Stock

Johan Norberg

During the pandemic, it seemed like the world was watching and worrying about Sweden, because my home country chose to stay open during the crisis. Many people warned that it was a reckless experiment that would end in disaster, and some people think Swedes came to regret this policy.

Today, I am publishing the Cato Policy Analysis paper, Sweden during the Pandemic: Pariah or Paragon? where I look at what Sweden did and summarize how it worked out. In the end, Sweden did better than other countries when it comes to school results and economic performance. That was to be expected as Sweden was one of few countries where schools and workplaces remained open. More surprisingly, Sweden also did better than most western countries on health outcomes.

Remarkably, Sweden had one of the lowest excess mortality rates during the three pandemic years 2020–22 – less than half of America’s. It seems like voluntary adaptation to the pandemic worked better than most people expected, and it suggests that it was not Sweden but the lockdown countries that engaged in an unprecedented experiment, depriving millions of their freedom without a discernible benefit to public health.

Read it here.

Michael Chapman

Among many interesting facts in a new Cato Institute report, Terrorism and Immigration, is that between 1975 and 2022 the annual chance of being killed on U.S. soil in an attack by a terrorist who crossed the border illegally was zero.

During the same timeframe, “the annual chance of an American being murdered in a terrorist attack by a refugee [was] about 1 in 3.3 billion,” said the report’s author, Alex Nowrasteh.

Foreign‐​born terrorists killed 3,046 people in the U.S. between 1975 and 2022, but the statistical chance of an illegal immigrant committing such a crime was zero. Most of the 219 foreign‐​born terrorists who killed those 3,046 people were in the U.S. on tourist and student visas, the report documents.

Most of the victims (97.8 percent) were killed on Sept. 11, 2001. The other victims (2.2 percent) lost their lives in a few attacks over 48 years (1975–2022).

In that period, the report documents that “the approximate annual chance that an American resident would be murdered in a terrorist attack carried out by a foreign‐​born terrorist was 1 in 4,338,984.”

Another interesting fact is that the overwhelming majority of foreign‐​born terrorist attacks in the U.S. were committed by radical Islamists. For instance, between 1975 and 2022, 219 foreign‐​born terrorists carried out operations on U.S. soil. Among those terrorists, “67 percent were Islamists,” according to the report.

Among the other foreign‐​born terrorists, “16 percent were foreign nationalists, 6 percent were right‐​wing extremists, 5 percent were non‐​Islamic religious terrorists, 4 percent were left‐​wing extremists, and the rest were separatists, adherents of other or unknown ideologies, or targeted worshippers of specific religions,” states the report.

Terrorism is terrifying, but it is fortunately infrequent. The chance of being murdered in a non‐​terrorist homicide was 316 times as great as being killed in a terrorist attack during the 48‐​year period studied in the policy analysis. Terrorism committed by foreign‐​born terrorists remains a threat to the life, liberty, and property of Americans but it is a relatively small threat that has diminished over time.

Nicholas Anthony

Bank of America is at the center of an ongoing January 6 investigation. Yet not because it (or its leadership) was directly involved in the riot. Rather, there has been an ongoing investigation into whether Bank of America supplied the Federal Bureau of Investigation (FBI) with financial records of people in the DC area for January 5–7, 2021.

Brian Knight, director of innovation and governance at the Mercatus Center, has created an ongoing series to break down the facts as new updates come forward. The first installment of the series can be found here, but I want to highlight just a few of the key pieces that Knight has identified over the last few months.

In the first installment, Knight explores whether handing over this information was legal. He explains that the Right to Financial Privacy Act is meant to protect citizens from the government, but it provides immunity for private institutions sharing financial information with the government under certain circumstances (see 12 U.S.C. Section 3403(c)). Depending on how much information was shared, this provision could mean the process was legal.

In another installment, Knight walks through why Bank of America may have been so proactive in its effort to share its records with the FBI. There are many factors to consider, but let’s focus on two. First, financial institutions have long been required under the law to act as de facto law enforcement investigators. Therefore, it’s possible that sharing this information was seen as being a proactive measure under those requirements. Second, financial institutions must be mindful of the risk of regulatory retaliation. Knight points to a study by Nicholas Parrillo, a professor at Yale Law School, to explain:

[B]ecause banks are basically incapable of perfectly following the multitudinous and complex rules that govern banking, they rely on having a positive relationship with their regulators to prevent those regulators from going too hard on them when the inevitable mistake occurs.

So between the immunity provision for sharing information, banks being deputized as de facto law enforcement investigators, and the threat of regulatory retaliation, it’s easy to see why Bank of America may have handed this information over.

