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Michael Chapman

The minimum wage for most fast‐​food workers in California went up to $20 per hour in April. Since then—no surprise—thousands of workers have lost their jobs and menu prices have risen. Coincidentally, a new book by the Cato Institute, The War on Prices, devotes two chapters to the destructive effects of minimum wage laws. Lawmakers in California and nationwide should read it if they really want to enact policies that help people.

The first, an essay by economist Jeffrey Clemens, details how firms adjust to higher mandated wage floors in ways beyond simply cutting jobs. Yes, despite claims to the contrary, the evidence still suggests overall that raising wages by government fiat can result in “substantial job losses, especially for the least‐​skilled, least‐​experienced, and least productive workers,” writes Clemens. But he confirms other ways firms often adapt to higher mandated wage rates to keep their employment costs from rising.

They can trim “fringe benefits,” such as health insurance, paid leave, and pension accounts. They also might forestall improvements or safety upgrades. Or they can sweat workers harder, micromanage their schedules, or substitute inexperienced workers for more experienced staff.

In the second essay, San Diego State University Economics Department Chairman Joseph J. Sabia explains why “minimum wages are an ineffective and inefficient anti‐​poverty tool.” Although poverty reduction has been a stated rationale for increasing minimum wages since FDR’s federal law in 1938, Sabia shows that less than 10 percent of individuals in poverty are minimum wage workers.

Add to this how high wage floors destroy entry‐​level opportunities for “less experienced, less educated, low skilled workers”—i.e. those who are more prone to poverty—and one sees why minimum wages are so ineffective and ill‐​targeted in reducing poverty.

California’s situation affirms some of these pernicious effects.

For instance, raising wage costs has reduced labor demand. The Wall Street Journal reported in March that some restaurants were “already laying off staff and reducing hours for workers as they try to cut costs.” Other businesses said they had “halted hiring” or were “scaling back workers’ hours.”

Round Table Pizza and Pizza Hut, for example, announced they were laying off about 1,280 delivery drivers. This eradicates entry‐​level positions that can give vital experience to young and lower‐​skilled workers and provide protection against poverty. Driver Michael Ojeda, 29 years old, said, “Pizza Hut was my career for nearly a decade and with little to no notice it was taken away.”

At the same time, the fact that the wage control applies to all fast‐​food outlets (with at least 60 locations nationwide) has meant firms have passed through a lot of the elevated costs into higher prices. Even before the wage floor was introduced at $20 per hour, up from $16 per hour, McDonald’s, Chipotle, and Jack in the Box “plan to raise menu prices to compensate for the required wage increase,” reported NBC 7 San Diego in March.

According to consumer reporter John Stossel, “Starbucks prices have increased as much as 15 percent” and “a chicken burrito at Chipotle will cost up to 8 percent more.” To the extent that poor Californians eat fast food, these higher prices reduce their standard of living.

It’s all a reminder that controlling prices doesn’t change the underlying economic pressures in the labor market. Control one price—the hourly wage rate—and other margins adjust. In California’s case, raising the minimum wage means fewer work opportunities for the young and unskilled and higher prices for fast food consumers.

This is more confirmation that, as The War on Prices documents, minimum wage laws only deliver “symbolic hope to the working poor” and “risk leaving many of the nation’s most vulnerable worse off.”

Romina Boccia

At a recent congressional hearing, Representative Randy Feenstra (R‑IA) grilled witnesses on one fundamental point of disagreement regarding how Social Security works: Does Social Security spending add to the national debt? (Scroll down for the transcript of the exchange.)

The answer is yes because the US government did not save any of the excess payroll taxes the Treasury Department collected when Social Security was running a surplus. Instead, the US government turned around and spent those payroll taxes on other things.

While Social Security Chief Actuary Stephen Goss suggested at the hearing that “Social Security can only service some of the debt that the rest of the federal government develops,” Social Security surpluses have also fueled the growth in federal government borrowing. Several economic studies confirm that Social Security surpluses have historically not been used to reduce the public debt, but rather to increase non–Social Security government spending. Some estimates suggest a dollar‐​for‐​dollar ratio in higher spending, meaning that Social Security’s surplus payroll taxes increased non–Social Security government spending in direct proportion.

Another way to put it is that the payroll taxes the government collected in excess of what was necessary to pay out Social Security benefits present a double‐​whammy: they simultaneously increased government spending in decades past while leaving future workers with a debt owed to Social Security. This fiscal paradox underscores the intricate challenges of managing long‐​term entitlement programs on a pay‐​as‐​you‐​go basis within the broader context of federal budgeting.

Congress used funds meant for the future to not only cover, but also to expand, current and future costs, creating greater debt afflicting both current and future generations.

These dynamics are important to keep in mind as the debate over Social Security reform heats up in the coming years—the closer we get to 2033 when Social Security’s trust fund will be depleted and automatic benefit cuts of 21 percent loom. Any “solution” that increases Social Security cash‐​flow surpluses to the US Treasury while also increasing future Social Security cash‐​flow deficits to be repaid by workers, is a band‐​aid approach that doesn’t solve much of anything. As the Manhattan Institute’s Brian Riedl explained in a thread on X: “A truly solvent system would aim to achieve annual balance (or at least close), instead of running up big surpluses that cannot be saved and forcing taxpayers to spend trillions bailing out the system later with huge interest costs.”

