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Chris Edwards

The low‐​income housing tax credit (LIHTC) provides $13 billion a year of federal subsidies to state governments, which distribute the benefits to favored developers. The program has many faults, but perhaps the worst is the absurd complexity.

I described some of the complicated state‐​level LIHTC rules at National Review and at AEI. Now let’s look at the federal rules. This webpage lists documents containing the LIHTC’s federal rules, including IRS regulations, rulings, procedures, and notices. I examined the number of pages in each document as a measure of the complexity that administrators and developers have to deal with. I only included LIHTC‐​specific documents. I tallied the PDF page counts, as shown in the tables below.

Statute. The LIHTC statute—Internal Revenue Code Section 42—covers 59 pages of text.
IRS Regulations. The law is further defined by regulations. I counted 18 regulations for the LIHTC covering 181 pages.
IRS Rulings. These documents indicate how to apply the LIHTC rules to specific facts. I counted 18 revenue rulings covering 101 pages.
IRS Procedures. These documents indicate how to apply the LIHTC rules in certain situations. I counted 18 revenue procedures covering 78 pages.
IRS Notices. These documents provide updates and calculation details for the LIHTC. I counted 10 notices covering 82 pages.
HUD Guide. Other federal rules include a 794‐​page guide from the Department of Housing and Urban Development on occupancy requirements for LIHTC buildings. Check out the extraordinary micromanagement here.
Audit Guide. The IRS audit guide for the LIHTC is 350 pages of mind‐​numbing details. A few other federal rule documents add another 474 pages.
Total Pages. All in all, federal rules for the LIHTC span at least 2,060 pages.

This single tax credit needs 2,060 pages of federal rules to implement, plus masses of state‐​level rules, as discussed here. The winners? Only the lawyers. The LIHTC is not some simple investment incentive, but rather a giant central‐​planning scheme for the nation’s apartment buildings.

Krit Chanwong contributed to this blog post.

David J. Bier

This updates an earlier post.

Student visas are the primary jumping‐​off point for most high‐​skilled immigrants to the United States. Immigrants study at America’s elite universities and then find jobs here when they graduate—largely through the post‐​graduate employment authorization program called Optional Practical Training. Despite the importance of these visas, the State Department rejected an unprecedented 36 percent of student visa applicants in 2023, surpassing 2022’s record.

Student visas are known as F‑1 visas. Figure 1 shows the F‑1 student visa denial rate compared to the visa denial rate for all other nonimmigrant (i.e. temporary) visa applicants. As it shows, student visas usually had a similar rejection rate to other nonimmigrant visa applicants. But from 2021 and 2023, student visas were denied at nearly twice the rate of all other applicants. The student visa denial rate increased from a low of 15 percent in 2014 to 36 percent in 2023.

In 2023, consular officers denied a record 253,355 student visas. As Figure 2 shows, more visas were denied in 2023 than were issued in 2002 and 2005. The staggering number of denials occurred even as the number of issuances remained far below the peak year of 2015. Even 2015, with far more applicants, had far fewer denials than in 2023. It now appears that the higher denial rates, which shot up in 2016, may have dissuaded some applicants from applying, and the absolute number of total student visa applicants has declined, and student visa issuances have declined 31 percent from 2015 to 2023.

It is important to understand that before a student can even apply for an F‑1 visa they must already be accepted into a government‐​approved university. This means that the US Department of State turned down 220,676 students who would have likely paid roughly $30,000 per year or $7.6 billion per year in tuition and living expenses. Over four years that number rises to $30.4 billion in lost economic benefits to the United States.

The State Department does not separately delineate the reasons for student visa denials but nearly all nonimmigrant visa denials are for failing to prove “nonimmigrant intent” (that is, the desire not to move to the United States permanently). Applicants need to show sufficient ties to their home country that would impel them to return to their home country when their reasons for visiting have ended.

The nonimmigrant intent subjective standard can be enforced in a variety of ways. Consular officers are supposed to only consider someone’s “present intent” not considering how their intention might change if opportunities arise in the United States to stay legally. In practice, there is very little consistency in application.

The unprecedented denials occurred even though the State Department officials in Washington, DC attempted to return to a lower standard of evidence for students that existed before Trump. The Foreign Affairs Manual now states that students “should be looked at differently” because “typically, students lack the strong economic and social ties of more established visa applicants, and they plan longer stays in the United States.” It concludes that “the natural circumstances of being a student do not disqualify the applicant.” This change occurred in September 2021 before the start of fiscal year 2022.

The State Department hasn’t disclosed the denial rate by nationality in 2022, but the rise and fall of Chinese students is the most important trend in student visa policy in recent years (Figure 3). Another ground for denial—which is far less frequent but affects mainly students from China—is Presidential Proclamation 10043, a Trump proclamation that bars visas for people who studied at any university that now works with the Chinese military in any capacity.