Yet, in the most recent installment, Knight shares the news that Representative Thomas Massie (R‑KY) announced he has evidence that it was the FBI that told Bank of America what records to give them. If true, this detail changes what legal questions need to be asked. And, as Knight explains, the Right to Financial Privacy Act might not be much help here either.

The Right to Financial Privacy Act has around 20 different exceptions to its protections and a few of them could easily apply in this situation. For example, there’s an exception when government authorities “only” request the name, address, account number, and account type of a customer or a group of customers. There’s also an exception for government authorities authorized to conduct investigations related to terrorism (e.g., the FBI). Likewise, there is another exception if government authorities determine there is a risk that delaying access would lead to people getting hurt, property being damaged, or people fleeing prosecution.

The story is still unfolding and it’s still unclear what exactly happened, so be sure to follow Knight’s series. However, one thing does seem clear: the Right to Financial Privacy Act does not live up to its name. This example is, unfortunately, another case in a long history of the Right to Financial Privacy Act failing to protect people’s privacy. As Congress continues to investigate what happened, it should also look to reforming the Act.

Walter Olson

Section 3 of the Fourteenth Amendment prohibits anyone who has previously taken an oath of office (that is, most current and former public officials) from holding public office if they have “engaged in insurrection or rebellion” against the United States. That raises the question of whether any of the persons who took part in unlawful efforts to block the transition of presidential office in January 2021—and if so, which ones—might be barred from future office. It also raises the question of who decides on the disqualification: the state officials who list candidates’ names on the ballot? Other officials charged with gatekeeping, such as legislative bodies in charge of accepting member credentials? Or only the courts? And if so, can they weigh the evidence on their own, or do they need to wait until there has been some previous kind of ruling that the former official engaged in insurrection?

In a social media exchange last year, I was incautiously dismissive of attempts to disqualify candidates on this ground, saying most of them struck me as “performative long‐​shot complaints that stand little chance of success, and zero chance if based merely on bad talk.”

Like many others, accordingly, I was a bit shaken by the impressive article by two respected originalist legal scholars, William Baude and Michael Stokes Paulsen, making the case that Section 3 is very much a live thing and should be interpreted to disqualify candidates up to and including Donald Trump. (Arkansas Governor Asa Hutchinson brought up that question at Thursday’s Republican debate.) Among the points they make:

The original understanding of the definition of “insurrection or rebellion” was more sweeping than I had assumed, and crucially includes some broad classes of behavior that we would see as aiding, abetting, or even counseling miscreants, far from any front lines. It is by no means limited to, say, taking part in violent clashes.
Section 3 fell into decay following an appellate level decision called Griffin’s Case, written by Supreme Court Chief Justice Salmon Chase (though it was not a Supreme Court opinion). Chase interpreted the section as not “self‐​executing” in the absence of some prior proceeding or implementing legislation designating who exactly came under its restrictions. Baude and Paulsen make a strong case, however, that Griffin’s Case was in all likelihood wrongly decided and at odds with a sound understanding of the text of the Amendment, which had been ratified just one year before. It was part of a series of moves by which various governmental actors, the federal courts among them, gutted some of the most ambitious achievements of the Radical Republicans in Congress.
Contrary to what is sometimes asserted, successive amnesties declared by Congress in 1872 and 1898 affected only persons subject to disqualification at that time, and could not prospectively immunize persons whose later behavior brought them under the law.
Since January 2021, litigation seeking to disqualify candidates based on their conduct then has made clear that the law is not somehow a dead letter. New Mexico removed a county commissioner from office, one member of Congress was found covered by an appeals court but lost his seat in a primary resulting in the mooting of the case; another member of Congress won a ruling that she had not been factually shown to have engaged in covered conduct, which is distinct from any notion that the law wouldn’t have applied if she had.

Other legal scholars have weighed in, with Steven Calabresi applauding Baude and Paulsen’s work, and Michael McConnell urging extreme caution. McConnell notes that the article’s interpretation would place into the hands of secretaries of state and other officials a power over democratic choice—whether to exclude from the ballot the leader of the opposition party—that would be hard for the best of them to use impartially, and would be open to the most dangerous sorts of misuse.

This is not the time or place to assess the Baude‐​Paulsen argument as a whole, so I will content myself with making two quick points.

First, since it is likely that Donald Trump will face some vigorous efforts to disqualify him under the Amendment, it is greatly in the nation’s interest that the question be resolved in a rapid and nationally uniform way. That will almost certainly require a speedy trip up to the U.S. Supreme Court. Professor Ned Foley has outlined how this could happen. If and as local officials move to disqualify, the courts will inevitably backstop that determination. We need certainty long in advance of the scheduled general election.