When Representative John Larson (D‑CT) suggested during the hearing that Social Security “does not contribute a penny to the national debt,” he was conflating wishful thinking about how Social Security was portrayed to work with fiscal reality about how ‘the system’ actually works. Larson’s statement is only true if you think that the government saved excess payroll taxes for Social Security (which it did not) or you treat the gross national debt (which includes intragovernmental debt) as the only relevant measure of government debt (the publicly held debt is the most economically relevant measure because it accounts for debt owed to the public based on bonds sold).

While Social Security doesn’t have legal borrowing authority in the way that most other government programs do, this doesn’t change the fact that every time Social Security redeems a bond with the Treasury, the Treasury must go out and raise that money from the public by issuing new government debt. So, while Social Security must not add to US debt, on paper, in reality, paying for Social Security benefits in excess of payroll taxes collected does add to the US debt.

See below for a lightly edited transcript about how Social Security spending adds to the publicly held debt, pulled from the June 4, 2024 Social Security Subcommittee hearing on “The Social Security Trust Funds in 2024 and Beyond,” which explains this concept in more detail:

Rep. Feenstra (R‑IA): We have a lot of concerns with Social Security, and we have to resolve them. We also have to be singing from the same songbook, understanding what’s happening. Dr. Swagel, I have many topics to discuss, but I want to ask you: does Social Security—its payments—create debt? I am hearing from the other side that there is this view that it doesn’t. I’d like you to explain to me: does it create debt?

Dr. Swagel: There is lots of ways to look at it, and that is part of the confusion. The $150 billion that Steve and I both talked about, that is being funded by the Treasury. The cash has to come from the Treasury, to get that 150 billion dollars.

Feenstra: [Social Security] has got to redeem its assets….

Swagel: Correct. It’s an asset for Social Security but a liability for the Treasury. The Treasury borrows [to provide Social Security with the cash].

Feenstra: So how does the Treasury redeem its assets?

Swagel: The Treasury raises cash by selling bonds.

Feenstra: So, it actually is [adding] to our debt.

Swagel: To redeem the assets from the [Social Security] trust fund, the Treasury must borrow and create debt.

Feenstra: Yes, it’s got to create debt. Mr. Goss.

Mr. Goss: If we redeem $100 billion of debt that is owed to the trust funds and we trade that for $100 billion that is now owed to the public, it’s merely a swap. The total [gross] federal debt is unchanged.

Feenstra: But the Treasury still needs to sell bonds to do that. Is that a fair statement?

Goss: It has to sell bonds to the public [when] redeeming the same amount of bonds that are held by the trust fund.

Feenstra: Thank you. Mr. Swagel, can you answer that?

Swagel: The numbers that we focus on are debt held by the public. What Steve is saying is correct, the debt held by the public goes up.

Read our latest Social Security fact sheet.

Walter Olson

Could bipartisan reform of the National Emergencies Act (NEA) move forward as early as this year?

There might be hope. Jennifer Shutt at States Newsroom, reporting on a Senate Homeland Security hearing held May 22, writes that senators from both parties “appeared to be on the same page about limiting presidential emergency powers” and that bipartisan collaboration on the details could happen “in the coming months.” The committee is controlled by Democrats; ranking Republican member Sen. Rand Paul (R‑KY) is a longtime advocate of emergencies reform.

Gene Healy, senior vice president for policy at the Cato Institute, was among the three witnesses at the hearing. He noted that Congress enacted the NEA in 1976 as

a framework statute aimed at restoring congressional oversight and “returning the United States to normal peacetime processes.” Title I of the NEA brought those four emergencies to a close, sunsetting the authorities they relied upon. Title II of the act imposed procedural strictures designed to cabin presidential emergency powers. To invoke such powers, the president was required to formally declare a national emergency and specify the statutory provisions he intended to rely on. Emergency declarations would expire after one year unless renewed by the president, but could be terminated earlier by presidential or congressional action.

For the most part, the Act failed. One reason is that it does not try to define what a national emergency is, instead leaving the practical drawing of lines to the give and take between Congress and the White House.

Unfortunately for that plan, its main practical mechanism for enforcement was the device known as the legislative veto, under which Congress was accorded power to terminate emergencies by a majority vote of both chambers. But in 1983 the Supreme Court struck down the legislative veto device. With that gone, the president can simply veto any measure that by declaring an end to an obsolete emergency threatens to curtail his power. The result is that Congress can lift an emergency against the executive’s will only by mustering a veto‐​proof majority.

That is why presidents go on renewing emergencies at will decades after the original rationale has expired. As Elizabeth Goitein of the Brennan Center noted in her comprehensive testimony,

renewal of emergencies after one year, intended to be the exception, has become the default. Most of the emergencies declared since the National Emergencies Act was passed are still in effect. The average length of emergencies has been close to a decade, with 31 emergencies lasting even longer. The longest‐​running state of emergency was issued by President Jimmy Carter in 1979 in response to the Iranian hostage crisis and remains in place today.

As dangerous executive powers go, it’s understandable to focus on the separate Insurrection Act, under which presidents can deploy troops domestically. But Goitein says the NEA leaves the gate open for presidents to assert a wide range of other domestic powers that could prove dangerous, including powers to freeze private bank accounts and control the transportation system and even the Internet under authorities from the old days of telephone and telegraph regulation.

The third witness, Satya Thallam, currently at the Foundation for American Innovation, worked on the law 2015–2019 as a staffer with the Senate Homeland Security Committee. His testimony traces the NEA’s legislative origins, which were distinctly bipartisan, and says part of its cross‐​aisle appeal was specifically that it afforded a “policy‐​neutral mechanism.”

