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Colleen Hroncich

When education was disrupted during the pandemic, Dominique Burgess didn’t waste time. An educator with more than a decade of experience, she had started Burbrella Education pre‐​COVID‐​19 to support parents, teachers, and school leaders with coaching and support. In spring 2020, she started offering remote learning options to help families while schools were closed.

Dominique was very flexible and began adding options as parents and teachers expressed interest. She now operates Burbrella Learning Academy, which includes an online microschool, an in‐​person microschool in North Carolina, and tutoring.

In the beginning, she says most of the families who signed up with Burbrella were already homeschooling their kids and were looking for academic support and a consistent schedule. Then there were parents who were frustrated by the poor communications from their local school and wanted something more concrete. As schools started to return in person, some parents who weren’t ready for that turned to Burbrella. But at the same time, other parents were asking for in‐​person options. “So we coordinated some homeschool co‐​ops in specific states where we had interest from parents,” she explains.

As the homeschool co‐​ops spread, more families were asking for in‐​person options in their locations. Dominique says, “I did a good amount of research on microschools for about a year. After looking at the parameters around how a microschool can operate in North Carolina, I decided to start the first one here because (1) this is currently home for me, and (2) I spent a lot of time during Covid analyzing the different educational institutions and dynamics of education here in North Carolina.”

She chose Alamance County for her first in‐​person location to help parents see that there are other educational options out there and because she didn’t find many alternatives in the area. “The first question that we get is ‘what’s a microschool,’” says Dominique. That gives her the opportunity to explain what a microschool is and how they are revitalizing education while providing families with choice.

The Burbrella microschool in NC, which opened this year, is K‑5 and meets Monday through Friday. Parents can choose a hybrid option as well, where they do three days in person and two at home in the online school. There’s also a homeschool drop‐​in option for homeschoolers on Tuesdays and Thursdays. The after‐​school program is open to district, charter, and private school students.

Plans are in the works to open an in‐​person microschool in Indiana next year. The online microschool is preK‐​12, which is Dominique’s goal for her in‐​person locations as well.

The Burbrella online microschool offers live classes Monday through Friday. Students get all of the core content area subjects—math, reading, history, and STEAM [science, technology, engineering, art, and math]. Dominique says teachers must understand that Burbrella is play‑, projects‑, and nature‐​based. “Our classes are structured just a little bit different than the traditional online classes, and we hire teachers that are aligned with our philosophy and our mission,” she says.

According to Dominique, Burbrella operates kind of like a network school district. “We say, ‘Here are the parameters around curriculum. Every class that will be taught in the online school needs to cover these four subjects—because we’re in a large number of states and want to make sure that the homeschooling expectation for every state is covered.”

It’s clear that Dominique’s flexible approach is appealing for many parents. She has 168 students from 18 states in the online microschool.

Dominique’s advice for parents is “know what’s available to you in your community, in your county. If it’s not there, push for it, ask for it.” And, like other education entrepreneurs I’ve talked to, her advice for prospective school founders is “take the leap.”

She notes that many teachers are afraid to leave the traditional setting because they don’t know where they’ll get things like insurance and retirement plans. “It will find you,” she says. “I tell teachers all the time the same 401K that I had and insurance premiums that I had, I still have. And that’s because people in this community found me. I was able to bring plans over for a much cheaper rate. So, take the leap. Do it. All the things will fall into place for you.”

Daniel Griswold

The Census Bureau reported this week that real median household income in the United States fell in 2022 for the third year in a row. We can debate the underlying causes of the setback, but the report shouldn’t obscure the long‐​term gains made by American workers and families during recent decades of expanding globalization.

One data point—highlighted by AEI scholar (emeritus) Mark Perry in a chart posted on X—exposes the myth that decades of growing trade have somehow “hollowed out” the American middle class. Going back to 1967, Perry shows that the share of American households with earnings between $35,000 and $100,000 (in constant 2022 dollars) has indeed shrunk, but so too has the share of households with earnings below $35,000. Meanwhile, the share of households earning more than $100,000 has nearly tripled.

I document the same phenomenon in a new essay, “The Misplaced Nostalgia for a Less Globalized Past: The ‘Great Again’ Economy Wasn’t so Great.” The essay is part of an ambitious new Cato Institute project called “Defending Globalization.”

Looking at the same Census series from 1970 to 2021, you can see in the nearby chart that the number of both poor and middle‐​class households has been shrinking as a share of total households, while those with incomes above $100,000 in constant dollars have been rising. The American middle class in the era of globalization has been moving up, not hollowing out!

In fact, when we account for changing household sizes as well as more accurate measures of price inflation, median household income in the United States has increased by 50 percent since 1967. Meanwhile, real average hourly earnings have risen by 74 percent in the past 50 years. The time that Americans must work to acquire basic household goods such as food, clothing, and appliances has fallen steadily as technology and trade have combined to make goods more affordable.

The essay goes on to show that Americans are not only earning more on the job but are safer from workplace injury and death. Women workers have benefited in our more globalized era from rising levels of education and more opportunities in the workplace. The rising level of prosperity has benefited minorities as well with falling levels of poverty; inequality as measured by the Gini co‐​efficient has actually decreased slightly in recent decades.

All this has occurred over decades of rising levels of foreign trade and investment as a share of U.S. gross domestic product. Despite the recent turbulence, Americans today are better off than they were 50 years ago, not despite globalization, but in significant measure because of it.

You can check out all the essays as they roll out as well as Scott Lincicome’s introductory talk at the “Defending Globalization” website.