This order—which is retroactively applied to students who studied at such universities before the order was issued—was the basis for about 2,000 visa denials in 2021 and probably about 1,600 in 2022, though the exact figure is not published. The number for 2023 is not available yet, but while that is a lot of denials in absolute terms, and it certainly deters many more applicants, it would only explain 1 percent of total student visa denials in 2023.

What may explain the sudden increase in denials is the sudden increase in issuances for Indian students. After major delays during the pandemic, Indian consulates issued an unprecedented 130,839 student visas, by far the highest total for India ever. But according to data obtained by researchers via Freedom of Information Act requests, before the pandemic, US consulates in India were far more likely to deny students than US consulates in China. Indians accounted for a record 29 percent of all visa issuances in 2023, so their higher rate of denial could have affected the worldwide average more.

This theory is plausible, but the only country‐​by‐​country visa denial data that the State Department is releasing are for B visas for tourist and business travelers. For tourist visas, the two countries switched places with Chinese applicants now much more likely to be denied than Indian applicants (Figure 5). Whether this also happened with student visas isn’t known, and the fact that student refusal visa rates stopped closely tracking other nonimmigrant refusal rates complicates the issue. But it could imply that the problem isn’t specific to India and perhaps the increase in denials is coming more from China or elsewhere.

The bigger issue here is how Consular Affairs handles visa interviews. The head of the Consular Affairs division in India is Don Heflin. Heflin explained how student visa interviews work in April 2022:

Bring [bank statements] just in case the vice consul asks, but we are looking at this less than we used to. We know Indian families usually find a way [to pay].… Mostly it’s about explaining why this school and this curriculum makes sense to you. It’s what in American English we call the Elevator Pitch. You’ll have a minute and a half to tell us why this [school] makes sense to you. Don’t walk up and recite something from memory about the campus, the student body, and how old the school is.… Listen, I have a lot of Indian friends. I know that your father may have told you where you were going to go to school and what you were going to study. That’s fine. Tell us what he told you. Show us that it makes sense for you.

None of this information has anything to do with the legal requirements for a student visa. This absurd method of adjudicating student visas explains why India has a much higher than average student visa refusal rate even though Indian students are extremely successful in the United States. The United States should not pass on tens of billions of dollars in economic activity from these students just because they memorized their “elevator pitch” on why they want to study computer science in Kansas. It’s totally irrelevant. The administration needs to increase transparency about student visa denials and adopt a fair and uniform policy for reviews.

David Inserra

The Supreme Court heard oral arguments on the Murthy v. Missouri case, which looks at the issue of when government communications with social media companies become illegal attempts to informally censor the expressive rights of social media platforms and their users. The overall takeaway of the oral arguments is that some justices seemed concerned about the government’s conduct in this case while others were concerned with the impacts on regular government communication with private actors. The court also discussed questions of legal standing that would sidestep the core constitutional questions.

What follows is a summary of the oral arguments with limited commentary for those interested in how the oral arguments went. It is focused on the core constitutional and policy discussions rather than issues of standing and legal process.

US Solicitor General

Justice Thomas asked the opening question about whether the coercion standard in Bantam Books v. Sullivan was the only way for the court to look at this case. The US solicitor general asserted that the Bantam standard is the correct standard. 

Justice Sotomayor then asked about the impacts of the injunction that had been in place prior to the Supreme Court. How did and would it affect the government if allowed? The solicitor general agreed that while the government can’t coerce, the analysis and injunction by the 5th Circuit would hinder the sharing of national security information. The bully pulpit is not coercion and they happened years ago so no longer an immediate threat of harm.

Justice Alito asked a series of questions about the nature of the communications revealed by discovery, subpoena, and related disclosures. Justice Alito pointed to the government referring to its relationship with social media platforms as a partnership, the demands and expectations government actors made, regular meetings and follow‐​ups on government demands, and the cursing and aggressive language.

Justice Alito asserted that the government couldn’t get away with this for print media and that it could here because it could hold Section 230 liability protections over social media companies’ heads. The solicitor general responded that COVID-19 was a special situation and that context should be considered when looking at the “unusual” email discussions and tone.

Justice Kavanaugh followed up and asked if such anger and incivility was regular practice among government officials. The government agreed that this may not be ideal but it’s not the first time intemperate language had been used by government officials. Justice Alito joked that perhaps whenever the media write something the justices don’t like, the Supreme Court press team should call up the media outlet to curse them out and try to partner with them in writing future media reports.

The solicitor general acknowledged this isn’t necessarily a good thing but also asserted that the First Amendment isn’t a civility code and only protects specific tangible harms from coercion.

Justice Kavanaugh followed up and noted that it struck him as unusual that government actors would call themselves partners to social media companies. The solicitor general said it might look unusual, but it was an open door with the social media companies who publicly stated they wanted government feedback and conversations.