“Though Democrats and Republicans were ultimately motivated by different specific emergencies they found to be illegitimate, they found common cause in upholding Congress’s constitutional responsibility, no matter who occupies the White House,” said Thallam.

Emergencies reform saw a flurry of bipartisan interest in 2019 when it was the subject of a Cato forum, Cato Policy Report article by Deborah Pearlstein and Ilya Somin, and commentary from Gene Healy, who also wrote a relevant chapter in the 2022 Cato Handbook for Policymakers. On the spending side, Romina Boccia and Dominik Lett recently noted that emergency declarations open the door to profligate and far‐​from‐​transparent government expenditures.

Swaminathan S. Anklesaria Aiyar

Viva Indian democracy! Opinion polls and exit polls had suggested a third successive runaway victory for Narendra Modi’s Hindu nationalist party, the Bharatiya Janata Party (BJP). It seemed that Modi was all set, with massive public approval, to take India towards a Hindu autocracy. In fact, he just scraped through on the crutches of two regional party allies. The BJP itself fell far short of a majority on its own and will have to negotiate every future step with allies it had gotten used to ordering around.

Voters have sent an unmistakable message that India is not going to become a Hindu autocracy. The BJP’s anti‐​Muslim hate speech during the election campaign has not won votes. Dissent and media criticism, which Modi muzzled in the last five years, will come back, though many media houses will still play it safe.

He has misused draconian laws on money laundering and unlawful activities that deny bail to arrest foes on dubious charges. Two opposition chief ministers are in jail. Opposition politicians are often targeted under these two laws, and cases against them are dropped if they defect. Modi can continue using these draconian laws to reward friends and punish foes, in the media as well as politics. But he stands warned that such tactics may not endear him to voters.

Modi boasted 74 percent popular approval, higher than that of any other democratic leader. Both the opinion polls and exit polls suggested a BJP sweep. Why were they so badly off the mark? The answer is that when dissent is curbed and too many media outlets become fawning courtiers, the ruling party is denied information about what is going wrong and where dissatisfaction is spreading. Fear of retribution prompts bogus praise and oaths of support for the leader, while dissenters prefer to keep silent. The truth only comes out in a secret ballot.

However, the bottom line is that Modi is back in power. Practitioners of realpolitik say that what matters is who won, not the margin of victory. But Modi’s capacity to shape India’s future stands transformed. He is no longer the Hindu knight in shining armor who conquers all. His moral authority to mold India to his liking, once seemingly unchallenged, has crumbled. He has nowhere near enough seats in Parliament to amend the Constitution at will, an outcome that was widely feared earlier.

Modi said recently that he felt a divine force helping him shape India’s future. Religious delusions are recognizable signs of megalomania. Yet many were circumspect in their criticism because, to date, Modi did indeed have the appearance of a Hindu knight in shining armor, beloved by the people, taking the country in a new direction. The sheen is now gone.

On which issues were voters most unhappy with the BJP? No simple answer will suffice. Unemployment and inflation have always been at the top of public gripes. Communalism and misuse of laws may have put off some voters. But none of this explains why the BJP made a clean sweep in some states but stumbled badly in some traditional strongholds. Very possibly deeper analysis will reveal local issues that took precedence over national ones. The BJP campaigned as though the only issue was Modi. That was an error.

David J. Bier

President Joe Biden announced today that he will impose a near‐​complete ban on asylum for anyone who crosses the border illegally. He will also raise the standard for protection under related statutes that prohibit removals to persecution or torture. The law clearly states that the right to apply for asylum is “irrespective of status” and “whether or not at a designated port of arrival” (8 USC 1158(a)(1)). Biden doesn’t care about the law because he thinks this move will benefit him politically. It will not. This is both bad policy and bad politics.

We should start with the statement that this is not a “new position” for Biden. Since day one, he has enforced the most severe restrictions on asylum in American history—first under Title 42 of the health code and then under Department of Homeland Security regulations in May 2023. He has already enacted more than 120 policies designed to restrict entry at the southwest border, and he is currently detaining and expelling vast numbers of people—far more than his predecessor.

This action is consistent with his goals since his inauguration. The fact that Biden failed to get Congress to pass his immigration bill does not justify ignoring the laws that Congress has passed.

Setting an Unmeetable Standard

Biden’s order will take effect when Border Patrol arrests exceed 2,500 per day (which they do now) and will expire only when arrests fall below 1,500 per day for two consecutive weeks. From fiscal years 2019 to 2024, DHS has met this 1,500-per-day target in 11 months—all but once in fiscal year 2020. The Biden administration has never met this standard.

Even the Trump administration, despite the pandemic, a locked‐​down economy, and the most determined executive branch, failed to meet this standard in August, September, October, November, or December 2020. Achieving this goal would require a 60‐​percent decline in arrests.

This executive order might be the first time a politician has intentionally set an unmeetable goal. Imagine if President Obama had established a similar goal. It is extraordinarily unlikely that any set of enforcement‐​only policies will reduce Border Patrol arrests to below 1,500 per day for two weeks—particularly when the clock is running out on this administration.

Biden fears more immigrants trying to get in before the election, and that’s why he’s doing what he’s doing. However, setting and failing to achieve such a goal will not make him look more competent on border policy.