Second, no one should assume that just because Baude and Paulsen have made a powerful intellectual case for their originalist reading, that the Supreme Court will declare itself convinced and disqualify Trump. Justice Antonin Scalia memorably described himself as a “faint‐​hearted originalist,” which captures something important about the thinking of almost every Justice—if overruling a wrongly decided old case threatens to disrupt settled expectations to the point of spreading chaos and grief through society, most of them will refrain. Stare decisis, and a general preference for continuity in law, still matters.

Alan Reynolds

Larry Summers, former Director of the National Economic Council for President Obama, recently wrote a Washington Post article advising “What Jerome Powell should say on inflation.”

To support his latest excuses for the Fed to “hit the brakes some more,” he added a strange graph claiming, “The last decade of U.S. inflation mirrors 1966 to 1976.” “It is sobering to recall,” he wrote, “that the shape of the past decade’s inflation curve almost perfectly shadows its path from 1966 to 1976 before it accelerated in the last 1970s.”

It is doubtful that Summers’ graph was meant to imply that inflation follows a predictable 50‐​year cycle. It is more likely that he expected us to see it as proof that inflation is a mysterious wild beast that can arise from the deep and attack us at any moment unless the Fed keeps beating it on the head with “considerably higher” short‐​term interest rates.

To make any sense of the two‐​in‐​one Summers graph, we must separate the two periods and add two key variables—oil prices and Fed interest rates. What both periods had in common were huge surges in oil prices in 1974, 1980, and 2021–22, which greatly affected inflation and Fed interest rates.

The lowest year‐​on‐​year monthly inflation in the 1966–76 period was an artificial decline from 4.4 percent in August 1971 to August 1972, before Nixon’s price controls blew up. That 1972 low Consumer Price Index (CPI) for 1966–76 matches up with the 0.3 percent low in April 2020 when the pandemic hit the United States and oil prices fell 74 percent from a year earlier.

Similarly, the peak inflation numbers in the 1966–76 period were in 1974 when Arab oil production cut pushed monthly oil prices up 135–184 percent. That 1974 peak lines up with highest recent inflation of 8.9 percent in June 2022 with global oil prices up 61 percent from the Russia‐​Ukraine oil crisis—on top of other large oil price hikes during the March to May 2021 reopening and stimulus. For 1966–76, CPI increases averaged 5.5 percent and the federal funds rate averaged 6.3 percent. For 2013–23, average CPI increases were 2.6 percent and the federal funds rate averaged 1 percent.

Figure 1, for 1966 to 1983, copies Summers year‐​over‐​year (YoY) changes in the Consumer Price Index but adds the year‐​over‐​year change in the price of a barrel of West Texas Intermediate (WTI) Crude Oil on the right axis, shown as grey bars. It also adds the federal funds rate as a red line on the left axis together with the YoY change in the CPI in green.

Figure 2 repeats the same data for 2013 to July 2023, with inflation and interest rates on the left axis and WTI oil prices on the right.

Figure 1

The mistaken lesson Fed hawks like Summers try to draw from Figure 1 is that the Fed cut rates too fast too long after the middle of the 1975 recession. But the Fed has always slashed rates in recessions ever since keeping the 5–6 percent discount rate higher‐​for‐​longer” in the deflations of 1921 and 1929. If anyone does not want the Fed to push rates too low (such as June 2008 to June 2022), then don’t let the Federal Open Market Committee (FOMC) keep launching recessions by inverting the yield curve too long.

As it happened, oil prices began rising again in February 1976, up by 25 percent YoY that September, and inflation did too. Oil exploded with the Iranian Revolution—up 149 percent in April 1980, when CPI inflation peaked at 14.6 percent. It is a convenient institutionalized Fed myth that Chairman Burns or Miller cut interest rates “prematurely” before Volcker arrived in August 1979. The federal funds rate had risen in synch with consumer prices after 1975, exceeding the inflation rate by early 1978.

It was the Volcker Fed that cut the fed funds rate prematurely. CPI inflation peaked at 14.6 percent in March 1980 and the federal funds rate was raised to 19.4 percent in the week ending April 2, 1980. But the recession was not as mild as promised, so the federal funds rate was quickly halved to 8.7 percent by July 23. It was back above 19 percent by year end, of course, in time for President Reagan’s inaugural.