Commentary: It’s true that social media companies in plenty of situations may certainly want to hear from governments that have relevant information. But the US solicitor general’s characterization here is not entirely accurate. In his opening statement, the Louisiana solicitor general cites internal emails by Meta’s policy chief, former UK deputy prime minister Nick Clegg, in which Clegg looks to change a content policy, not because Meta wanted to, but because it could not afford to be punished by the government. So it was not truly an open door.

Justice Jackson started what would become a consistent line of inquiry about why coercion isn’t always problematic. She pointed to the unique nature of the once‐​in‐​a‐​lifetime COVID-19 pandemic as a context that may be relevant when determining if such government action meets the relevant level of scrutiny. The solicitor general agreed that in some situations the government can suppress speech that meets strict scrutiny standards, but that in this case there was no coercion.

Justice Gorsuch asked if coercion can include not only threats but also inducements. The government viewed inducements as the other side of the coin from threats—both can coerce private actors into doing the government’s bidding. Justice Gorsuch followed up to see if the solicitor general agreed that a threat or inducement regarding anti‐​trust or Section 230 action is indeed coercion. The solicitor agreed that anti‐​trust action would be coercion, but said statements about 230 may not always be coercive because as executive branch officials they can’t enact Section 230 reforms.

Justice Gorsuch pushed back by noting that they clearly have the power to influence policymaking. Gorsuch continued by asking if a government official accused social media platforms of killing people, if that should be considered coercion. While asked as a hypothetical, the solicitor general defended President Biden who made such a statement. The solicitor conceded that in certain circumstances it could be coercive but not in this context.

Justice Thomas then asked a few questions about whether the government is allowed to pursue the suppression of protected speech. He also asked if it makes any difference if the platforms make their own decisions or if the government collaborates with platforms. The solicitor general argued that as long as it is merely persuasive and not coercive, then yes, the government can advocate for the suppression of protected speech.

Justice Gorsuch inquired about market concentration and if it should be considered in whether or not it makes it easier to coerce private actors. The solicitor general was not sure.

Justice Kavanaugh asked if the significant encouragement standard used by the lower courts is different than the coercion standard. The solicitor general said the way the significant encouragement test was used by the states and lower courts is far broader than the coercion standard. Justice Kavanagh asked about the various situations where the government may communicate. The solicitor general pointed to awful but lawful content, national security issues, law enforcement issues, and election integrity, as well as providing advice on current issues when asked by social media companies.

Justice Barret then asked if, hypothetically, Facebook decided to cede its content moderation over to the government as a sign of being a partner, is that okay? The solicitor general conceded that this veers into state action.

Commentary: At the start of the pandemic, Meta (then Facebook) created a policy that turned government lockdown orders into the rules for Facebook. So for a short period, Facebook did effectively cede a portion of its content policy to government edicts, though it did so of its own free will as far as I’m aware.

Jackson asked if Bantam and Blum v. Yaretsky (the significant encouragement test) need to be read as very different. The solicitor general agreed that the significant encouragement test should be treated as an implicit/​explicit inducement test like coercion.

Louisiana Solicitor General for the States and Individuals

Alito started by asking about the significant encouragement and coercion tests. The Louisiana solicitor general responded that both are complementary tests for determining when the government set out to suppress speech.

Sotomayor objected that Louisiana is mixing up legal standards but the solicitor general responded that they all fall under Norwood v. Harrison, which states that the government “may not induce, encourage or promote private persons to accomplish what it is constitutionally forbidden to accomplish.”

Justice Jackson argued that certainly the government can censor speech in some cases. The solicitor general agreed that some national security cases, for example, may meet strict scrutiny. Justice Jackson concluded that not every case affecting speech is a First Amendment violation. Louisiana’s solicitor conceded that it is not always the case but the topline rule should be if the government has set out to abridge speech. Justice Jackson countered that this isn’t the First Amendment test, to which the solicitor general responded that this is the plain text of the First Amendment. Justice Jackson seemed to suggest that the government may be justified in suppressing certain COVID‐​related online speech.

Justice Kagan noted that encouragement is a very common thing. The state solicitor general agreed but noted that the target of government complaints or encouragement usually knows of the complaint. In this case, the government encouraged social media platforms to remove the speech of third parties who are never informed of such suppression.

Amid some cross‐​talk, Chief Justice Roberts joked that he has no experience coercing anybody. But he argued that the government isn’t a monolith, so that might dilute the power of government encouragement. He offered an example of the EPA and the Army Corps of Engineers trying to coerce a private party in opposite directions. The solicitor general responded that in this case the government was largely looking to suppress certain viewpoints of his clients.

Commentary: Isn’t that just bad all around? Doubling the coercion doesn’t make the actions of either government agency acceptable, does it?

Justice Kagan asked if law enforcement should be allowed to request that platforms take down protected terrorist speech. Louisiana cautioned that giving the government the right to try to suppress protected speech by potential bad actors inevitably ends with the government labeling various types of American speech as needing to be suppressed.

Justice Kagan argued that there is just too much normal discussion and encouragement by the government and private actors that would become illegal if the court sided with the states and individuals. The solicitor general answered that the government can respond to false or harmful speech by using its positive counter‐​speech.