Scott Lincicome

Thirty‐​four years ago tomorrow, Boris Yeltsin — then a newly elected member of the Supreme Soviet of the Soviet Union — visited NASA’s Johnson Space Center in Houston, Texas, where he toured the U.S. government facility and the various technologies therein. But it’s a brief, impromptu visit to a nearby grocery store that may very well have changed world history.

Yeltsin, who’d two years later become the first freely elected leader of Russia, roamed the aisles of the relatively small Randall’s market that day and was astonished at the variety and affordability of the products on display. According to various reports, this visit — not the one to NASA — catalyzed Yeltsin’s exit from the Communist Party and his abandonment of the Soviet economic model. His 2007 New York Times obituary tells the tale:

During a visit to the United States in 1989 he became more convinced than ever that Russia had been ruinously damaged by its centralized, state‐​run economic system, where people stood in long lines to buy the most basic needs of life and more often than not found the shelves bare. He was overwhelmed by what he saw at a Houston supermarket, by the kaleidoscopic variety of meats and vegetables available to ordinary Americans.

Leon Aron, quoting a Yeltsin associate, wrote in his biography, “Yeltsin, A Revolutionary Life”…: “For a long time, on the plane to Miami, he sat motionless, his head in his hands. ‘What have they done to our poor people?’ he said after a long silence.” He added, “On his return to Moscow, Yeltsin would confess the pain he had felt after the Houston excursion: the ‘pain for all of us, for our country so rich, so talented and so exhausted by incessant experiments.’ ”

He wrote that Mr. Yeltsin added, “I think we have committed a crime against our people by making their standard of living so incomparably lower than that of the Americans.” An aide, Lev Sukhanov was reported to have said that it was at that moment that “the last vestige of Bolshevism collapsed” inside his boss.

My Cato colleague Sophia Bagley and I recall this wonderful story in a forthcoming essay for Cato’s new Defending Globalization project, explaining how the United States’ grocery abundance — owed in large part to globalization — fueled Yeltsin’s freezer‐​side conversion and has increased further since that time. Between 1975 and 2022, for example, the number of products in an average U.S. supermarket has increased by more than three‐​fold, from 8,948 products to a whopping 31,530. Not all of that increase is due to globalization, of course, but much of it is. As shown below, for example, imports of essentially every type of food have increased substantially in the decades following Yeltsin’s tour of Randall’s:

Some of these gains reflect Americans’ increasing appetites for “ethnic foods” and the related explosion of such items in American grocery stores. As I note in my first essay for the project (on the current state of globalization), these cuisines are today “so commonplace that American grocers are struggling to fit them all in the ‘ethnic food’ aisle, where buyers and sellers prefer them,” while “H Mart, a Korean American supermarket chain, has become one of the fastest‐​growing retailers by specializing in foods from around the world.”

But there’s probably no bigger symbol of U.S. grocery globalization than in the produce section. Supermarkets in 1980, for example, carried an average of 100 different produce items, and the number approached approached 250 by 1993. But, even then, certain fruits and vegetables were limited to North American growing seasons, and few here had even heard of products like rambutans, lychee, or jackfruit.

A casual stroll through the same aisles today, by contrast, reveals an incredible variety, driven in large part by global trade and Americans’ globalized taste buds. According to the FDA, in fact, 55 percent of fresh fruits and 32 percent of fresh vegetables are today sourced from abroad. As Bagley and I explain in our essay, much of the expansion in international trade in food is owed to trade agreements completed in the 1990s.

In the United States, the 1994 North American Free Trade Agreement improved Americans’ access to warm‐​weather produce grown in Mexico and certain other foods in which Canada specialized (and not just maple syrup). Globally, the 1995 World Trade Organization agreements, especially the Agreement on Agriculture, dramatically reduced global food and related trade barriers. Since then, agricultural trade has more than doubled in volume and calories. (For more on why we have these and other trade agreements, check out Simon Lester’s new Defending Globalization essay.)

Globalization has even improved our domestic food supply. For example, more than 40 percent of the steel used for canning goods is sourced globally, meaning that many canned foods, although grown domestically, would be more expensive if U.S. producers lacked access to imported materials. American farmers, meanwhile, often rely on imported fertilizer, or use export revenues to fund expansions or crop experimentation. Total U.S. food and agriculture exports hit $196 billion in 2022, almost half of which ($88 billion) went to Asia.

Sadly, the hope and optimism of Yeltsin’s Russia are today a distant memory. But his amazement that day in Houston — and the blessings of American grocery abundance — are still worth celebrating. They may have even changed the world.

Jeffrey A. Singer

On September 12, a Food and Drug Administration advisory panel reported that oral phenylephrine hydrochloride, an ingredient in many popular over‐​the‐​counter decongestants people purchase to treat common cold symptoms, does not reduce nasal congestion.

Phenylephrine, a drug that causes small blood vessels to constrict, is an ingredient in numerous cold remedies, including Nyquil Sinex Nighttime Relief and Sudafed PE. The FDA and drug makers believed that constricting blood vessels that supply mucus glands in the nasal passages and sinuses would cause a drop in mucus production. However, new research shows that oral phenylephrine is no more effective than a placebo.

Because FDA drug approval means that the agency determines a drug is both safe and effective, the agency might next order all of these popular brands pulled off the shelves.

The FDA first approved phenylephrine as a safe and effective over‐​the‐​counter decongestant in the 1970s. In 2007, an advisory panel told the FDA that evidence oral phenylephrine worked was “murky” and “not definitive” and recommended further study.

It is reasonable to ask why it has taken the FDA—an agency that controls what drugs doctors can recommend to their patients and what medications people may take to self-medicate—roughly 50 years to figure out that a drug it declared effective is not.