Oil price shocks are temporary, and crude oil prices fell after March 1981 and inflation slowed to 8.9 percent by year end. From 1983 to 1986, after the Iran‐​Iraq war subsided, oil prices fell dramatically and so did inflation, which is why Summers ends his graph with 1983. As Figure 1 shows, the Fed was shockingly slow to bring interest rates down as inflation fell which made real interest rates punishingly high. Fortunately, the foolishly delayed Reagan‐​Kemp tax rate reductions were finally implemented with a 10 percent cut in 1983 and another 10 percent in 1984. Much to the dismay of the Fed, real GDP grew by 4.4 percent a year for seven years, with a brief interruption from a brief oil crisis when Iraq invaded Kuwait.

FIGURE 2

In June 2022, Larry Summers lectured that “we need five years of unemployment above 5 percent to contain inflation—in other words, we need two years of 7.5 percent unemployment or five years of 6 percent unemployment or one year of 10 percent unemployment” just to contain inflation, not reduce it.

Figure 2 shows how incredibly wrong that was. The annual rate of CPI inflation was 9.7 percent in the second quarter of 2022 and 2.7 percent in the second quarter of 2023. The annual rate of inflation was 1.5 percent in May, 2.2 percent in June, and 2 percent in July. The habit of measuring inflation over 12‐​month spans understates the pace of change because an average of the last 12 months is still lugging around old baggage leftover from last fall and winter.

The smart takeaway from Larry Summers’ misleading comparison of recent events with the oil crises of 1973–1982, and from his June 2022 cheerleading for a 5–10 percent unemployment rate, is that Fed Chairman Powell should look elsewhere for advice.

Michael Chapman

Republicans have been promising to shut down the federal Department of Education ever since it was created by President Jimmy Carter in 1980, some 43 years ago. At the first GOP presidential debate on August 23, four contenders said they would end the department if elected. While trusting a politician’s promise is a dubious gamble, closing down Fed‐​Ed is good policy.

At the GOP debate in Milwaukee on August 23, Vivek Ramaswamy said, “Let’s shut down the head of the snake: the Department of Education. Take that $80 billion [and] put it in the hands of parents across this country. This is the civil rights issue of our time.”

Three other Republicans on the stage echoed that point: former Vice President Mike Pence, North Dakota Governor Doug Burgum, and Florida Governor Ron DeSantis.

The fiscal year 2023 budget for the Department of Education is $79.6 billion, which, rounded off, is the $80 billion cited by Ramaswamy. The department employs 4,400 people, according to its website.

As the Cato Institute’s 2022 Handbook for Policymakers states, “The Constitution gives the federal government no authority to exercise control over elementary and secondary education, including by spending money and attaching conditions to the funds, the primary mode by which Washington has influenced education.”

America’s Founders believed that education was “best left in the hands of parents and civil society—the families and communities closest to the children—and certainly not in a distant national government,” reports the Cato Handbook. “Nearly 60 years of experience with major and, until very recently, constantly expanding federal meddling in K–12 education have proved them right.”

Some public schools, of course, do an excellent job, and some schools are total failures. And no one denies that many teachers in our public schools are selfless, dedicated, and hard‐​working educators. But the federal government should not be involved. It’s unconstitutional, period. It also apparently does no good.

For instance, educational assessments of U.S. public school students are not encouraging. This suggests that the $80 billion spent by the Department of Education might be better spent if it was left in the hands of parents and students.

In December 2019, the Washington Post reported, “Teenagers in the United States continue to lag behind their peers in East Asia and Europe in reading, math and science, according to results of an international exam that suggest U.S. schools are not doing enough to prepare young people for the competitive global economy.”

That test is the Program for International Student Assessment (PISA). The exam is administered to 15‐​year‐​olds in 79 countries every three years. In the 2018 PISA results, the U.S. ranked 13th in reading, behind such countries as China, Hong Kong, Estonia, Canada, Ireland and Poland, reported the Post.

In science, U.S. students ranked 18th and, in math, U.S. students came in 37th, behind students from Russia, Iceland, Latvia and England.

In another measure, the National Center for Education Statistics found that for the school year 2022–23, “The average scores for 13‐​year‐​olds declined 4 points in reading and 9 points in mathematics compared to the previous assessment administered during the 2019–20 school year. Compared to a decade ago, the average scores declined 7 points in reading and 14 points in mathematics.”

The federal government has intervened in America’s public schools for decades, starting as far back as 1957 with the National Defense Education Act. By most every measure, that intervention has not made things better for educating our children.

There’s no constitutional warrant for federal involvement in K–12 education, except perhaps in a few narrow areas: accommodating school choice for military families, Native Americans, and in the District of Columbia, which is overseen by Congress.

As the Cato Handbook notes, “In 1943, the U.S. Constitution Sesquicentennial Commission, chaired by President Franklin Delano Roosevelt, published a document that included the following: ‘Q. Where, in the Constitution, is there mention of education? A. There is none; education is a matter reserved for the states.’”