Justice Barrett then asked about what the legal standard should be for newspaper op‐​eds versus social media platforms. The Louisiana solicitor general responded that the topline is the Norwood standard: that the government can’t do indirectly what it is prohibited from doing directly. Therefore, any government action—coercion, inducement, encouragement—that fits under that topline rule should not be allowed.

Barrett further asked if just plain encouragement should be disallowed as it covers a lot of content. Louisiana’s solicitor responded that the court shouldn’t allow the government to encourage platforms to remove protected speech in any way, but even a higher significant encouragement standard works as that happened in this case.

Justice Jackson returned to her argument that it is permissible for the government to persuade or even coerce platforms to take down speech in various situations. She provided a hypothetical of what happens if classified documents are leaked. Could the government try to take down that content? The state solicitor general responded that strict scrutiny may support the government here. But, they pointed out, the court has never in its history said that the government can use its power to argue for eliminating viewpoints and their protected speech.

Justice Jackson doubled down with a hypothetical of a dangerous viral challenge that results in teens jumping out of buildings and getting harmed. Could the government declare this an emergency and demand social media platforms take down that content? The solicitor general affirmed the ability of the government to condemn such activities as harmful, but not to demand that social media companies remove the content. The government can use its speech to highlight a problem but not to encourage the removal of protected speech.

Chief Justice Roberts asked further about Justice Jackson’s viral challenge hypothetical. The solicitor general responded that, while as a policy matter it may be good for the government to stop harmful speech, giving the government the power to target categories of speech to be suppressed is a problem.

Concluding commentary: There is something appealing and pure about Louisiana’s desire for a world where the government is not allowed to target protected speech for suppression but uses its bully pulpit as a mechanism for counter‐​speech . As some of the hypotheticals point out, in practice there may be situations where the court very much wants the government to be able to recommend removing harmful speech in non‐​coercive ways. As other Cato experts have written, the seemingly inescapable challenge for the court is finding a standard that allows potentially valuable and non‐​coercive government speech while preventing abuse.

Scott Lincicome

Today we’ve published two new essays for Cato’s Defending Globalization project:

Competing for Capital: Tax Competition and Globalization, by Adam N. Michel, explains that international tax competition has not resulted in a race to the bottom in tax rates. Tax competition has allowed countries to simultaneously reduce corporate tax rates, benefit from increased investment, and collect higher corporate tax revenues.

The Globalization of Ideas Enriches the World, by James Bacchus, discusses the often‐​overlooked part of globalization that is the spread of ideas that accompanies trade. The global sharing of information has produced immense benefits for humanity and fueled modern abundance.

As a reminder, we also recently posted a video featuring Lawrence H. Summers, former US secretary of the treasury.

Make sure to check out the 23 other essays that have been published, as well as other multimedia features, on the main Defending Globalization project page.

Peter Van Doren

A recent New York Times op‐​ed by Obama administration deputy assistant treasury secretary Aaron Klein declares that the market for credit cards is “broken and predatory.” The problem is that many credit cards offer cash or other rewards for use, and those rewards are financed by a portion of the interchange fees that merchants must pay to process the cards. The merchants, in turn, pass this expense onto their customers in the form of higher prices. Klein argues this places a hidden tax on customers who pay cash or use non‐​reward cards. He assumes these customers are lower income than reward card users.

I have reviewed the evidence about the distributive effects of reward card use, and it is not very supportive of this view.

Klein’s argument assumes that consumers with different incomes buy the same goods at the same stores at the same prices, and higher income consumers pay with reward cards while lower income consumers pay with cash or non‐​reward cards. But if consumers with different incomes shop at different stores or buy different goods, merchants cannot pass on rich card users’ rewards costs to poor customers. For example, if cardholders buy premium products, and cash holders buy generic, and merchants charge higher margins for premium products, the cardholders pay for their own rewards.

But what about those products bought by both cash and reward card customers within the same store? Why don’t merchants offer cash discounts? Federal law guarantees merchants the right to offer cash discounts. Most merchants do not do so because the costs of handling cash are real and substantial.

A final requirement for Klein’s redistribution hypothesis to be true is that, for items within a store that both cash and card customers purchase, the interchange fees charged to merchants for card use are passed through to all consumers through price increases. How much of the interchange fee is passed onto consumers through price increases?

Evidence from taxes on producers or changes in foreign exchange rates suggests that the pass‐​through rate is about 50 percent in the long run. More directly analogous evidence comes from the cap on debit card interchange fees mandated by the Durbin Amendment to the 2010 Dodd–Frank financial reform legislation.

Did consumers benefit from the interchange fee reduction? The large banks affected by the debit‐​fee rule totally offset their $6.5 billion loss in debit card interchange fees by charging higher checking account fees. Monthly maintenance fees on checking accounts doubled, decreasing the share of consumers with free checking accounts from 60 percent to 20 percent. And an intensive study of gasoline stations found no reduction in prices for consumers.

