government leaks to the media.

The Border Patrol does not expel some immigrants for various reasons. Mexico has agreed to accept back immigrants only from Mexico, the Northern Triangle (since March 2020), Venezuela (since October 2022), Haiti, Nicaragua, and Cuba (since January 2023). For anyone else, it is much more logistically challenging to fly them to their home country. In March 2023, Mexicans were expelled 83 percent of the time, Northern Triangle immigrants 62 percent, Nicaraguans 60 percent, Venezuelans 57 percent, Haitians 10 percent, and all others were expelled just 8 percent of the time.

In March, more than 44 percent of those not expelled are adults without children from countries other than the Northern Triangle and Mexico, 23 percent were families from those countries, another 15 percent were unaccompanied children (kids traveling alone) who are explicitly exempted from the policy, 11 percent adults without children from the Northern Triangle and Mexico, and 7 percent families from the Northern Triangle.

Immigrants from countries other than the Northern Triangle and Mexico are difficult to expel because they must be flown to their home countries. This is happening to some extent. The government averages about 120 removal and expulsion flights per month. At most, this is a capacity to fly out about 15,000 to 18,000 immigrants monthly. But because this includes expulsions of criminals and others from the interior of the United States, not just border arrests, the share of border crossers the government is able to fly out from the border is quite low. It also may not be possible for Border Patrol to detain someone long enough to transfer them to Immigration and Customs Enforcement for a flight out of the country.

It is not surprising that the government lacks the capacity to fly out this many immigrants from countries other than Mexico and the Northern Triangle because it has never in its history arrested so many immigrants from elsewhere. Already through half of fiscal year 2023, the Border Patrol has arrested more people from nontraditional sending countries than they did in their entire history before the Biden administration.

In addition to allowing Border Patrol to expel immigrants, Title 42 has also permitted Customs and Border Protection (CBP) to cap the number of asylum seekers at ports of entry. CBP has slowly increased the number of exceptions to the ban, but it has still not reached the level that it reached when it allowed Ukrainians fleeing the war to enter legally in April 2022. In March 2023, CBP processed just 645 asylum seekers per day at southwest ports of entry. These exceptions are important because they are effectively the only way to immigrate legally at the U.S.-Mexico border. Haitians have made up the largest proportion of immigrants admitted at southwest ports in recent months.

The administration says it plans to increase the cap at ports of entry to 1,000 per day starting on May 11, but it is estimating between 10,000 and 13,000 or more per day will be arriving both legally and illegally at the border, so the cap is far below demand. CBP should remove this unlawful and arbitrary cap on asylum, which is not found in the law.

In addition, the administration has created humanitarian parole programs that permit legal entry for people from Ukraine (since May 2022), Venezuela (since October 2022), Haiti, Nicaragua, and Cuba (since January 2023) who have U.S. financial sponsors. These immigrants can fly directly to the United States without coming to the U.S. border. These programs in conjunction with more admissions at ports of entry have transformed the flow from these countries from mostly illegal to nearly entirely legal in just a few months. Unfortunately, the administration is not expanding these programs to other nationalities.

The administration has done more than any since Eisenhower to increase legal migration to prevent illegal immigration, but much more can and should be done. Unfortunately, the main focus now seems to be perpetuating the status quo through deporting people to Mexico once Title 42 ends rather than building on the successful legal migration programs.

Walter Olson

I’ve got a new opinion piece at Ricochet about a particularly disturbing new lawsuit campaign:

According to education site The 74, at least eleven school districts around the country have sued the owners of such platforms as Snap, Instagram, YouTube, and TikTok seeking financial compensation for the “increased mental health services and training they’ve ‘been forced’ to establish” as a consequence of student use of social media.… Cash demands aside, the schools say they want to negotiate a settlement with the platforms to change how they operate.