How ironic that Republican presidential contenders in 2023 agree with the liberal FDR—now that’s bipartisanship!

Clark Packard and Alfredo Carrillo Obregon

Technology and innovation are at the forefront of the geostrategic competition between the United States and China. Who will dominate the commanding heights of technology in the 21st century is a paramount question in the power balance between the world’s two largest economies. Yet policymakers seem intent on breaking up America’s most globally competitive and innovative firms while doing nothing to liberalize desperately‐​needed high‐​skilled immigration. An in‐​depth legal analysis of anti‐​trust claims and potential cases against American tech giants is beyond the scope of this blog post, but aggressive efforts to pursue such cases and moreover, impose additional regulations on U.S. high‐​tech industries has important geopolitical and economic implications that must be acknowledged.

U.S. firms are world leaders in advanced sectors and innovation. According to a recent report by the Boston Consulting Group (BCG), 25 out of the 50 most innovative companies are based in the United States. The companies at the top of the list were Apple, Tesla, Amazon, Alphabet, and Microsoft, all of which are American‐​based multinational firms. Also in the list is Nvidia, which has invested heavily in artificial intelligence (AI) and recently eclipsed over one trillion dollars in market capitalization. Similarly, Google, Amazon, Microsoft, Apple and Facebook collectively spend over $200 billion annually in research and development (R&D) and nearly another $200 billion in capital expenditures.

One reason why U.S. multinationals can invest so heavily in cutting‐​edge R&D and thus be at the forefront of tech innovation is because they have harnessed the power of globalized supply chains and globalized production, which academic studies have found correlates with higher levels of R&D activity and innovation. Notably, the U.S. high‐​tech manufacturing sector emerged as a global leader in this regard. As our Cato colleague Scott Lincicome recently noted, the computer and electronic industry has pioneered a factoryless model, where U.S.-based affiliates concentrate on “knowledge”-intensive activities while overseas suppliers managed physical production. This approach contributed significantly to breakthrough patent growth and the majority of U.S. manufacturing value‐​added growth in the past decades.

This type of innovation and global production has made the United States dominant in advanced sectors, which explains why American‐​based multinational firms account for such a high share of the top 100 companies’ market capitalization. According to recent report from PricewaterhouseCoopers (PwC), the world’s top 100 companies account for $30.9 trillion in market capitalization. U.S.-based multinational firms account for 70 percent—or $21.7 trillion—of this market capitalization.

While the United States is locked in a high‐​stakes competition with China for dominance in the next wave of technological innovation, proposed regulations will undermine U.S. efforts to maintain its lead in the technology race. Breaking up large tech firms may satiate populist demands but it will undermine U.S. innovation and competitiveness vis‐​à‐​vis China and Chinese competitors like Tencent and Alibaba. Unfortunately, many U.S. politicians nonetheless continue to seek to regulate and even break up these firms. In July 2022, Senator Amy Klobuchar and Charles Grassley released the American Innovation and Online Choice Act, which proposes a range of antitrust regulations aimed at reducing the size of many of the technology companies on BCG’s innovation list. Similar bipartisan efforts have been proposed in Congress in recent years.

In fact, contrary to policymakers’ aims, such regulations could have a chilling effect on market entry and competition. In their crusade to limit the growth of the tech giants, policymakers risk imposing industry‐​wide regulations that, counterintuitively, are more burdensome for smaller firms (particularly if the incumbent giants in these industries have an outsized lobbying influence in the creation of these regulations). Competition fuels innovation, and without competition, incumbent firms are less inclined to innovate. The result? Precisely, less dynamism in the high‐​tech sectors that the United States should be intent on dominating, and in turn, greater vulnerability relative to Chinese competitors.

Importantly, innovation is not only desirable for abstract economic and geopolitical purposes. It is also desirable as a means to improve the lives of Americans who increasingly purchase goods and services, directly and indirectly, from these and other high‐​tech firms. Innovation prevents anti‐​competitive monopolies. About 15 years ago, many industry experts thought that Nokia and MySpace would dominate the smartphone and social media market for years to come. When these companies failed to innovate, more innovative competitors like Apple and Facebook eroded the incumbents’ market share. Thus, while anti‐​trust enforcement has been guided for nearly 100 years by the consumer welfare standard—that is, regulators evaluating whether business conduct harms consumers—recent legislative proposals would upend this approach: A 2021 analysis by NERA Economic Consulting estimates these regulations would force the five largest tech companies to incur over $300 billion in additional costs. These costs would likely mean less R&D, less innovation, and less quality and efficiency—all resulting in higher costs for consumers, too. For instance, the study concludes that the implementation of these new laws would probably lead to the termination of Amazon Prime, which would cost the average consumer over $148 annually.