So, reductions in debit‐​interchange fees did not benefit consumers. Thus, the original incidence of such fees when they were first imposed may well have been largely on merchants.

But let’s assume the best case for the redistribution hypothesis: Cash and card consumers buy the same products in the same store, and prices increase to reflect all card interchange fees; thus cash customers pay a “tax.” Are card customers higher income and cash customers lower income? Two‐​thirds of adults earning less than $40,000 per year have credit cards. Some 98 percent of credit cardholders own a rewards card, including 82 percent of cardholders earning less than $20,000 per year.

So even if cash customers pay a “tax,” the relationship between rewards card ownership and income is very weak. The distributional consequences are not obviously regressive.

What if we compare reward and non‐​reward credit cards? High‐​FICO (that is, credit‐​score) cardholders earn money from rewards cards while low‐​FICO cardholders lose money. But again, the relationship between winners and losers and income is low. High‐​income consumers with high FICO scores benefit from rewards credit cards largely at the expense of high‐​income consumers with low FICO scores.

So, a more neutral summary of the evidence regarding the effects of rewards cards is as follows:

Those with better credit scores, regardless of income, benefit from rewards programs, which are partially “paid for” by interchange fees charged to merchants. Those interchange fees, in turn, may or may not be passed on to consumers who use cash, depending on whether those consumers buy the same goods and services from the same merchants as those using credit cards. But even then, the pass‐​through is a proximate result of decisions by merchants not to offer cash discounts, often because the administrative cost of doing so is greater than any benefit they would reap through larger margins on cash transactions.

Marc Joffe

The State of California finally published its fiscal year 2022 audited financial statements on March 15, 2024, 350 days later than the March 31, 2023 deadline required by the municipal bond market and the federal government. Even worse, the tardy audit revealed that California had overstated its “Net Position” by about $29 billion.

But there was some good news. The FY 2022 filing delay of 350 days represents a slight improvement from FY 2021, reversing a trend toward worsening delays. Further, California State Controller Malia Cohen set out a goal of getting back to timely financial reporting by FY 2025. As she stated in her submittal letter attached to the newly released FY 2022 ACFR:

The SCO [State Controller’s Office] will continue to work earnestly toward the goal of publishing the 2024–25 ACFR in March 2026. The SCO’s statewide ACFR process improvement initiative will increase efficiencies and data quality to advance the fiscal integrity of the state into a position to support our continued economic growth. These efforts include establishing an ACFR compilation governance structure, streamlining manual processes, and optimizing technology. The SCO will build upon our work with partner agencies to provide departments the technical assistance and resources needed to accurately and timely submit financial reports.

While it may be a stretch to suggest that improving state financial processes is necessary to support California’s economic growth, it is good to see the state controller take ownership of the issue, which is tied to the incomplete rollout of the state’s $1 billion financial software system.

Unfortunately, the state is giving itself until 2032 to complete this software conversion, meaning we could see high‐​speed rail trains rolling through the Central Valley before California’s state financial backbone is stabilized.

Information technology problems also plague the state’s Economic Development Department (EDD), which is still struggling to address pandemic‐​era unemployment insurance fraud. The state auditor had to give California a qualified audit opinion because:

The Employment Development Department had inadequate internal control over its financial reporting for federally funded unemployment insurance (UI) benefits, including not properly estimating the total population of ineligible payments. As a result, the department was unable to provide complete and accurate information for certain accounts within the federally funded portion of the UI program. We were therefore unable to obtain sufficient and appropriate audit evidence to conclude that the department’s balances regarding 100 percent of Other Liabilities, 11 percent of Intergovernmental Revenues, and 12 percent of Health and Human Services Expenditures within the Federal Fund are free from material misstatement.

California is not alone in the struggle to accurately report on the financial state of its unemployment program. In her most recent analysis of state Annual Comprehensive Financial Reports for Truth in Accounting, Dr. Christine Kuglin found that Georgia, Illinois, and Nebraska also received less‐​than‐​clean FY 2022 audit opinions due to UI issues.

But, in terms of absolute size, California’s challenge is much larger. The Golden State government was obliged to add $29 billion of net liabilities to its balance sheet to recognize the amount of improper UI payments that may have to be remitted back to the federal government.

With the pandemic‐​induced Unemployment Insurance payment fiasco now almost four years in the rearview mirror, California and other states are undoubtedly anxious to move on. The federal government might help by writing off state debts for improper payments. While that would be good for California and other state governments hoping to clean up their books, it may be less welcome by federal taxpayers who will ultimately shoulder the cost.

All this further illustrates a point I made in a December 2023 Wall Street Journal commentary: while Gavin Newsom’s California aspires to take on the world’s “big, hairy, audacious goals,” it remains unable to reliably tackle the less glamorous challenge of running a transparent, financially responsible government.