The cited article is from March, and I’m told that the number of suits filed around the country is now approaching 100. Plaintiff school districts include those of Seattle, San Mateo County (Calif.), and Mesa (Arizona). I write:

These are bad lawsuits that courts should reject. The suits’ announced goal (regulating social media use by students) is in itself debatable, but the means employed (damage lawsuits to recoup public agency expenditures) vaults the whole thing into the realm of the absurd.

I cite Jennifer Huddleston’s Cato briefing paper of last month, which convincingly rebuts the idea that there is some straightforward way to child‐​proof social media that does not result in the squelching of large amounts of wholesome speech, including speech by adults.

A typical suit in this new genre can’t actually point to much in the way of violations of existing statute, especially given the role of Section 230, which broadly bars platform liability for user speech. 

Instead it falls back on the notion, not a part of the historic civil law, that social media is a “public nuisance” – earlier lawsuits in the recoupment genre have tried out this idea on guns, fossil fuels, vaping, opioids, you get the picture – as well as newly posited “duties of care” meant to precipitate tort negligence liability from thin air plus indignation.

The Supreme Court has twice made clear that laws meant to child‐​proof aspects of the Internet can be unconstitutional on the grounds that they punish or chill too much speech. Declaring speech a “nuisance” is not a permissible way to end‐​run the First Amendment.

Paul Matzko

Former FCC Chairman Newton Minow died a few days ago and outlets dug deep into their archives to dust off their pre‐​written obits for the 97‐​year‐​old who lived a full and eventful life. I had the opportunity to be on a panel with Minow back in 2021, which was a somewhat surreal experience given how few of the people that I covered in my book on broadcasting in the 1960s are still around. I have a few thoughts about his legacy to share with you.

Let’s start with a positive note. Minow often had solid foresight. For instance, he was right when he told JFK that launching the first telecom satellite in 1962 was a bigger deal than landing a man on the moon. We’ve since sent twelve men to the moon and might eventually send more. But in terms of the effects on our everyday lives, manned moon missions pale in comparison to the 11,139 satellite launches over the same time period (and the prospect of tens of thousands more in the near term).

But that’s not what Minow is generally remembered for, although the fact that he is remembered at all is remarkable given how few FCC commissioners that even relatively well‐​informed members of the public are familiar with. Minow’s legacy is inextricably linked with the only speech in the history of the FCC that managed to worm its way into the public consciousness, when in 1961 he declared that television was a “vast wasteland” full of “blood and thunder, mayhem, violence, sadism, murder,” westerns, gangsters, and cartoons.

Minow’s proposition that tv was a “vast wasteland” became the implicit framing for much television regulation over the next half century, including the creation of public television. He believed that commercialized television programming was not just subpar but actually dangerous, especially to children. As he testified to Congress in 1991, “In 1961 I worried that my children would not benefit much from television, but in 1991 I worry that my grandchildren will actually be harmed by it.”

In this regard, Minow was very much a man of his time, his views an artifact of the counter‐​counter‐​cultural moral panics of both the 1960s and 1990s. Tipper Gore complained about metal music and hiphop to Congress, and we got parental warning stickers on cassettes. Minow worried about children seeing “25,000 murders” on tv before turning 18, and we got V‑chips in all our tvs. (No kidding; your tv still has one.) And there is an echo of this kind of technocratic nanny‐​Statism in the ongoing debates over imposing new regulations on the internet, like prohibiting targeted advertising to impressionable youths or even banning their access to social media entirely.

It’s worth reflecting on the two core mistakes that Minow made — and which his politically progressive but temperamentally conservative descendants often continue to make — when it comes to mass media. First, he was (mostly) wrong to call television a vast wasteland in 1961. Entertainment is good, actually. In his famous speech, Minow doesn’t bother actually *proving* that entertainment is harmful to children; he simply assumes that his audience will agree with him. And yes, there will always be cultural critics like Minow and Neil Postman who worry about the vulgar amusements of the common man, but I think they mistake their personal preferences and antipathies as representative of the public interest.