Legislation in Congress is far from the only risk to the dynamism of America’s high‐​tech industries: Anti‐​trust proceedings at the Federal Trade Commission (FTC) could also undermine consumer‐​benefitting innovation. Take, for instance, the FTC’s planned comprehensive antitrust lawsuit against Amazon, which will challenge a wide range of Amazon’s business practices. Amazon is on the forefront of making investments to provide consumers with improved and more affordable goods and services. Amazon acquired Twitch in 2014 to enhance its streaming services market and Whole Foods in 2014 to expand its product range to include organic and fresh products. More recently, the company also announced the launch of Bedrock, which will provide cutting‐​edge language models to compete with OpenAI and Google. Amazon is also on the path to power its operations with renewable energy by 2025. A concerted push to break‐​up Amazon could undermine these efforts and investments—again, to the detriment of the American economy and American consumers.

Meanwhile, in an increasingly globalized world with more options than ever for high quality talent, U.S. immigration policies undermine efforts to push the envelope on precisely the type of high‐​tech R&D needed to outcompete China. Eric Schmidt, the former CEO of Google, recently wrote in Foreign Affairs:

“[T]he United States must invest in the input that lies at the core of innovation: talent. The United States boasts the world’s top startups, incumbent companies, and universities, all of which attract the best and the brightest from around the world. Yet too many talented people are prevented from coming to the United States by its outdated immigration system.”

Indeed, the immigration system desperately needs reform. Current law is riddled with barriers to recruiting and retaining the world’s top scientists and engineers, which puts the United States at a disadvantage to countries more welcoming of high‐​skilled immigrants such as Canada and the United Kingdom.

After examining new data from the Organisation for Economic Co‐​operation and Development, our Cato colleague David Bier recently noted that the United States lost more published scientists than it gained in 2021 while China gained more than 2,400 published scientists.

To see how this plays out in real life, consider the story of Erdal Arikan, a Turkish citizen and graduate of the California Institute of Technology and the Massachusetts Institute of Technology. Arikan authored a paper that provided the theoretical basis for faster and more accurate data transfers. Yet Arikan was unable to obtain a green card through an academic position “or funding to work on this seemingly esoteric problem in the United States.” Arikan was forced to return home to Turkey and instead found opportunity in China. As the essay notes, “It turned out that Arikan’s insight was the breakthrough needed to leap from 4G telecommunications networks to much faster 5G mobile internet services.” American immigration policies made Huawei, China’s technology giant, the beneficiary of Arikan’s genius and today holds over two‐​thirds of the patents related to Arikan’s work.

Or consider the recent story on Saudi Arabia’s competitor to ChatGPT, which is being built at King Abdullah University of Science and Technology (KAUST). Chinese scientists and engineers are largely responsible for the work being done at KAUST. Yet, as noted in the Financial Times, “Many Chinese nationals with AI expertise have chosen to work at KAUST because they have been prevented from studying and working in the United States […]” Indeed, foreign talent will continue to look for opportunities outside the United States as long as American policymakers refuse to adapt immigration policies to the realities of a globalized 21st century economy.

Onerous regulations and immigration restrictions can slow innovation, reduce investment, and hamper product development. If American policymakers are serious about countering China’s rise at the nexus of technology, and truly want to foster economic growth and innovation while maintaining global competitiveness, it is crucial to support and encourage a vibrant ecosystem of companies, while avoiding counterproductive efforts that hinder their potential.

Cato Institute interns Dyuti Pan Dya and Aidan Meath contributed to the writing of this blog post.

Jeffrey Miron

This article appeared on Substack on August 24, 2023.

Over the past two decades, numerous countries and cities have adopted body‐​worn camera (BWC) requirements for some or all of their police officers. The primary motivation is to discourage misconduct by creating evidence of any inappropriate behavior.

BWC programs have always been expensive; beyond cameras and associated equipment, costs include administration, monitoring, and (video) file storage.

More recently, police groups in several U.S. cities have requested extra compensation in exchange for wearing BWCs, which makes such programs even more expensive.

So do BWC requirements generate benefits greater than costs?

The evidence is mixed. Some early studies found desirable effects, such as reductions in civilian complaints or reduced police violence, but other research estimates weak or even perverse impacts. A 2020 review offered a tepid endorsement.

More recent evidence, however, along with a related meta‐​analysis, seems to make a solid case for BWCs, finding a benefit to cost ratio of almost 5 to 1.