Sophia Bagley and Ryan Bourne

In the Biden administration’s latest effort to combat “junk fees,” the Federal Communications Commission (FCC) voted March 14 to mandate “all‐​in pricing” for broadband and direct broadcast satellite (DBS) providers.

Under the new rule, cable and DBS providers must display a single line, all‐​in price for their services in consumers’ bills and on advertising materials that state a price. The FCC thinks this will stop consumers from being surprised by unexpected fees passed onto them, such as the mandatory “broadcast TV fee, or regional sports programming surcharge.”

Making sure these fees are represented in an upfront total price will “allow consumers to comparison shop,” the FCC says, without being misled to think these charges are government‐​imposed.

Who could oppose revealing the total price of a video programming service upfront? Compared to other “junk fee” regulations that control prices (credit card late fees) or make all customers pay to provide services to others (banning airlines from charging parents on basic economy tickets for guaranteeing seats with their children), this regulation might seem like a fuss about nothing.

Firms can still itemize bills to provide consumers granular detail, including identifying these charges, as well as “franchisee fees, public, educational, and governmental access fees…and other…charges imposed by the government,” or equipment costs. So there’s not much being lost on transparency through this bundling.

Yet even a seemingly innocuous regulation mandating all‐​in advertised prices may cause confusion and actually distort competition.

Providers in this industry often engage in national advertising campaigns. Yet it would be near impossible to advertise an all‐​in price nationally given the regional variation in sports network fees alone. An all‐​in price would thus invariably be wrong for a large number of potential customers. So how should it be represented? Providers would have to show a dizzying range of regional prices, select the highest national price that will certainly be wrong for most customers, or just not advertise prices nationally. Would any of these options be clearer and more transparent for customers?

Furthermore, all‐​in pricing could discourage the use of bundles, which benefit a wide array of consumers through discounts and increased choice. Oftentimes, cable or satellite TV is bundled together with voice services and broadband packages. This regulation mandates a stand‐​alone price for video programming services when firms are advertising such a bundle by price. Not only does this mean the companies have to calculate a sub‐​price where it currently doesn’t exist, but it’s likely to be incredibly confusing to customers with varying service preferences.

The rule may also distort competition, given it covers cable and DBS providers while not covering competitors like online streaming services. The FCC would say that’s because only cable and satellite companies face and pass on these mandatory fees. Yet that’s not quite true. Some sports streaming services, such as Fubo, charge regional sports fees. Fubo would thus still be free to advertise a base price excluding the fees, while cable and DBS providers would not.

These companies also often differentiate themselves through strategic offerings such as diverse channel selections and varying terms of service, often through promotional deals. They aren’t just competing on price. Direct TV points out that its entry‐​level “Entertainment” package has 165 channels, for example, against DISH’s 190 channels and Xfinity’s 125 in its “Popular” package. Deals might also give customers a taste of certain premium channels for a number of months, which they are then able to cancel. Would an all‐​in price regulation have to cover the cost of channels that consumers could opt out of after a set period in a contract? And if not, how would that deal be represented accurately?

Aside from these consequences, there are also concerns regarding the legal basis of this rulemaking. Many industry stakeholders, along with two FCC commissioners, assert that the FCC lacks the authority to impose price disclosure rules beyond the scope of the Television Viewer Protection Act of 2019 (TVPA). The TVPA mandates disclosures at the point of sale for video programming but does not extend to regulating pricing in advertising or delegating rulemaking power to the FCC.

Commissioner Carr adds that the FCC realizes this and attempts to call on other parts of the law to justify this rulemaking, but those too are not convincing. He concludes that “this item is yet another example of the new normal at the FCC. After three years of restraint, the Commission is now unlawfully arrogating authority over every aspect of a communications provider’s business. At this point, only the courts can put an end to this raw assertion of power.”

While an all‐​in pricing rule for cable and DBS providers may sound like common sense, it serves as a prime illustration of how anti-”junk fees” regulatory measures, even those seemingly benign, could yield unintended consequences. The intricate nature of the video programming industry, combined with the obligations imposed by the rule, threatens to reduce consumer choice and foster confusion while tilting the deck towards some providers over others.

For more on the Biden administration’s crusade against “junk fees” see here and here.

To pre‐​order The War on Prices: How Popular Misconceptions about Inflation, Prices, and Value Create Bad Policy click here.

Colin Grabow

Last week the United Steelworkers and other unions filed a Section 301 petition seeking US government action against China over its employment of subsidies and other market‐​distorting measures that they blame for the hollowing out of the US commercial shipbuilding industry. Given US‐​China animus and election‐​year politics, the petition’s timing is auspicious. Indeed, two senators have already announced their support and both President Joe Biden and US Trade Representative Katherine Tai have highlighted the filing on social media.

The complaint, however, is hypocritical, ahistorical, and—most of all—misplaced. While there is no doubt that China engages in market‐​distorting practices, they have little explanatory power for the US shipbuilding industry’s enfeebled state.