Bear in mind that television in 1961 was still a young medium. It wasn’t until 1954 that a majority of American households even had a television. Parents responded in predictable fashion to a new technology popular with their children, both grateful for the break as their kids watched Howdy Doody and worried that it would rot their minds and morals. It didn’t. There’s strong evidence that moderate consumption of television is not harmful for kids, and even in larger doses any negative effects appear minor and/​or correlative.

Of course, Minow couldn’t have known that, and freaking out about new technologies and their affects on children is a rite of passage for parents and bureaucrats alike. In the 18th century, it was novels that were leading children astray by promoting loose morals and lying fictions. In the early 20th century, the “tell‐​tale signs of corruption” included well‐​thumbed pulp paperbacks that tempted schoolboys to fantasize about flying to alien worlds instead of doing their homework and becoming good, sane, sober citizens. Minow’s style of parentalism is both very old and boringly expected.

And like with novels and pulp fiction, it’s not just that westerns and gangster shows and cartoons are harmless; they can be actively good. Consider the animated Netflix show BoJack Horseman. It’s won award after award for its darkly comedic exploration of the hollowness of fame, struggles with mental health, generational trauma, and the persistence of toxic masculinity. If my son, when he becomes a teenager, were to tell me he’s started watching BoJack episodes, I’d see it as a great chance to both bond with him and do a little parenting as we unpack the sundry issues explored by the show. Yet Minow thought cartoons et al ipso facto valueless, even dangerous. His “vast wasteland” was as much a failure of his own imagination as a reflection of the lay of the media landscape.

Something similar is commonplace with reactionaries today in regards to new media. When policymakers discuss social media, their belief that the medium is (at best) valueless and (at worst) dangerous for teenagers operates on the level of assumption. They rarely bother asking kids what they think. While the adults fret away, teens are busy learning new skills on Youtube, building ad hoc communities on Instagram, and getting their news from TikTok. Between the advent of digital streaming and the rise of social media, teens now live in an unprecedentedly rich information environment. The video landscape is vast, to be sure, and operating at a scale that makes the network television era seem quaint by comparison — but it’s only a wasteland if you have a blind determination to bypass every oasis in sight.

Now, I said Minow was “(mostly) wrong” about the quality of television in 1961 (and in 1991, etc). Television was once a much less interesting and less diverse space. In the 1960–61 season, there were roughly 150 series aired on the big three networks, including more than a few of Minow’s hated westerns (Maverick, Gunsmoke, Bonanza) that are now beloved classics of the era marketed to nostalgic Boomers. And that programming tended to appeal to the lowest common social denominator, which also entailed racial and gender exclusion. My grandfather’s favorite was The Red Skelton Show, an unchallenging sketch comedy rarely accused of pushing social boundaries.

By 2019, including cable and streaming shows, the number of scripted TV series — which, note, is a smaller category — has ballooned to 532 shows. And the sheer diversity of shows would be unfathomable to someone in the 1960s, with content appealing to a much broader range of people and underserved communities than ever before in television history. In this era of peak TV, you could get a queer dramedy about a privileged white woman in prison (Orange is the New Black), the story of a high school teacher Breaking Bad and becoming a drug kingpin at the cost of losing his family, or an alternate history of the United States as scathing critique of patriarchal norms (Handmaid’s Tale). These shows simply could not have been made in the 1960s, when the combined motivations of a network‐​dominated industry structure and FCC nanny‐​ism incentivized the production of safe, inoffensive, bland tv. Today, we have both more AND better quality television.

This takes us to the second way in which Minow was wrong. Like progressive technocrats are wont to do, spotting a market failure means reflexively turning to a government solution. To be fair, Minow’s favored solution, public media, could have turned out much worse than it did. I am a frequent listener to public radio and grew up watching quite a bit of public television. It is quality content, even if skewed towards the center‐​left politics of its original proponents. And it’s notable that the success of public media appears to be in inverse proportion to just how “public” it actually is. American public media is exceptional for how light of a governmental touch is involved compared to other countries’ public media systems.