Why It Won’t Work

The executive order will not work. Biden has already tried a complete ban on asylum—an even more severe version under the health code law known as Title 42. Title 42 was applied most strictly to adults traveling without children from Mexico and northern Central America. During the time that it was enforced, Title 42 almost immediately led to more arrests of this demographic. This increase happened primarily because people who were expelled often attempted to re‐​cross the border, leading to more arrests.

It is still unclear whether Mexico will start taking people subject to this rule back. Early reports indicate that Mexico has not agreed to do this. If that’s the case, then this rule probably won’t lead to more arrests like under Title 42. Instead, it just won’t have any long‐​term effect on crossings because there are already not enough planes to fly everyone who is denied asylum back to their home countries. People have this conception that there are a bunch of deportation agents with planes waiting to be filled with people denied asylum, but the planes are already maxed out. Biden is currently deporting record numbers of people. This action doesn’t change these logistics.

Refusing to Make Legal Entry Possible

Biden is demanding that every asylum seeker apply for asylum at US ports of entry, but his order also requires that they use a cell phone app called CBP One to make an appointment three weeks in advance while they are still in Mexico. Moreover, the number of daily appointments is capped at 1,450. Therefore, Biden is effectively banning about 4,000 people per day from seeking asylum but is not opening up any additional legal ways for them to enter. Not a single additional person will enter legally because of this new rule. This will doom the entire effort, as people will continue to enter illegally.

It Will Make the Situation Worse

If the order is effective at denying people who cross illegally, it will cause more people to enter illegally and try to evade detection rather than turn themselves in for asylum. Evasions mean more trespassing on private property, more car chases with smugglers, and more confrontations between Border Patrol agents and migrants. We saw this exact result during Title 42. Since Title 42 expulsions ended in May 2023, the number of evasions or “known gotaways” recorded by Border Patrol has fallen 70 percent. This is an astounding border security success that Biden’s new action jeopardizes.

Conclusion

This action will only result in more deaths of migrants who think the only way to enter is by evading Border Patrol—by hiding in deserts, swimming the Rio Grande River, or slipping in surreptitiously into the back of tractor‐​trailers. In the big picture, President Biden should not be ignoring US laws. He should not be seeking to stop people from coming to the United States. Instead, he should be working to let them enter this country legally and orderly so they can contribute to it. America is a great country, and people want to join it. That’s a good thing. We should let them do so legally.

Thomas A. Berry and Christopher Barnewolt

The government cannot force Americans to speak (or otherwise convey) messages with which they disagree. Such “compelled speech” violates the freedom of speech protected by the First Amendment. Yet the National Labor Relations Board (NLRB) disagrees. Citing the National Labor Relations Act (NLRA), the NLRB believes that the government can force employers to allow controversial political speech in the workplace—regardless of whether the speech harms business or violates the beliefs of employers.

Home Depot’s employees are easily identified by their bright orange aprons, which are a key part of Home Depot’s brand. Home Depot permits its employees to engage in limited personalization of their aprons, such as by adding pictures of family members. But to maintain an apolitical environment that is welcoming to all and focused on home improvement, Home Depot does not permit political messages to be displayed on its aprons.

In August 2020, a Home Depot employee wrote “BLM” (for “Black Lives Matter”) on the employee’s Home Depot apron and wore the slogan while interacting with customers. Upon being informed of Home Depot’s policy against displaying political slogans (which was also enforced against other messages such as “Blue Lives Matter” and “Make America Great Again”), the employee refused to remove the message. The employee later resigned, and the NLRB brought enforcement proceedings against Home Depot, alleging unfair labor practices.

The NLRA protects employees’ rights to organize “for the purpose of negotiating the terms and conditions of their employment or other mutual aid or protection.” The NLRB’s administrative law judge, after considering the case, concluded that the message “BLM” was not related to organizing for improving workplace conditions and thus found in favor of Home Depot.

But the NLRB overruled that decision. Reasoning that the phrase “BLM” could be interpreted as protesting alleged incidents of racial discrimination at the workplace, the NLRB found that the slogan was protected speech under the NLRA. The Board ordered Home Depot to rehire the employee and to cease interfering with the employee’s “Black Lives Matter” speech in the workplace.

Now Home Depot has appealed the NLRB’s order to the Eighth Circuit Court of Appeals, and Cato has filed an amicus brief supporting Home Depot. In our brief, we make three key points explaining why enforcing the NLRB’s order would violate Home Depot’s First Amendment rights.

First, we emphasize that the freedom of speech protected by the First Amendment includes the right to be free from government‐​compelled speech. The government cannot force individuals or businesses to convey the speech of others, whether that speech is provided by the government or a third party. The Supreme Court has reaffirmed this principle in many contexts, from parades to newspapers and from license plates to the Pledge of Allegiance.

Second, we point out that Americans do not give up their First Amendment rights to be free from compelled speech when they choose to engage in business, hire employees, or take advantage of the corporate form.

Finally, we discuss how it is essential for businesses to be able to regulate speech in the workplace. We point out how the NLRB’s theory would empower the government to force businesses to allow a nearly endless array of controversial and divisive political speech in the workplace during working hours. The NLRA does not require such a result, and the First Amendment forbids it.

The Eighth Circuit should follow Supreme Court precedent and vacate the NLRB’s decision.

Ian Vásquez and Daniel Raisbeck

On Sunday, 58 percent of Mexican voters elected left‐​winger Claudia Sheinbaum as president. A former head of government of Mexico City and a close ally of the current president, Andrés Manuel López Obrador (AMLO), Sheinbaum was the continuity candidate. Her overwhelming victory—and the possible qualified majority in both branches of Congress obtained by AMLO and Sheinbaum’s party, Morena, and its allies—also leaves the survival of Mexico’s republican institutions at stake.