In the unions’ telling, the United States was one of the world’s leading shipbuilders in the post‐​World War II era until the 1981 demise of construction differential subsidies that paid up to half the cost of US‐​flagged ships used in foreign trade (ships operating domestically were ineligible). Although the petition later concedes that an “array of factors” explains US commercial shipbuilding’s decades‐​long decline, it argues that “headwinds facing the industry since 2000 have been due primarily to unfair competition from China.”

This is an incredibly strained interpretation of history.

As I’ve previously documented, the US shipbuilding record even before the defunding of construction differential subsidies was thoroughly mediocre. From 1951 to 1981, US shipyards’ share of global ship deliveries only exceeded 5 percent twice (1953, 1954) and most years did not exceed 3 percent.

The 18 ships per year delivered on average by US shipyards during this period trailed the shipyards of France (28), Sweden (41), and both the United Kingdom and Germany (80+ each) by significant margins and were dwarfed by those of Japan (270).

While the petition points out that US shipyards in 1975 had “more than 70 commercial ships of 1,000 gross tons or more on order (emphasis added),” their actual deliveries that year did not crack the global top ten. That’s no surprise given their long‐​standing lack of competitiveness, with no vessels built for export since 1960. Rather, US commercial shipyards’ orders consisted almost exclusively of subsidized vessels and those required to be built by the Jones Act—not the competitive international market.

Far from a shipbuilding leader, the United States had been relegated to a peripheral role in the global shipbuilding market long before China’s emergence. By the time China—responsible for only 2.5 percent of global shipbuilding output in 1990—started flexing its shipbuilding muscles in the international market, US shipyards had already made their exit. China’s rise has come at the expense of other major shipbuilders, such as those in Japan, South Korea, and the European Union—not the United States.

Claims that Chinese subsidies have had any bearing on the fortunes of US shipyards in recent decades, meanwhile, similarly fail to withstand scrutiny. US‐​built oceangoing merchant ships can cost at least 300 percent more than those built overseas. China’s shipbuilding subsidies, however, have been estimated to only reduce their shipyards’ costs by 13–20 percent. Significant to be sure, but an amount that pales in comparison to the vast gulf with US prices.

Remove all Chinese subsidies and US shipyards would very much remain frozen out of the international shipbuilding market.

There’s also the small matter that the US government is itself an avid practitioner of shipbuilding subsidies. Not only does the United States require that vessels used in intra‐​US commerce be domestically constructed to comply with the 1920 Jones Act—a significant giveaway to the shipbuilding industry—but it also attempts to promote domestic shipbuilding via federal loans, tax advantages, and direct grants. State and local governments dispense additional goodies. Philly Shipyard, for example, has received over $200 million from the Pennsylvania state government and has a $1 per year lease.

Notably, US shipyards helped torpedo a 1990s agreement to rein in international shipbuilding subsidies. They’ve not just taken advantage of subsidies but have helped perpetuate their worldwide use.

This US affinity for subsidies is also reflected in the petition’s proposed actions. To pressure China over its shipbuilding practices, the petition calls for leveling a new fee on US port visits by Chinese‐​built vessels with proceeds going to a “US Commercial Shipbuilding Revitalization Fund.” This fund would be used to beef up existing US subsidy programs and resurrect the construction differential subsidy program—in other words, a de facto tariff to bankroll a playbook that has proved ineffective in revitalizing US shipbuilding.

The money grab is no shock. It is, however, somewhat surprising that the unions turned a blind eye to US‐​flag shipping firms’ frequent patronage of Chinese shipyards for repair work. If punishing Chinese shipyards is the goal, such work would seem a logical candidate for higher tariffs. Or, better yet, why not eliminate the tariff for work performed in shipyards outside of China to divert business away from the country?

Although the pursuit of action against China over its market distortions is no doubt politically attractive, it will do nothing to arrest US commercial shipbuilding’s long decline. The industry’s inability to compete internationally isn’t a product of Chinese perfidy in recent decades but a reality that dates back to the 19th century.

The constant in this ongoing saga of US failure is not subsidies by China or any other Asian country but extreme levels of protectionism that have smothered US shipbuilders’ competitive fire. Instead of casting subsidy stones, US policymakers should first inspect their own glass house.

Chris Edwards and Scott Lincicome

Federal government debt tops $26 trillion, or $200,000 for every household in the nation. Compared to the size of the economy, the rising debt will soon reach levels never seen in our history.

Next year, the government will spend $6.8 trillion, or 36 percent more than it raises in revenues, with the difference made up by vast borrowing. Despite the massive flow of red ink, politicians keep dreaming up new ways to spend money that we don’t have.

This is madness!

Congress should change course and cut spending. But which programs should it cut? Cato has proposed many specific reforms, and Romina Boccia has proposed that a congressional commission tackle the problem.