Regardless, the advent of what we now call the “golden age of television” was all about unleashing market forces. In the decades after Minow’s time at the FCC, one new mass media after another was freed from burdensome government oversight. First, cable broadcasting, which had languished under tight FCC restrictions, was freed from content oversight by the courts in 1977. That led to the cable boom of the 1980s as new channels and programs innovated and diversified.

Then in the 1990s both Congress and the courts decided that the internet should be born free rather than in regulatory captivity. Online content would be regulated more like print than like broadcasting, meaning a much higher degree of First Amendment protection against censorship and regulatory control. That enabled the proliferation of Web 2.0 platforms in the ‘00s and ‘10s, leading to a firehose of user‐​produced content.

Honestly, I’m selling the transformation short by focusing on television rather than the new online platforms. The average teenager spends far more time watching Youtube and TikTok than all other platforms combined. The golden age of television is about to be eclipsed by a new era of user produced content, which will only accelerate when AI allows anyone to create any kind of video they are capable of imagining.

Far from a wasteland, the amount and quality of televisual content has never been bigger or better. Every day on Youtube, a third of a waking human lifetime’s worth of videos is being uploaded. In just the last week or so on Youtube, I’ve watched a former NASA engineer explain Rwandan drone tech to my son, seen a longform video essay unpacking the transphobia of JK Rowling, and done the stereotypical dad thing and watched a few WW2 documentaries.

Inasmuch as Minow’s “vast wasteland” was once real, deregulation and digitization have long since flooded the desert.

This essay is crossposted from the author’s Substack. Subscribe for more posts on the intersections between history and policy.

Chris Edwards

The Inflation Reduction Act (IRA) of 2022 included $79 billion in added funding for the Internal Revenue Service (IRS) over the coming decade. The funding will roughly double the agency’s budget by 2031 in nominal dollars, with 57 percent of the added funding for enforcement but just 6 percent for business systems (computers) and 4 percent for taxpayer services. House Republicans are seeking to repeal most of the new funding as part the debt negotiations.

The $79 billion IRS funding increase is projected to raise tax revenues $180 billion over the coming decade, for a net gain of $101 billion. Supporters conclude this indicates a high “return on investment” from the funding, and thus is a beneficial policy change.

But such a return on investment is only a partial analysis. The IRS funding is a win for the government, but that does not mean it is a win for society. As best as they can, policymakers should try to compare the overall benefits to society to the overall costs.

Let’s look at the cost side. Costs will include the $79 billion in resources consumed by the IRS plus possibly higher compliance costs on the private sector from raising $180 billion. Income tax compliance costs may be about 8 percent to 10 percent of tax revenues, which suggests perhaps $14 billion to $18 billion in costs. There may be additional costs for tax planning, post‐​filing activities, tax lobbying, and other items. So rather than $79 billion, the IRS plan may consume close to $100 billion in resources.

Now let’s look at the benefit side. The government will raise a net $101 billion to be used for added spending. But this amount is not the net benefit to society because it will displace private spending. Let’s be optimistic and assume that the new federal spending will be worth 50 percent more than the private spending displaced. In that case, the plan to beef up the IRS will generate $51 billion in net benefits above the benefits of alternate private‐​sector spending.

So tallying up, IRS funding and added compliance costs may total $100 billion, but the added spending that is funded may generate perhaps only $51 billion in net benefits. With these assumptions, boosting IRS funding by $79 billion to squeeze $180 billion more out of taxpayers is not worthwhile.

An additional cost of the IRA plan may be an increase in deadweight losses from raising the $180 billion in taxes. These losses would stem from taxpayers changing their behavior in ways that undermined output, such as reducing their working and investing.

Let’s look further at compliance costs. The bulk of new IRS funding goes toward enforcement, which may increase compliance costs because individuals and businesses would be prompted to spend more on lawyers and accountants to defend themselves against the tax agency.