AMLO has overseen a drastic increase in violence—including an upshot in political violence, with 34 candidates for public office killed prior to the election—while weakening established political institutions and undermining civil society. According to economist Isaac Katz, AMLO’s presidency has been a “six‐​year term of destruction.”

AMLO was elected in 2018 under the slogan “hugs, not bullets,” a promise to demilitarize Mexico, where the army has fought the drug cartels since 2006. Once in office, however, AMLO not only maintained the army on the streets. He also gave the Mexican Armed Forces a central role in the management of affairs well beyond the military sphere. These include customs duties, gasoline distribution, and the delivery of school textbooks. The armed forces are also engaged in the construction of infrastructure, including AMLO’s Tren Maya railway in the Yucatán Peninsula. The army’s greater activity has come with greater privileges, especially in the form of a strengthened lobbying capacity and a slew of government contracts. 

More power for the military has not brought greater security. During AMLO’s term, 43,000 people have gone missing and there have been over 180,000 homicides, a record in modern times. Cartels control a third of the country. Beyond the drug trade, they engage in human trafficking and the extortion of small and large businesses across Mexico. To protect their turf, criminal organizations have launched a wave of political violence. Hence the systematic murder of candidates in recent months. The violence is not new. During AMLO’s term, 836 attacks have been launched against government employees, candidates, and other individuals active in politics.

Equally alarming has been AMLO’s attack on Mexico’s institutions by weakening the checks and balances that are necessary in any democratic republic. For example, the president has accused the National Electoral Institute (INE), a respected, independent agency of the state, of fraud, and has tried to take away its autonomy, proposing that it be placed under the control of the executive. He also tried to reduce the budget, personnel, and authority of the INE. And, as independent organizations have documented, AMLO’s government threatens press freedom.

During the recent campaign, Sheinbaum ran to the left of AMLO and promised to promote his centralizing agenda. Her main opponent, Xóchitl Gálvez, emphasized the need to defend political pluralism and republican institutions. But it was of little avail.

Morena’s landslide victory in Congress is especially threatening. The INE’s preliminary results, which are yet to be confirmed, give Morena at least 233 seats out of 500 in the Chamber of Deputies, Mexico’s lower house. CNN reports that, along with Morena’s main allies, the Labor Party and the Ecologist Green Party, the new government would count with at least 346 seats, well above the 334 necessary for the qualified majority needed to reform the constitution.

In the Senate, the left‐​wing coalition needs 85 votes out of 128 to obtain a qualified majority. It is not yet clear whether it will reach this threshold; the preliminary report suggests that pro‐​AMLO parties will hold between 76 and 88 seats.

AMLO is currently promoting his “Plan C,” a third attempt to implement constitutional and legal reforms before he leaves. These include changes to the constitution that would politicize the Supreme Court and the INE by having their members elected by popular vote.

If a leftist‐​qualified majority is confirmed, Congress could introduce these reforms when it is inaugurated in early September, weeks before AMLO’s term ends on October 1. Even without a Morena supermajority, members of other parties might still jump on the bandwagon given the president’s popularity and that of his successor.

AMLO’s proposed constitutional reforms pose a threat to freedom. As Katz observed:

“If approved, they will imply the disappearance of the separation of powers by having an all‐​powerful executive branch in de facto control of the legislative and judicial branches, the disappearance of autonomous bodies, and the destruction of liberal democracy; Mexico would become an openly autocratic, quasi‐​dictatorial system.”

Although Sheinbaum was the clear favorite before Sunday’s election, the leftist sweep of congressional seats—and possible changes to the constitution—rattled investors. The iShares MSCI Mexico ETF fell by over 10 percent on Monday, while the Mexican peso dropped by over 4 percent. As Reuters reports:

“The latest losses mean the peso has weakened more than 3% since the start of 2024, a sharp turnaround for the currency, which was, until recently, one of the few in emerging markets to have gained ground against a strong dollar this year.”

Financial markets reflect the concern that the reelection of AMLO’s party—with its unequivocal electoral strength—means that freedom in Mexico will continue to decline.

Eric Gomez and Benjamin Giltner

The backlog of US arms sales to Taiwan did not change in May 2024. Congress was not notified of any new arms sales, and there was no indication that any backlogged arms sales arrived in Taiwan. Per Figures 1 and 2, the backlog remains valued at $19.7 billion, with a majority of the backlog ($10.87 billion) consisting of traditional capabilities.

In Table 1, we have opted to keep the two sales of HIMARS—an original $436 million sale for 11 launchers and $520 million more for 18 additional launchers—as separate items instead of combining the two. The two sales have separate delivery timelines. Disaggregating them makes it easier to track the change in the backlog’s dollar value.

Taiwan was a very busy place despite the lack of change in the arms sale backlog.

Lai Ching‐​te officially became Taiwan’s new president on May 20. Shortly after the inauguration, China conducted large‐​scale military exercises around Taiwan, though Chinese ships and aircraft stayed outside of Taiwan’s territorial waters and airspace. The exercises were similar to those held in August 2022 after then‐​Speaker of the House Nancy Pelosi visited Taiwan.

Several members of Congress also visited Taiwan in late May to signal US support for the Lai administration and to reassure Taipei that US weapons are on the way. Assuming there are no new delays, Taiwan should receive its first tranches of newly‐​built F‑16s, Abrams tanks, and HIMARS launchers by the end of 2024, which will put a big dent in the backlog.