The public should weigh in, and so Cato is launching a tournament to crowdsource spending cut priorities for Congress—Spending Madness 2024!

www​.cato​.org/​2​0​2​4​-​s​p​e​n​d​i​n​g​-​m​a​dness

Spending Madness pits 32 bloated, deficit‐​causing programs against each other across four regions of the federal budget—Social Security and Health Care, Federalism, Subsidies, and Welfare. Which programs should Congress cut first? Help us pick the “winners” by choosing the worst programs in each head‐​to‐​head matchup over five tournament rounds.

Our computers will tally the crowdsourced choices in each matchup. After each round, the top vote-getters—the policies that voters think are the more wasteful, harmful, inefficient, and unaffordable—will advance to the next round.

We’ll announce the Spending Madness 2024 champion on April 11, 2024.

Good luck!

Jai Kedia

A few months of hotter‐​than‐​expected inflation numbers have led to a renewed debate around how entrenched inflation has become. Most recently, the February Consumer Price Index increased 0.4% (4.8% annualized), driven primarily by shelter and gasoline which accounted for 60% of the overall increase in price level. Energy increased by a massive 2.3% in February alone. Despite these scary numbers, inflation is still trending in the right direction. This article will show that the elevated components of inflation—shelter and energy—do not accurately portray economic conditions.

In a free market‐​based economy such as the US, a central bank should do as little as possible since most economic fluctuations revert to trend through stronger and more informed market forces. When a (well‐​intentioned) central bank responds to incorrect price signals, it risks causing further damage by unnecessarily crushing credit markets and dampening real activity. The Fed rushing to respond to February’s elevated inflation would be an example of such a mistake.

Figure 1 shows two measures of CPI inflation—owners’ equivalent rent (OER) and the aggregate index less shelter since 2010. Both inflation metrics are computed by calculating the percent change of their respective quarterly price indices and then annualized (multiplied by 4). The aggregate metric was high post‐​pandemic but eventually started to fall in late 2022. Aggregate inflation less shelter maintained this downward trend and remained below 2% through most of 2023. The graph shows—especially since the pandemic—that shelter inflation as measured through the OER significantly trails the rest of the CPI. (In economist speak, it is a lagged measure.) OER inflation hit its peak 2 quarters after other price measures and similarly lagged in its recovery back towards trend.

Rather than indicating that inflation is entrenched, this increase in the OER is an indicator that shelter prices increased some time back. The problem is that those price increases are just now showing up in the CPI.

Figure 1 also shows median consumer one‐​year ahead inflation expectations as collected by the Michigan Survey of Consumers. Keeping expectations anchored is a vital component of managing inflation and this metric too is trending down since its post‐​pandemic high. It is important to note that median expectations are slow to adjust and typically do not fluctuate drastically, as the graph shows. The series trended gently upward during the worst of the inflationary episode, and it is likewise gently trending down. Again, this does not indicate that high inflation is entrenched. Instead, it offers further evidence that long‐​term inflation is headed in the right direction.

When can shelter prices be expected to catch up with the rest of the economy’s prices? Figure 2 shows the cross‐​correlations between the two CPI inflation metrics from Figure 1. Cross‐​correlations measure the similarity between any time series and a lagged version of another time series. Plotting the cross‐​correlation between these series at a variety of lags, as done in Figure 2, allows a researcher to determine the lag length at which the two series are most similar. The figure shows that CPI OER inflation is most similar to the aggregate of all other CPI components at a lag of 3 to 5 quarters. This suggests that consumers will likely have to wait 9 to 15 months to see rent prices follow the rest of the economy and revert to trend. (It is also important to note from Figure 1 that OER inflation trend is higher than the other metrics; it is reasonable to expect rent inflation to fall but not to the level of other price inflation metrics.)

Reporting on inflation has also expressed concern over its other elevated component—energy. Figure 3 compares CPI energy inflation and core (i.e., less food and energy) CPI inflation since 2010. Both metrics are computed like the inflation metrics from Figure 1.

As the chart shows, inflation volatility in the energy sector is significantly higher than the core CPI. Values for energy inflation range from ‑52% to +45% in this period. Core CPI inflation only fluctuates between ‑2% to +7%. Since 2010, the standard deviation of energy CPI inflation is 18.49% while core CPI is only 1.64%; as such, energy price inflation is over 11 times as volatile as the core CPI. Like rent inflation, energy inflation does not accurately reflect any truths about the current and future path of inflation—it is simply too volatile and acts in a very different manner to core CPI. It should not be used to express concern about elevated price levels.

To be clear, it is useful and informative to have reporting on a variety of inflation metrics. The concern is if policymakers base their decisions on improper price metrics. If the Fed were to intervene and discretionarily react to short‐​term price fluctuations that stem from rents or energy, it would only exacerbate current economic problems. For example, an improper rate increase could further tighten credit markets, increasing default rates on mortgages or credit card debt that are already very high. Sound policymaking accounts for such distinctions. Despite the hotter than expected inflation numbers, the conclusion to be drawn remains that aggregate inflation continues to trend down.