As Michael Cannon and I wrote in “Drug Reformation”:

Government‐​imposed prescription requirements violate the rights of individuals to access the medicines they want. Vesting this power in government has left Americans with less access to medicines overall—even relative to consumers in other nations where governments also impose prescription requirements. It imposes unnecessary costs that rise during public health crises such as the COVID-19 pandemic. Evidence also suggests that government‐​imposed prescription requirements make patients less safe, not more.

The answer might have something to do with the fact that Congress passed the Combat Methamphetamine Epidemic Act in 2005, which went into effect in March 2006. Designed to prevent the diversion of an effective decongestant, pseudoephedrine, into the black market where meth lab “cooks” converted it into methamphetamine, the Drug Enforcement Administration ordered all oral pseudoephedrine medications to be “behind the counter.”

Pharmacists must record the personal identification of patients wishing to purchase it. The DEA places strict limits on the dose and number of pseudoephedrine‐​containing products patients may obtain within a 30‐​day time frame. Oregon and Mississippi lawmakers went even further. Those states required patients to get a doctor’s prescription to purchase oral pseudoephedrine. Both states repealed those prescription requirements in 2022.

Sudafed, a popular and effective brand of pseudoephedrine decongestant, was moved “behind the counter” under the new law. People can purchase Sudafed PE over the counter without restrictions. Sudafed PE substitutes phenylephrine for pseudoephedrine (thus the “PE”).

Of course, the restrictions and inconveniences the DEA imposed on patients did nothing to combat the “methamphetamine epidemic.” It didn’t take long for the drug cartels to figure out other ingredients that could be used to make methamphetamine more efficiently (anybody who has watched the award‐​winning television series “Breaking Bad” knows this).

One such ingredient is phenyl‐​2‐​propanone, also called phenylacetone or P2P. As a result, meth‐​related drug deaths per 100,000 increased nationally by 1,500 percent between 2006 and 2021. The iron law of prohibition — “the harder the law enforcement, the harder the drug” — struck again.

Two agencies, the FDA and the DEA, combined to make millions of people with colds, allergies, and other causes of severe congestion waste their money on placebos and go without relief for decades while driving the drug cartels to discover more effective ways to make more potent forms of meth, which helped to cause meth‐​related deaths to skyrocket. 

Sometimes, irony can be tragic.

Chris Edwards and Krit Chanwong

Congress is scheduled to reauthorize farm programs this fall, which provides an opportunity to cut spending and reduce budget deficits. This Cato study discusses reasons to cut cash payments to crop farmers, but there are other dubious farm programs in addition to the direct handouts.

The U.S. Department of Agriculture (USDA) spends more than $2 billion a year on three programs that provide food aid to poor countries, which aim to alleviate hunger and support development. The programs have noble goals, but they suffer from serious practical flaws.

Food Aid Programs

The table summarizes three foreign food aid programs. The programs provide emergency aid in crisis situations and nonemergency aid aimed at long‐​term development. They rely on nongovernment and international organizations for implementation.

Most of the aid involves shipping U.S. food abroad and distributing it to recipients. But some of the aid involves buying food abroad near the area where it will be delivered. And some of the aid involves shipping U.S. food abroad and reselling it in foreign markets to raise cash for programs, which is called monetization.

Here are some program details:

Food for Peace. Enacted in 1954, this program was aimed at feeding poor nations while disposing of excess U.S. crop production stimulated by federal support programs. Food for Peace (also called P.L. 480) is administered by the U.S. Agency for International Development (USAID) but is funded in USDA’s budget and relies on the USDA to purchase the food. About four‐​fifths of the aid is for emergencies and one‐​fifth for non‐​emergency programs.
Food for Progress. Enacted in 1985, this program funds development activities, including helping countries improve their infrastructure and agriculture. The program uses monetization—shipping U.S. food abroad and selling it in foreign markets to raise money. It is run by the USDA.
McGovern‐​Dole. Enacted in 2002, this program donates food for school‐​age children and other groups in poor countries, while also helping countries expand their government food programs. Up to 10 percent of funding can be spent on purchasing food in foreign markets, which is called “local and regional procurement.” The program is run by the USDA.

The U.S. foods purchased for these programs include wheat, sorghum, pulses, rice, corn, soybeans, and vegetable oil. Africa is the largest recipient region.

The Congressional Research Service (CRS) says, “U.S. reliance on in‐​kind [food] aid is controversial due to its potential to disrupt international and local markets and because it typically costs more than market‐​based assistance.” Also, the USDA’s foreign aid activities overlap those of the main federal aid agency, USAID.

Undercutting Local Farmers

When the United States gives free grains and other foods to poor countries, it risks undercutting local farmers abroad, and thus undermining the ability of poor countries to feed themselves. Foreign aid experts have warned about this problem, and of the general inefficiency of food aid, for decades, but U.S. agricultural and shipping interests favor donating U.S. food. The CRS notes that other donor countries have mainly dropped in‐​kind food aid: “Many other major donors—such as Canada, the United Kingdom, and the European Union—have converted primarily to cash‐​based assistance.”

In recent years, McGovern‐​Dole has given thousands of metric tons of rice to Laos. But Laos is a substantial producer of rice—indeed a net exporter—and the U.S. donation was small compared to the total Laos production. Using U.S. taxpayer funds to ship rice across the ocean to potentially displace some of Laos’ production does not make economic sense.