Additionally, it will be interesting to see what the first US arms sale to the Lai administration will be. Taiwan’s outgoing President Tsai Ing‐​wen frequently stressed the need for more asymmetric weapons and Taiwan’s military made some important investments in these capabilities during her tenure. However, Taiwan’s military has resisted fully embracing an asymmetric defense posture, and 55 percent of the backlog’s dollar value is for capabilities that are both more expensive and less likely to survive long in a conflict with China.

Taiwan Arms Backlog Dataset, May 2024 

Nicholas Anthony

For as long as governments have meddled with money, currency devaluations have been a phenomenon. Whether it be by debasing the purity of gold coins, running up the printing press, or just adding a few zeros to the end of the ledger, governments around the world have often abused the privileges that come with having a monopoly on the money supply.

With that in mind, it was quite a surprise to see Consumer Financial Protection Bureau (CFPB) Director Rohit Chopra had spoken out against “currency devaluations.” For a moment, it had seemed that the CFPB director had taken a break from the Biden administration’s “war on junk fees” to speak out against how governments themselves have harmed consumers.

However, upon further review, that’s not at all what the CFPB director had in mind.

Currency Devaluations, Just Not Those Currency Devaluations

Rather than share concerns about the countless people who have suffered as governments have mismanaged money, Director Chopra’s concern was with the devaluation of credit card reward points.

“When Americans sign up for rewards credit cards, they intuitively assign a monetary value to those points that makes signing up and spending worthwhile,” Director Chopra said. “However, our initial review of all the fine print suggests that credit card companies and airlines have the power to quickly and dramatically devalue those points.” In other words, Director Chopra is concerned because prices have been changing during a period of high inflation.

Chopra then went on to share concerns about wholesale pricing. “We have also observed that airlines sell points to consumers at inflated rates while selling those same points to credit card issuers at a much lower price,” he added. “This not only creates confusion about the true value of the points but also raises questions about fairness.”

Anyone who has operated a business (or shopped at Costco) likely recognizes what’s happening in the described situation. Credit card issuers are likely buying points in far greater quantities and at far more consistent intervals than the average consumer. As such, they are receiving better prices.

Conclusion

Unfortunately, basic economics is often missing from economic policies, and that has been particularly the case with the Biden administration’s war on junk fees.

Are you interested in learning more about price controls and other government interventions in the market? Ryan Bourne’s new book, The War on Prices, is out now.

Andrew Gillen

Note, this post updates last month’s post. The biggest changes from last month include:

Updated total loan forgiveness figures ($167 billion for 4.75 million borrowers) to account for the latest developments.
Update on the Mackinac and Cato lawsuit, and the implications for the SAVE lawsuits.
Added a new plan, waiving interest.

Mass student loan forgiveness is terrible policy (see this report for a comprehensive list of reasons), but that hasn’t stopped the Biden administration from trying to forge ahead. While the Supreme Court overturned the Biden administration’s student loan forgiveness plan, every few weeks, the administration announces another batch of loans that have been forgiven.

The administration recently celebrated that since taking office it has succeeded in forgiving $167 billion of student loans for 4.75 million borrowers by transferring the financial burden from the students who took out the loans to taxpayers who did not. And they aren’t going to stop—the administration’s spokeswoman declared, “President Biden has vowed to use every tool available to cancel student debt for as many borrowers as possible, as quickly as possible.” President Biden himself stated, “I will never stop working to cancel student debt—no matter how many times Republican elected officials try to stop us.”

But if student loan forgiveness lost in the Supreme Court, how are so many student loans still being forgiven? The answer is that there isn’t a student loan forgiveness plan, there are many plans, some of which are already up and running. Previous laws had already left a plethora of methods to forgive student loans, and many of those laws may give the Secretary of Education the ability to expand those programs. The administration is also claiming existing law gives it the authority to create new ways to forgive student loans.

So the student loans the Biden administration already has or wants to forgive are a combination of existing programs, existing programs the administration has expanded, and new programs the administration is seeking to implement.

Here’s a rundown of the administration’s student loan forgiveness plans and actions, which I’ll update monthly.

HEROES (New plan – overturned in court)

This was the big plan that got a lot of attention in 2022 and 2023. The plan was to forgive $10,000 for borrowers making less than $125,000, and $20,000 for borrowers who received a Pell grant, at a total cost of $469 billion to $519 billion. The alleged authority for the plan was the 2003 HEROES Act. While designed to alleviate loan‐​related hardships for soldiers and reservists serving in Iraq and Afghanistan, the law also covered national emergencies, and the Biden administration argued the COVID-19 emergency gave it the authority to forgive virtually everyone’s loans.

Most observers were skeptical of this supposed authority, but it was not clear who had standing to sue (standing is the requirement that those filing the suit have a concrete injury from the policy). The companies that service student loans would be the most obvious injured party, but there was a perception that the Biden administration would punish any servicer that challenged the policy in court, a perception that now appears accurate.

Fortunately, the Supreme Court ruled that Missouri had standing to sue (due to a quasi‐​public student loan servicer that would lose revenue under the plan) and that the plan violated the major questions doctrine (which holds that there needs to be clear congressional authorization for programs of substantial economic or political significance), preventing the policy from being implemented.