This cost‐​benefit analysis, however, did not incorporate the police stipends mentioned above (because they did not yet exist). Accounting for these reduces the benefit to cost ratio by about half.

The right policy then becomes less clear. Local police departments should presumably still be free to experiment with BWCs, since these are not obviously harmful and might provide useful evidence.

Yet BWC programs will probably become more expensive over time, assuming police unions negotiate for higher and higher stipends.

In addition, BWCs do not address the most fundamental problem with existing criminal justice systems: laws that should not exist in the first place, such as drug prohibition. Perhaps the greatest cost of BWC requirements, therefore, is detracting attention from this key issue.

Colleen Hroncich

One of the most exciting parts of the growing push for universal school choice is the new learning options that will be created when parents can direct the education funding for their children. Expression Prep Academy in Huntington, West Virginia, is a good example of this. Pastor Kevin West of Expression Church says he’d been looking for the right time to start a school. Then a friend introduced him to Don and Ashley Soifer from the National Microschooling Center.

“Their model seemed like the perfect hybrid between the homeschool and private Christian school setting,” he says. “I started researching it and put a team together. Last year, with the Hope Scholarship coming into play here in West Virginia, it made it really feasible. Rather than doing a real slow process, it helped us expedite it by making it more affordable for families.”

When the Hope Scholarship was delayed by a lawsuit, Pastor West says they decided to move ahead with the new school despite the uncertainty. “We started out with about 13 kids last year and this year we have tripled that. We’re around 43 kids now. Our biggest challenge is the scholarship application period goes from March 1 to May 15 here in West Virginia and people just don’t know about it.”

Expression Prep was K–8 in the first year with multi‐​age classrooms split into K–2, 3–4, 5–6, 7–8. This year includes a high school, which has a different structure since the students have to earn specific credits to graduate. Each student has an individualized learning plan, so they can progress according to their specific needs and abilities. The teachers work with students in small groups and one‐​on‐​one throughout the day.

Pastor West would prefer to have kindergarteners in a separate classroom, but the student body isn’t quite big enough yet. By next school year, he expects to have 100 students overall and at least one separate kindergarten class. They have a 32,000-square-foot building, an additional building, and another 3 or 4 acres that can use.

“I’m confident we’ll be able to grow. There are about 37–38,000 people in Huntington, but we’re right on the river, so we draw from Kentucky, Ohio, and West Virginia,” Pastor West says. “We’re a very sports‐​driven area and a lot of the private schools lose kids to public high schools because of the lack of sports and arts and music. But we are a very big arts, music, and athletic school and church. We have the facilities for it, and we’re building a sports dome right now on our campus.”

He says even as the school grows, they’ll focus on keeping the small school feel. “Our church has the same model as this microschool,” he says. “We’re a small church with lots of people. We do everything we possibly can to create small community and affinity groups. We work hard at that. So I don’t think the number of kids is going to be an issue as long as we stay true to our model.”

For parents looking for a small Christian school with strong music, arts, and athletics programs, Expression Prep Academy could be the perfect fit. Thanks to the Hope Scholarship, opportunities like this are becoming more and more accessible for West Virginian families.

Adam N. Michel

Policymakers across the political spectrum and around the world are concerned about global profit shifting—whereby multinational businesses artificially shift paper profits between countries to lower their effective tax rates and erode the domestic tax base. These concerns have motivated decades-long policy initiatives to stop profit shifting with costly new international tax rules. However, data indicate that profit shifting is economically small and, following the 2017 U.S. corporate tax cut, profit shifting has steadily declined.

Knowing the magnitude and distribution of multinational profits around the world is critical to assessing the validity of proposed policy responses, such as domestic proposals by President Biden or the global tax increases proposed by the OECD. Unfortunately, the data on the location of corporate income around the world is notoriously imperfect and difficult to interpret, given the complex structures of modern multinational firms. This piece first assesses data from the U.S. Bureau of Economic Analysis (BEA) on the location of multinational foreign profits. Then, it puts those estimates into the context of total corporate profits, concluding that the share of total corporate income reported in tax havens has grown modestly over time and has most recently fallen to its lowest level in over a decade.

Where in the World Do Firms Report Income?

Simple measures of foreign corporate profits show a precipitous rise in the share of income reported in tax havens beginning in the 1990s. Other measures that better attribute income to its original source show a much lower level of income in tax havens and significantly temper the increasing trend over time.

The top line in Figure 1 shows the share of U.S. multinational foreign direct investment income (DII) reported in seven low-tax tax havens as a share of all foreign income.[1] The DII data show the key trend motivating policy concerns over increasing profit shifting. By this measure, the tax haven share began to rise from about 25 percent of all foreign profits in the 1980s to 65 percent in 2016. The data show a clear shift in trend in 2017, after which the tax haven share of U.S. multinational foreign profits declined. However, DII systematically overstates income reported in tax havens relative to higher tax jurisdictions. The second line in Figure 1 presents a more accurate measure of the havens’ share.