A 2017 study examined 118 countries over 45 years that received U.S. food aid to see if the aid affected local food production. It found that “doubling U.S. food aid reduces cereal‐​grain production by 1.5%” in recipient countries, and that the “disincentive effect of food aid on production is particularly significant for sub‐​Saharan African countries, low‐​income countries, and regular recipients of U.S. food aid.”

The USDA and USAID are supposed to analyze whether their food aid projects will distort local economies, but the GAO found that the agencies “did not consistently document that U.S. commodities would not negatively affect recipient countries’ production or markets.”

It is counterproductive to provide foreign aid in ways that interfere with poor countries’ efforts to achieve market‐​based growth. Thus, providing free commodities that may undermine farmers in recipient countries is not a good aid strategy.

Slow and Expensive Delivery

Even in cases where U.S. food aid may be helpful, such as some crises, the long time needed for shipping reduces the usefulness. U.S. food aid shipments typically take four to six months to reach their destinations abroad. USAID pre‐​positions some food abroad for emergencies, but that approach is expensive and subject to problems such as theft, infestation, and spoilage.

A better approach is usually local and regional procurement (LRP) in markets near to where food is needed. But only a small share of U.S. food aid uses this approach, apparently because of the influence of U.S. farm and shipping lobbies.

LRP is less expensive than shipping U.S. food, and it can reach destinations months earlier. One study found that compared to shipping U.S. food, “Procuring food locally or distributing cash or vouchers results in a time savings of nearly 14 weeks, a 62 percent gain.” The study found that procuring grains and pulses locally was far less expensive than shipping from the United States.

The GAO found that U.S.-sourced food aid typically costs 25 percent more than LRP. And the auditors have noted, “Buying food close to where hungry people live has advantages over buying food in the United States and shipping it overseas: It can be much more cost effective and allow for more timely assistance .… This practice can also have the added benefit of supporting the local or regional agricultural sector, rather than undercutting it with imported food.”

The George W. Bush and Barack Obama administrations favored expanding the LRP approach instead of shipping U.S. food. The Donald Trump administration proposed repealing the Food for Peace program noting, “Procuring food near crises can save up to two months or more on delivery time and can significantly reduce the costs of food aid.”

Foreign aid experts generally argue for flexibility in aid responses and against tying aid to U.S. food production, which is a relic of farm support programs from decades past. Repealing the USDA’s foreign aid activities and allowing USAID to use more efficient aid approaches—such as LRP—would be a step forward.

Cargo Preference

The Cargo Preference Act requires that half the tonnage of government‐​financed cargo must ship on U.S.-flagged vessels. Food for Peace, Food for Progress, and McGovern‐​Dole must abide by these rules. U.S.-flagged vessels have substantially higher costs than vessels flagged abroad, so the rules raise the costs of U.S. food aid programs.

A GAO study found that cargo preference rules increase shipping costs of food aid by an average 31 percent. A 2021 study by the American Enterprise Institute found that “cargo preference requirements increase real ocean transportation costs per metric ton by 68 percent for packaged goods shipments and 101 percent for bulk goods shipments.”

Interestingly, about half of the U.S.-flagged ships available for food aid programs are owned by foreign parent companies. Colin Grabow discusses other flaws in the cargo preference rules here. The bottom line is that even in situations when donating U.S. food to poor countries makes sense, the government is doing it in an inefficient manner.

Monetization

Under the Food for Progress program, the “USDA donates U.S. agricultural commodities to international organizations, NGOs, foreign governments, or private entities, which can then distribute the commodities to beneficiaries or monetize the commodities by selling them locally to raise funds for development projects.”

So rather than, say, paying directly for an education program in a poor country, monetization involves shipping U.S. food abroad and selling it to raise cash for the program. The main U.S. farm products shipped in the program are soybeans, wheat, and rice.

The monetization process loses money for taxpayers and can undermine foreign farmers. A GAO study on food aid monetization was titled, “Funding Development Projects through the Purchase, Shipment, and Sale of U.S. Commodities Is Inefficient and Can Cause Adverse Market Impacts.” The GAO found that monetization is “inefficient and can actually hurt the domestic agricultural markets in developing countries that are already challenged in meeting the food needs of their people.”

Monetization is a wasteful and roundabout method of funding aid programs, and it should be repealed.

Overlap with USAID

In 2023, the federal government will spend more than $17 billion on USAID, the Millennium Challenge Corporation, multilateral aid institutions, and other non‐​security international aid agencies. Funding other foreign aid on top of that through domestic agencies, such as the USDA, creates wasteful duplication with the international‐​focused agencies.

The GAO has examined the bureaucratic overlap between the USDA and USAID. The auditors found, for example, “Both USAID and USDA were implementing nonemergency food aid programs in Guatemala and Uganda in fiscal year 2011, and we found that these programs shared common geographic focus areas, activities, and implementing partners.”

There are so many agencies now involved in foreign food aid and hunger issues that the government created a superstructure to coordinate the sprawl called the Government Global Food Security Strategy (GFSS). The GAO reported last year that the USAID “leads the global coordination of efforts conducted by itself and 11 other U.S. agencies—collectively known as the GFSS Interagency—to implement the strategy. According to the GFSS, increased interagency engagement is intended to build effective coordination.”

But we suspect that coordination would be better and taxpayer costs lower if aid was consolidated in the USAID and not spread across 11 other agencies.

Conclusions

Congress should end the USDA’s involvement in foreign aid. The Trump administration pointed to the flaws in these activities in proposing to repeal Food for Peace, Food for Progress, and McGovern‐​Dole. That would save taxpayer money, reduce duplication, and eliminate the harmful side effects that food aid projects can create.