Higher Education Act (New plan – forthcoming)

Immediately after losing on HEROES, the Biden administration announced a new effort that would use authority under the Higher Education Act. The administration announced the new plan, which would

Waive unpaid interest.
Forgive debt for those who have repaid for 20 years (25 years if there is debt for graduate school).
Forgive debt for those who attended a low‐​financial value program (e.g., programs or colleges that fail the Cohort Default Rate or Gainful Employment).
There is also a plan to release additional regulations soon that will forgive debt for those undergoing financial hardship.

There are several problems with this plan, which the Penn Wharton Budget Model estimates will cost $84 billion. The public comment window on the proposed regulations recently concluded, and the administration is now considering those comments and will issue final regulations, with a goal to start forgiving debt this fall. Once finalized, this plan will likely face the same fate in court as the HEROES plan, since it too will likely run afoul of the major questions doctrine. However, much of this forgiveness is easy to implement, so a key question is whether a court injunction will come fast enough to prevent the administration from forgiving billions of debt before the courts can determine whether the regulations are legal.

SAVE (New plan – still active)

Before diving into this one, it is important to understand the concept of income‐​driven repayment (IDR). Under traditional (mortgage) style loan repayment, the amount and length of repayment are fixed (e.g., $200 a month for ten years). For the past few decades, the federal government has been introducing IDR plans, in which the amount repaid each month varies based on the borrower’s current income and the length of repayment varies based on how fast they repay their loan. The key features of an income‐​driven repayment plan are:

the share of income owed each month (e.g., 20 percent);
the income exemption that is protected from any repayment obligation (e.g., the poverty line); and
the cap on length of repayment (e.g., 25 years).

IDR is a great idea, providing borrowers with better consumption smoothing across their lifetime and flexible repayment which helps avoid defaults due to short‐​term liquidity constraints.

But we’ve also botched the implementation. To begin with, a cap on the length of repayment is completely inappropriate. Income‐​driven repayment ensures that payments are always affordable, and borrowers who make so little they do not repay will receive de facto forgiveness even without the cap, so there is no justification for a cap on the length of repayment.

The other problem with how we’ve implemented income‐​driven repayment is political—the plans are tailor‐​made to allow politicians to give constituents big benefits today while sticking future taxpayers with the bill. It is therefore no surprise that these plans have become more generous over time. The first IDR plan, introduced in 1994, had an income exemption equal to the poverty line, a share of income owed of 20 percent, and a cap on length of 25 years. Very few borrowers would receive forgiveness under these terms, and of those who did, they really wouldn’t have been able to repay regardless of whether they received forgiveness. The Obama administration introduced plans with an income exemption of 150 percent of the poverty line, a share of income owed of 10 percent, and a cap on length of payment of 20 years.

The Biden administration’s Saving on a Valuable Education (SAVE) plan took an existing plan (the REPAYE plan) and made it much more generous. It changes the share of income owed from 10 percent to 5 percent, increases the income exemption from 150 percent of the poverty line to 225 percent, and caps the length of repayment at as little as ten years for some borrowers. By cranking every possible lever to the most generous settings in history, this plan would impose massive costs on taxpayers, estimated at $475 billion for just the next ten years.

Parts of the SAVE plan have already been implemented, and full implementation is scheduled for July 2024. The plan has already forgiven “$5.5 billion for 414,000 borrowers.” However, there are now two lawsuits that seek to overturn the plan, one by Kansas and ten other states, and another by Missouri and six other states. The legal questions facing this plan are the reverse of the HEROES plan. For the HEROES plan, the main obstacle was standing. Once that hurdle was cleared, it was fairly obvious that the plan was well beyond what Congress had authorized. But for the SAVE lawsuits, this is reversed. Standing is easily established (for Missouri at least), but the plan does have a much stronger argument for being within the parameters of the law.

A recent ruling from the 6th Circuit Court of Appeals rejected the kind of standing argument used by Kansas. While this doesn’t help Kansas’s case, courts are still likely to reach the merits of SAVE. To begin with, Kansas is in the 10th Circuit, so the Kansas case could still proceed if there is a Circuit split between the 6th and 10th Circuits on standing. Even if the Kansas case fails, Missouri has a completely different standing argument that was recently upheld by the Supreme Court.

As for the merits, Mark Kantrowitz thinks SAVE will be upheld, while Michael Brickman did yeoman’s work digging up details on page 18,909 of the 1993 Congressional Record that may lead to SAVE being scrapped.

Student Loan Payment Pause (Existing and extended plan – now expired)

When COVID-19 hit in March 2020, student loan payments were paused. The pause was supposed to last two months but ended up lasting three and a half years after Trump extended it once and Biden extended it six times. A pause would not normally result in massive student loan forgiveness as it would delay, but not waive, repayment. There would still be a cost to taxpayers (driven by the government’s cost of borrowing), but it wouldn’t be huge. But recall that IDR plans (unnecessarily) cap the length of repayment, and the pause counted towards that cap.

In other words, for any student who does not fully repay before they hit the length of repayment cap, payments weren’t paused, they were waived. We won’t know for many years how many students had their payments forgiven rather than postponed, but the current estimates range from $210 billion to $240 billion. There is virtually no chance for this burden on the taxpayer to be reversed. The only good news is that the payment pause ended, with most borrowers restarting payments in October 2023.

Public Service Loan Forgiveness (Existing and extended plan – still active)

The Public Service Loan Forgiveness (PSLF) program was established during the George W. Bush administration and allowed public and nonprofit workers to receive forgiveness after ten years of repayment when they used an IDR plan. While I object to PSLF in principle (as a distorting and non‐​transparent subsidy for the government and nonprofit sectors) and due to the windfalls these borrowers receive (an average of over $70,000 per beneficiary), because PSLF legally exists, it should operate as seamlessly as possible.