Because multinationals tend to own affiliates in high-tax countries through holding companies in low-tax countries, DII does not correctly source income to its appropriate affiliate. For example, if a U.S. multinational parent owns a German affiliate through an intermediate holding company in the Netherlands, BEA reports the German income on the Netherlands’ account due to the cascading ownership structure. DII is also reported after-tax, which mechanically biases up tax-haven profits (which face low or no taxes) compared to higher-tax, non-haven countries.

The BEA reports a second series on the activities of U.S. multinationals, but it also systematically overstates foreign income in tax havens.[2] The data on net income from activities of U.S. multinationals’ foreign affiliates double counts the profits of affiliates owned through an intermediary.[3] Jennifer Blouin and Leslie Robinson suggest removing equity income and adding back foreign tax expense to estimate adjusted pre-tax income (Adj. PTI), shown as the lower line in Figure 1. Adjusted PTI is a more faithful accounting of where profits are earned, but there remains some disagreement as to whether removing all equity income may over-correct the data and understate some profit shifting.

The adjusted PTI series shows that the haven profit share is significantly lower than reported by DII. Through the 2000s, the haven share of adjusted foreign profits averaged 25 percent, reaching 44 percent in 2018. Over the last decade, the havens’ share of adjusted PTI is about 22 percentage points lower than as measured by DII.

These data show that multinational firms have increased the share of foreign profits reported in tax havens, but simple measures overstate both the level and the magnitude of the shift over time.

Profit Shifting Is Economically Small

The trend in the tax haven’s share of foreign profits only tells part of the story. The overall magnitude of income reported in tax havens is relatively small compared to total U.S. corporate income.

Figure 2 shows tax haven DII as a share of total foreign and domestic U.S. corporate profits. By this measure, haven profits averaged about 6 percent before 2007 and 15 percent after 2008. In 2021, tax haven profits were 11.3 percent.[4] The financial crisis and subsequent policy uncertainty likely accelerated the use of more aggressive tax planning, leading to the increase in haven profits in the late 2000s. Due to DII’s overreporting of haven profits, Figure 2 shows an upper bound of haven income.

Adjusted PTI does not have a precisely comparable worldwide measure, but tax haven’s adjusted PTI share of total U.S. multinational net income (a smaller universe than all corporate profits) was 11 percent in 2020 and follows a similar trend to that in Figure 2.

The small magnitude of profit shifting is also apparent in the aggregate corporate tax data. If profit shifting significantly erodes countries’ tax bases, corporate tax revenue in higher-tax countries should decline. However, as I’ve written previously, data from the mostly higher-tax OECD countries show that aggregate corporate tax revenue has trended up, not down, over the last 40 years. Corporate tax revenue as a share of the economy increased from 2.4 percent in 1981 to 3.5 percent in 2021 across 22 OECD countries. Corporate tax revenue as a share of all revenue has also trended up since the 1980s. These trends are even more impressive given that the average corporate income tax rate across the same OECD countries was cut in half during the same time, falling from about 48 percent in the early‐​1980s to 24 percent in 2021.

The corporate revenue data is consistent with the trend in Figure 2. The share of total U.S. corporate income reported in tax havens grew modestly before 2008, remained relatively flat through 2017, and most recently fell to its lowest level in 14 years.

Conclusion

It is important to remember that tax haven income is not necessarily harmful and very likely creates economic benefits. For example, foreign low-tax investments are associated with additional complementary domestic investments that lead to higher employment levels and wage growth at home. Profits reported in tax havens are also not necessarily moved there artificially but instead are often associated with real economic activity and physical investments. In one estimate, approximately 60 percent of reported tax haven profits were not artificially tax-induced but rather the result of real investment activity.

Lastly, all three measures of tax haven profits show that profit shifting stopped increasing and began to fall around the time of the 2017 corporate income tax cut. In 2018, the U.S. federal corporate tax rate fell from 35 percent to 21 percent, almost entirely closing the 12-percentage point gap between the combined U.S. tax rate and the OECD average. This data suggests that a lower corporate tax rate is the most effective reform to reduce profit shifting.

Despite the flaws, the data on the distribution of foreign profits should give pause to policymakers proposing novel international tax increases to combat profit shifting. The mechanisms used to prevent profit shifting usually come with high compliance and other economic costs that may outstrip promises of higher tax revenues, especially if profit shifting is already small and declining.