More broadly, some analysts question the efficacy of government foreign aid in general. Ian Vasquez argues that providing foreign aid to countries with poor policy environments does not boost development. He points to the strong relationship between economic freedom and growth. In 2019, the average per capita income of the least free quintile of countries in the world was $5,911, which compared to $50,619 for the most free quintile.

Rather than relying on foreign aid, countries struggling with hunger and low incomes should pursue institutional reforms such as strengthening private property, opening markets, adopting stable money, and removing barriers to entrepreneurship including farming. The good news is that as more countries have adopted market institutions in recent decades, global incomes have risen and hunger has plunged.

More on farm subsidies here. More on global hunger issues at Human Progress here.

Scott Lincicome

Today we’re launching a new multi‐​year, multimedia Cato project — Defending Globalization. The last few years have witnessed renewed criticism from the left and the right — in the United States and abroad — on the relatively free movement of things, people, capital, and ideas across national borders, a.k.a., “globalization.”

Unfortunately, the most common anti‐​globalization narratives are not just inaccurate; they ignore the fundamental humanity of globalization and that, for all its foibles and missteps, global capitalism’s long‐​term direction is undeniably positive.

Frustrated by the ossifying conventional wisdom that, actually, globalization has been mostly Bad, we set out to launch this Cato project, which will both correct the record and offer a strong, proactive case for more global integration in the years ahead.

To make our case, Defending Globalization will roll out over the next year or so a trove of new content, including,

An online library of relatively short, accessible essays on all aspects of globalization (economics, foreign affairs, law/​politics, society/​culture, history, etc.), written by Cato scholars and prominent outside experts;
An interactive quiz on the myths and realities of globalization;
New polling on Americans’ view of globalization;
A day‐​long conference in January and other events in DC or elsewhere;
A searchable “Academic Library” containing all Cato “Research Briefs” summarizing scholarly research on trade, immigration, and related issues;
Videos and other media on both the facts and faces of globalization — real people who benefit greatly from our globalized world.

All this content (and more) will be available at this dedicated Cato website. Today, we’re leading off with my essay introducing the Defending Globalization project and seven others on a wide range of topics:

Comparative Advantage, by Don Boudreaux.
Globalization Creates a Global Neighborhood, Benefiting All, by Deirdre Nansen McCloskey.
The Dangers of Misunderstanding Economic Interdependence, by Dan Drezner.
The Misplaced Nostalgia for a Less Globalized Past, by Daniel Griswold.
U.S. Immigration Policy Lags Behind a Globalizing World, by David Bier.
Why Do We Need Trade Agreements At All? by Simon Lester.
Globalization Isn’t Going Anywhere, also by me.

Two weeks from now, and then every two weeks thereafter through the fall, we’ll roll out another three essays and additional multimedia content. (The aforementioned quiz, for example, will go live on September 26, along with essays on the World Trade Organization, digital trade, and the “American System.”) The Academic Library is also now live, as are essay pages listing both what we’ve already published and what we’ll publish in the weeks ahead.

Additional work will come online in 2024 as it’s ready. As you’ll soon see, we have a lot of new, different, and fun content in the works — content we believe will fill a big hole in the current debate on globalization and the future of global trade and immigration policy. We hope you enjoy it.

Daniel Raisbeck and Gabriela Calderon de Burgos

After paying little attention to dollarization in Latin America for over two decades, the international press suddenly features regular commentary on the subject. This is a result of Argentina’s primary elections of August 13, when Javier Milei, a candidate whose flagship proposal is to dollarize the Argentine economy, delivered a surprise victory.

In our last blog post, we took on seven myths about dollarization in Latin America that are often put forth against the measure. Myth #3 refers to the theory that dollarization already failed in Argentina in the 1990s, when the government of former president Carlos Menem (1989–1999) implemented a convertibility system.

As we explain, the equivalence is false because the convertibility system amounted to an unorthodox currency board in which the central bank still carried out monetary policy, something that does not take place under an orthodox currency board. Under full dollarization, whereby the dollar is granted legal tender, the central bank either disappears or is rendered obsolete in terms of its ability to implement monetary policy.

In a recent article, Bloomberg’s Eduardo Porter relies on myth # 3, claiming that dollarization in Argentina is “a dangerous delusion” because “the proposition has essentially been tested already.”

Strangely enough, Porter recognizes that the convertibility system did not amount to dollarization. He writes that the set‐​up allowed “the government in Buenos Aires wiggle room,” which, though narrow, “could still be used destructively.”

He adds that economic agents “would operate under the assumption that laws could be changed and the plan could be undone,” so that “the promise was short of being rock solid.”

Nonetheless, Porter writes that the convertibility system was “the next best thing” after dollarization. It was not, because the next best thing would have been an orthodox currency board, which strictly limits a central bank’s scope to fixing the exchange rate to the dollar.

The claim that convertibility was not a “rock solid” promise, moreover, is a gross understatement; the convertibility system’s leeway to the monetary authorities caused its eventual failure. Thus, the convertibility system’s experience in no way proves that dollarization is not feasible in Argentina. If anything, convertibility’s failure shows that the country’s monetary authorities can do much damage with minimum leeway.

The main point of dollarization, meanwhile, is precisely to get rid of all leeway for the monetary authorities. Dollarization is a superior alternative because it requires no promise from a central bank to abide by a fixed exchange rate.

Porter, however, argues that anyone who points to the convertibility system’s fundamental design flaws “misunderstands the root cause of convertibility’s failure. It collapsed, in essence, because the Argentine economy — its households and businesses, governments and banks — could not generate enough dollars to cover the debts incurred to maintain consumption in the convertible era.”