The Biden administration granted many waivers and other changes to increase the number of borrowers who could benefit under PSLF. For example, the administration introduced a waiver that allowed for payments made under non‐​IDR plans to count toward the payment limit (previously, only payments made while enrolled in an IDR plan counted). Some of these changes were good in the sense that they more faithfully implemented the law, but the administration crossed some lines too. In particular, it started counting some types of deferment as payments (borrowers can get deferment when they cannot afford to make payments, which generally allows the borrower to temporarily postpone payments though interest continues to accrue). The whole point of deferment is to temporarily avoid making payments, so for the Biden administration to give borrowers credit for making payments when they were in deferment is logically, morally, and potentially legally wrong (Cato was part of a lawsuit seeking to end this abuse, but the case was thrown out when a court ruled the policy didn’t directly affect Cato enough to satisfy standing requirements). The administration also waived income requirements, making more people eligible for the program. 

The Biden administration has forgiven “$68 billion in forgiveness for more than 942,000 borrowers” under these programs, which works out to around $72,000 per borrower. By comparison, a formerly homeless student who receives the maximum Pell grant for four years would get less than $30,000 in Pell grants. Some of this would have been forgiven even if the administration hadn’t made any changes to the program, but not all of it. In the future, these burdens on the taxpayer can be reduced by rolling back some of the administrative changes, but eliminating the program would require legislation.

Borrower defense to repayment (Existing and extended plan – still active, though recent changes are paused during a court case)

When a college engages in fraud or severely misleads students, borrowers can have their debt forgiven under borrower defense to repayment. This is reasonable, as victims of fraud should have some recourse. It is also extremely rare because a college would not just need to dupe a student but would also need to fool a state, an accreditor, and the US Department of Education, as all three are required to sign off on the legitimacy of a college before its students can take out student loans. As the House Committee on Education & the Workforce noted, “for the first 20 years of the rule, there were 59 claims.”

However, the federal government can claw back debt forgiven from the responsible college. This makes borrower defense to repayment an incredibly powerful tool for progressives in their war on for‐​profit colleges. If a for‐​profit college can be declared to have substantially misled students, they can be ruined financially by the clawbacks. Indeed, new regulations from the Biden administration would make it much easier to conclude a college engaged in misconduct. As the White House gloated, “Less than $600 million in debt relief had been approved through borrower defense, closed school discharges, and related court settlements from all prior administrations combined, compared to the $22.5 billion approved under the Biden‐​Harris Administration alone.” Some of this was done outside the law. For example, $5.8 billion of debt for Corinthian College students was forgiven even if the students didn’t submit a borrower defense claim. The administration has promised to forgo clawbacks on much of it (likely, in part, to avoid giving affected colleges standing to oppose the changes in court).

The good news is that any further forgiveness under the new regulation is on hold due to an injunction from the 5th Circuit Court of Appeals (this injunction applies to the closed school discharge plan as well).

Closed School Discharge (Existing and extended plan – still active, though recent changes are paused during a court case)

Borrowers whose school closes while they are still enrolled or shortly after they have withdrawn can have their student loans forgiven. The Biden administration imposed new regulations that loosened the requirements and has used this as an excuse to forgive other loans as well. For example, Biden forgave $1.5 billion in debt for students from ITT Technical Institute, even if they didn’t qualify for a discharge. Further forgiveness under the new regulations has been paused by the 5th Circuit Court of Appeals until courts determine whether the new regulations are legal. However, the administration can still forgive loans under the previous iteration of these regulations.

Total and Permanent Disability Discharge (Existing and extended plan –active)

Borrowers who are unable to work due to a permanent disability can have their loans forgiven. Historically this was very rare. To protect against fraud, the income of borrowers who had their debt forgiven was monitored to ensure that they really couldn’t work. The Biden administration both expanded eligibility and dropped fraud‐​detection efforts. In particular, in 2021, regulations were introduced that “provided automatic forgiveness for borrowers who were identified as eligible for a total and permanent disability discharge through a data match with the Social Security Administration. The department had been using such a match for years to identify eligible borrowers but required them to opt‐​in to receive relief.” Switching to the opt‐​out model dramatically increased the number of borrowers receiving forgiveness. As a result of these changes, forgiveness under total and permanent disability discharge spiked from negligible amounts to $14.1 billion.

Waiving Interest

Another method the Biden administration is using to forgive loans is to waive interest. This plan is unique in that it is usually a component of another forgiveness plan, but the goal and methods are unique enough to warrant its own category.

Waiving interest has been implemented primarily through three mechanisms. The first was the student loan payment pause, which as noted above waived interest for three and a half years. The second involved regulations that took effect in July 2023 that “ceased capitalizing interest in all situations where it is not required by statute (87 FR 65904). This includes when a borrower enters repayment, exits a forbearance, leaves any IDR plan besides Income‐​Based Repayment (IBR), and enters default.” The third is the SAVE repayment plan, which waives any unpaid interest.

Conclusion

In sum, the Biden administration has been the most aggressive in history regarding student loan forgiveness. Despite many setbacks, the administration has canceled a massive amount of debt ($167 billion and counting), with most of the burden on taxpayers still to come from future repayments that will no longer be made. And while many of its attempts to forgive student loans have been stymied, there are still many active plans in play, with more on the horizon.