Compliance costs are also expected to rise because of the IRA’s 20 or so new and expanded energy tax breaks, many with complex rules for eligibility, benefit amounts, labor standards, content sourcing, and other features. The new IRS Strategic Operating Plan (SOP) mentions the complexity of the energy provisions and estimates that they will cost $3.9 billion to administer. Private sector planning, compliance, and lobbying related to the energy breaks will also likely consume billions of dollars given that there is $1 trillion in benefits at stake.

However, there is good news from the IRS SOP. The document discusses major improvements in business systems and taxpayer services. It promises faster, more convenient, and more accurate taxpayer interactions. Unlike spending on tougher enforcement, spending on these activities should reduce compliance costs. It would be a net win for society if the IRA’s $8 billion for business systems and taxpayer services reduced private‐​sector compliance costs by a greater amount than the funding total.

In addition, improving IRS efficiency and making it easier to pay the correct taxes would improve taxpayer compliance. This is a better way to reduce the tax gap than heavy handed enforcement under our hugely complex tax system. The past National Taxpayer Advocate testified that “Complexity begets more complexity, burden, and noncompliance, as it creates opportunities for abuse, which in turn spur more complex legislation that may alienate taxpayers,” and she noted that “Complexity promotes noncompliance and contributes to the tax gap.”

For these reasons, the House Republican plan to retain funding for business systems and taxpayer services while rescinded the added enforcement funding makes sense. Improvements in the former two areas promise to save taxpayer time and money, while also boosting voluntary compliance and reducing the tax gap.

Indeed, providing a further funding boost for business systems and taxpayer services could be a compromise between the parties in debt negotiations. The SOP says that the current IRA funding for these two functions will not be enough: “We will need an ongoing investment on top of the allocated IRA funding to deliver all of the transformation objectives outlined in this Plan in taxpayer service improvements and information technology modernization.”

Policymakers should pursue additional IRS reforms, and they should put major tax‐​code simplification on the agenda. In the meantime, there are many worthy initiatives in the SOP that the IRS should pursue and policymakers should closely oversee.

More on the IRS here, here, here, and here.

Data Note: The 8 percent compliance cost is based on Scott Hodge’s estimates here for just the individual and corporate income taxes. Compliance costs are rough estimates, and the average costs I’ve cited here don’t necessarily equal the marginal costs.

Clark Packard

Five years ago next month the Trump administration began an aggressive trade war with China over a number of Beijing’s abusive trade and investment practices. The tariffs caused predictable retaliation imposed enormous costs on the U.S. economy, particularly manufacturing, and perhaps worst of all, failed to discipline Beijing’s legitimately troubling high tech mercantilist practices. Despite calling the Trump administration’s China tariffs “damaging” “reckless” and “disastrous” on the 2020 campaign trail and despite high inflation, President Biden has not reversed course and indeed has embraced more restrictions on international commerce and continues to spurn allies who share American concerns. Today, export controls and investment restrictions continue to proliferate. Meanwhile Congress has passed massive subsidies to reshore semiconductor production in the United States—mimicking the same type of heavy‐​handed industrial policy increasingly embraced by Beijing. These policies are woefully misguided; a new approach is desperately needed.

Amidst this worrisome backdrop, my Cato colleague Scott Lincicome and I released a new policy analysis today entitled “Course Correction: Charting a More Effective Approach to U.S.-China Trade.” The analysis acknowledges a number of troublesome practices employed by Beijing but offers a radically different approach to international trade and investment between the world’s two largest economies. Instead of doubling down on government intervention in the economy, we argue the United States should embrace its traditional strengths: openness to trade, investment, and immigration; a relatively light touch technology policy and tax reforms to bolster American competitiveness. Simply put, the United States should outcompete China and the way to do that is through a commitment to markets.

Over the long term, U.S. policies that restrict trade and investment, dissuade talented foreigners from coming to the country, and crack down on America’s most globally competitive and innovative firms is a recipe for stagnation. Our policy analysis provides a roadmap to policymakers looking for a more productive and effective approach to the U.S.-China economic relationship. Read the whole thing here.