While this might describe the consequences of the convertibility system’s failure, it is a bizarre argument against dollarization. In a fully dollarized country, there is no need to “generate dollars” in order to cover dollar debts incurred while using a local currency because there is no local currency.

In fact, a main advantage of dollarization is that, by granting the U.S. dollar legal tender, the entire economy operates in dollars, so that there can be no balance of payments crisis. Under dollarization, a debt crisis or a default will force the government to pay the price via higher interest rates in global sovereign bond markets, but this will not affect the money supply, the value of the currency, or even the interest rates for solvent private sector actors (see below).

It is only by creating a conflict between monetary policy and the exchange rate policy—that is, by keeping a national currency pegged to a foreign currency while allowing the central bank to dictate monetary policy— that a balance of payments crisis can arise. This is what took place in Argentina in 2002.

Porter further quotes a paper by economists Sebastian Galiani, Daniel Feynmann, and Mariano Tomasi, who argue that “the dollar value of incomes had to be sufficient to maintain spending and service debts, and for that to happen, a sufficient growth in the output of tradables had to materialize before the supply of credit dried up.” This was not the case in the wake of the Asian financial crisis of 1997, which, as Porter writes, “slashed capital flows and increased the costs of foreign borrowing.” Argentina’s exports suffered with the subsequent devaluation of the Brazilian real, and the convertibility system exploded thereafter.

But, again, the tension between rising debt and the dollar value of incomes and output earned in pesos was a feature of convertibility, not of a dollarized system. In their paper, in fact, Galiani et al. argue— in a footnote— that “the dollarization proposals would count as a particularly strong form of raising the bet, by exiting convertibility in the other direction.” But they go on to state that the proposal “did not find significant international support,” which is not surprising; as we have explained, no official institution in Washington supports dollarization.

They add that “in any case, (dollarization) could not restore export growth or solve the fiscal problems if the economy stagnated or went into a recession for more fundamental reasons.” This is true because dollarization is no guarantee of fiscal prudence or economic growth. However, dollarization does prevent the type of currency mismatch that blew up the convertibility system, which, at one point, established different exchange rates for imports and exports.

Porter doubles down on the “convertibility failed, hence dollarization is impossible” non sequitur when he writes: “It is a dubious proposition that ditching the peso altogether and adopting the dollar would have allowed Argentina to hold on. It rests on the fantasy that a dollarized Argentina would have kept attracting foreign money regardless of its economic realities.”

Although he does not state it explicitly, Porter seems to imply that dollarization would work in Argentina only if the country’s export growth outpaced or kept up with that of its imports. This focus on the balance of trade is wrong not only in terms of dollarization; it is a rehash of the fallacy that trade surpluses are desirable and even necessary for a nation to prosper, a theory refuted by Adam Smith in the 18th century as part of his demolition of mercantilist theory. (Porter displays mercantilist sympathies when he states that the government needs to run the economy).

Regarding trade, one of dollarization’s main advantages is that it provides an economy with a real exchange rate, through which trade and payments tend to balance each other. As such, dollarized economies operate in a way that is akin to the classical gold standard.

As David Hume, another eighteenth‐​century critic of mercantilism, wrote at a time when precious metals provided the means of exchange for international trade, the gold accumulated via exports that exceeded imports tended to raise a nation’s domestic prices. This made imports more attractive. Conversely, when imports began to exceed exports, gold flowed out and domestic prices would fall. The process would reverse once more as exports began to exceed imports.

Hence, under the classical gold standard, the balance of trade might never have been in a state of perfect equilibrium, but it did tend to balance automatically. Dollarization operates with the same type of automatic adjustment, with U.S. dollars, not gold, serving as the means of exchange. But politicians first have to allow dollarization to take place. To Argentina’s detriment, this did not take place in the 1990s.

The main problem with Porter’s argument is not even that he equates convertibility with dollarization, claiming that the latter would fail because the former failed. Much worse is that he assumes that convertibility is the only relevant comparison for Argentina today, but he fully omits the experience of all the Latin American countries that have dollarized successfully.

Panama had already used the dollar for nearly a century when the Asian crisis struck in the late 1990s and it suffered none of Argentina’s trauma: its last year of negative GDP growth before 2020 was 1988, the year before a U.S. invasion toppled General Noriega. In recent decades, dollarized Panama has posted some of Latin America’s highest growth rates in terms of per capita GDP, thus refuting the myth that dollarization prevents a country from achieving solid growth.

Nor did Argentina’s woes at the turn of the century prevent Ecuador and El Salvador from dollarizing in 2000 and 2001 respectively. Both countries have benefitted considerably from dollarization despite their lack of rapid growth.

El Salvador has proven that the private sector in a dollarized country still can access dollars at relatively low interest rates regardless of the government’s fiscal problems. Non‐​dollarized countries, on the other hand, must counter outflows in times of crisis with drastic interest rate hikes, thus undermining investing incentives across all sectors. As Manuel Hinds, a former finance minister in El Salvador, writes about his country’s recent experience:

In the last two years, there was a scare that the government would not repay a large instalment of its long‐​term debt, and the EMBI (the difference between the yield of the Salvadoran bonds and the American ones) went up to almost 30%… This indicates how the international secondary markets for sovereign debt consider the risks of lending to a government.

Yet, in El Salvador, both short‐​term and mortgage interest rates remained around 7%, highlighting how the international markets (into which El Salvador is directly inserted, without intermediation by the central bank) assigned a considerably higher risk to the government compared to the private sector.

It was dollarization, moreover, that reduced El Salvador’s interest rates and lengthened loan periods in the first place. As Hinds notes: “after dollarizing, the interest rate fell from 20% to 6% for mortgages, increasing their maturity from 5 to 25 years. Short‐​term loans also became cheaper. And this was not a fad.”

In Ecuador’s case, dollarization has succeeded in a classic “banana republic” — the country is the world’s largest exporter of bananas — that is also largely dependent on oil exports and remittances. Ecuador is thus uniquely subject to external shocks. Nonetheless, since it dollarized in 2000, the country has withstood major fluctuations in the price of crude oil, its main export, and sharp reductions in the flow of remittances.

Ecuadorians, in fact, lived through the Great Recession, the end of the country’s second oil bonanza, and the COVID-19 pandemic, all while maintaining a stable financial system and one of the lowest inflation rates in the region.

Yes, Ecuadorians could have enjoyed higher growth rates if other structural reforms had been implemented. In their absence, however, at least Ecuador did not experience the type of wipeout that was the norm between 1980 and 2000, when an external shock would be followed by an even stronger internal one.

Ecuador’s case also proves that a hard dollar regime, while no guarantee of fiscal prudence, still imposes significant budget constraints on profligate governments. Former president Rafael Correa, who governed from 2007 until 2017, was a poster boy for twenty‐​first‑century socialism and a declared enemy of dollarization. Nonetheless, Correa failed in his attempt to introduce a digital currency and was forced to reduce public spending — from 44% of GDP to 37% — between 2014 and 2017.

Being no free trader, Correa joined the European Union’s free trade agreement with Colombia and Peru in 2017 (after an accession process of several years). Mainly, this was because he found himself with no political support for further tax hikes, unable to monetize fiscal deficits, and with virtually no access to capital markets. Arguably, the EU trade deal was Ecuador’s most important trade liberalizing measure in the past quarter century.

The success of dollarization in Latin America has gone under the radar because the dollarized trio are relatively small countries, Ecuador being the largest with a population of 18 million. Were Argentina to dollarize, however, it hardly would be feasible to ignore or hide its benefits — monetary stability, low inflation, low interest rates, longer loan terms, built‐​in hard budget constraints — in one of the region’s largest and most influential countries.

If dollarization has been a regional anomaly hitherto, Argentina’s official adoption of the dollar could be a hemispheric watershed. Could this explain why the anti‐​dollarization camp has become so vocal of late?

Marc Joffe

If you’ve visited San Francisco recently, you know that a ride on the city’s famous cable cars is not cheap. The standard fare is $8 (regardless of distance) and an average trip is less than a mile and a half. I used to think that the city transit system, SF Muni, used the cable car to subsidize its bus and light rail services, but a deep dive into the numbers disabused me of this notion.

Despite the high fare, the cable car service loses copious amounts of money. It serves as a case study of how difficult it is to run a railroad profitably, especially when the operator is a government agency. Privatizing the cable car service is a better route to follow.

For the cable cars, the last full fiscal year of operation for which financial data are available was the year ending June 30, 2019. The system shut down between March 2020 and August 2021. We’re still waiting for fiscal year 2023 numbers to come in, but, given the drop in San Francisco tourism, they are likely to be worse than FY 2019.

For FY 2019, the federal government’s National Transit Database (NTD) shows that the San Francisco cable car system collected $24 million in revenues and incurred $70 million in operating costs, resulting in a reported operating loss of $46 million. The NTD figures overstate the system’s performance because they do not include depreciation expenses.

The key driver of the cable car’s unprofitability is the high cost of labor. Salaries and benefits accounted for 92% of San Francisco cable car expenditures in FY 2019. Of the $12.32 cost per passenger trip that year, $11.34 was labor‐​related.

Cable cars are especially labor intensive because each one requires two SF Muni employees: one to start and stop the vehicle, and another to collect fares. And cable car staff are expensive to employ. One operator profiled recently in local media (who, as a courtesy, I will not name) has a base salary of more than $86,000 annually according to Transparent California. But his total compensation works out to almost $154,000 when overtime pay, employer‐​paid health and dental benefits, employer contributions to his defined benefit pension, and other benefits are included.

Although a cable car operator works 40 hours per week, an experienced transit employee is entitled to 15 paid holidays, 15 paid vacation days, and 13 paid sick days annually, as specified by city policies and the union’s memorandum of understanding. The all‐​in cost of employing a cable car operator works out to around $70 per hour.

When cable cars are fully loaded with sixty passengers (seated and standing), they may generate enough revenue to compensate the two onboard employees as well as SF Muni’s support staff. But ridership varies by time, day, and season. Break‐​even operation may be possible if service is only offered at peak times, but the City Charter requires Muni to run cable cars for the same hours it did in 1971, which was about 16–18 hours each day including weekends.

Riding a cable car is an integral part of the San Francisco tourist experience, but like many tourist amenities, the system should be able to operate profitably without taxpayer subsidies. Because the cable cars run near alternative bus lines, they are not essential for local commuters. Consequently, the city would be best served by privatizing the service and amending the charter to permit fewer hours of service.

A private operator offering service only at peak times, potentially at a higher price and with non‐​union labor, should be able to profitably offer a beloved tourist amenity while saving money for beleaguered city taxpayers.

Jennifer Huddleston

The antitrust cases against Google brought by the Department of Justice (DOJ) and several state attorneys general begin today. This is the first of the major cases against the “big tech” companies to go to trial.

But are these cases really about protecting the consumer, or are they more a political move by regulators? Furthermore, what is actually at stake in this case?

The case against Google was initially brought under the Trump administration but has continued during the Biden administration. The case claims that Google is dominant in search (including specialized search) and search advertising. The government frames its case to claim that, despite the presence of other competitors like Bing and DuckDuckGo, Google has obtained monopoly power and is using that power in anti‐​competitive and harmful ways, such as obtaining default search engine status on various devices.

The problem is that a successful case against Google may help these competitors but harm consumers.

The real question should not be if Google has been more successful than the alternatives, but whether it achieved this success through a superior product or anticompetitive means. Consumers choose Google largely because they consider it a better product, not because they have been manipulated into choosing it as their option for search. After all, one of the most popular search queries on Bing is consumers looking for Google, illustrating that it is not by force but through consumer choice that has led to its popularity.

The same can be said for the “specialized search engines” referenced. Consumers can easily use Google to locate other platforms, such as Yelp, to search for reviews. Even on the hotly contested issue of mobile phone defaults, choosing another default search engine is only a few clicks away.

The timing of this case, however, may mean that by the time it is decided, innovation may have proven to be a better form of competition policy by disrupting the current vision of the underlying market. While Google has been put on trial, generative AI innovations, such as OpenAI’s ChatGPT, are already changing how we search for information. Such innovations, not legal trials, are also very likely to help Bing outcompete Google due to its linkage to ChatGPT.

Antitrust cases are not particularly fast, and technology can move rapidly during that time. For example, by the time the famous antitrust case against Microsoft had concluded, the market was significantly more mobile‐​focused and the so‐​called “browser wars” were largely over.

Unfortunately for consumers, Microsoft’s antitrust battles made it less able to focus on competing in the mobile operating system space. It is impossible to yet know what similar choices a company like Google may face or the deterrent factor such actions by the DOJ might be having on companies entering markets where they might be able to benefit consumers.

Antitrust actions should not be based on the presumption that big is bad. They should be firmly based on consumer welfare. When it comes to search, choice is rarely more than a few clicks away, and innovation is often our best competition policy.

David Boaz

New exercises of federal spending power are often justified on the basis of some emergency. Both the Hoover and Roosevelt administrations cited high unemployment and poverty in the Depression as justification for new transfer payments, such as farm subsidies and AFDC (“welfare”). When the emergency ended, the programs continued.

As economists would predict, any government payment program will create its own constituency. Program recipients will not willingly give up their source of income just because the emergency has ended. We’re now dealing with the latest example, the possible sunsetting of pandemic relief payments.

In March 2020, as government started to respond to the spread of the novel coronavirus, multi‐​trillion‐​dollar relief programs were quickly passed into law. Now some of those programs — and their recipients — are facing statutory deadlines. Which makes sense because the programs were justified on the grounds of keeping firms in business and employees supported. But the COVID-19 emergency has now ended, the economy is strong, and unemployment is low.

As usual, journalists are rushing to cover the plight of people who may lose their emergency benefits. A Washington Post article is headlined, “The incredible American retreat on government aid.” Note first that there is no retreat from the level of government transfer payments that existed in 2019. The concern is simply with new emergency programs dating from 2020 or later. The Post uses urgent language to bemoan

the expiration of a wave of federal programs passed in response to the pandemic to make life easier for millions of Americans.

Millions — possibly tens of millions — are losing Medicaid coverage, the result of the end of a covid‐​era program that gave federal aid to states that kept people continuously enrolled rather than carry out regular purges of the rolls.
Billions in covid‐​era federal funding to keep child‐​care centers open expire at the end of September, leaving states to scramble in the face of estimates 70,000 facilities could close and 3.2 million children (mostly five years old or younger) could lose their care.
That would have enormous ripple effects across the economy, forcing some proportion of parents out of their jobs to care for their children.

The article goes on to mourn the expirations of such other emergency programs as expansion of the Women, Infants, and Children food aid, student loan repayment suspensions, eviction moratoriums, and enhanced unemployment benefits.

Now it’s easy to find individuals who have benefited financially from these programs. But emergency payments, like any other government spending, have detrimental effects as well, and those are not considered in the Post article.

Federal spending skyrocketed in 2020 and beyond, and money diverted to federal purposes is money that is not available to private businesses and individuals, money that doesn’t contribute to job creation and economic growth. It did, however, contribute to the highest levels of inflation since the 1970s.

At Cato, we knew the risk that emergency programs would become permanent. As Ronald Reagan said in his famous 1964 speech, “No government ever voluntarily reduces itself in size. So, governments’ programs, once launched, never disappear. Actually, a government bureau is the nearest thing to eternal life we’ll ever see on this earth.”

In March 2020 Cato president Peter Goettler wrote in a letter to lawmakers, “Extraordinary measures must end with the passing of the crisis, and sunset clauses included in all emergency legislation.”

And staff writer Andy Craig wrote, “And perhaps most importantly: emergency rules and powers should extend only for the duration of the emergency, and be repealed at the earliest feasible opportunity. We should be wary of the ratchet effect, where governments tend to retain powers and keep open programs long after their original justification has disappeared.”

But it’s very difficult to get policymakers to make a binding commitment that temporary emergency programs will genuinely end when circumstances change.

That’s why the federal subsidy to wool and mohair producers, created in 1954 to increase domestic production of military uniforms, is still in effect decades after the Pentagon’s interest in the program ended. The difference is, that program is a budgetary rounding error compared to the trillion‐​dollar pandemic programs.

In the next perceived crisis, Congress will again move to demonstrate its concern by voting for massive spending programs. I hope that our current experience will remind future legislators to be far more cautious about creating “temporary,” “emergency” spending commitments.