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Romina Boccia

The US federal debt recently surpassed $34 trillion, a staggering figure just shy of the size of the US economy and about $100,000 for every US person. This development received modest attention in the news media, largely overshadowed by an ongoing government funding debate that’s dragged on since last spring.

Short‐​term deadlines continue to suck up most of the energy in Congress at the cost of incurring high long‐​term risks. But not everyone is complacent about the longer‐​term fiscal challenges.

The House Budget Committee scheduled a bipartisan markup of three fiscal bills, taking place at 10 a.m. EST today (you can join me in following along here).

A committee markup is a big deal. During a markup, committee members debate and amend proposed legislation before advancing it to the floor. This process determines whether a bill should be recommended to the full House and, if so, in what form. With this markup, the committee is taking a formal step towards bringing more attention to the nation’s rapidly deteriorating fiscal state and advancing proposals to address it.

Of the three bills chairman Jodey Arrington (R‑TX) and members of the House Budget Committee will be marking up this week, the Fiscal Commission Act of 2023 would have the biggest potential impact. The other two bills, the Fiscal State of the Nation Act (H.R. 6952) and the Debt‐​to‐​GDP Transparency and Stabilization Act (H.R. 6957) would primarily advance transparency and public understanding by requiring that Congress receive a presentation from the Comptroller General about the fiscal state of the nation each year, and by reporting the debt as a percentage of GDP in the President’s Budget submission.

Understanding the Fiscal Commission Act of 2023 (H.R. 5779)

Introduced by the chairs of the Bipartisan Fiscal Forum, Representatives Bill Huizenga (R‑MI) and Scott Peters (D‑CA), this proposal would establish a sixteen‐​member fiscal commission, composed of twelve lawmakers and four independent experts. All members would be appointed by House and Senate leadership from both parties.

The commission would aim to generate a reform package to stabilize the debt at no more than 100 percent of GDP within 10 years. Proposals should address the growth in direct spending (so‐​called mandatory programs, including major entitlements), and narrowing the gap between projected federal expenditures and revenues over the long‐​term. The committee is also instructed to improve the 75‐​year solvency of any programs governed by trust funds (Medicare, Social Security, Highway).

A simple majority of the commission members (including at a minimum three legislators from each party) would need to agree to advance a final proposal. Legislators from both chambers could then vote on the package, without consideration of amendments or points of order, and under expedited procedures that limit congressional debate time.

The Fiscal Commission Act of 2023 is a promising vehicle for highlighting the policy choices necessary to sustainably stabilize the debt. Its work will be critical to advancing greater public and member understanding of the challenge before us. For it to succeed in advancing reforms in Congress that would avert a fiscal crisis will require strong bipartisan majorities.

I’ve been arguing that Congress should establish a fiscal commission that is modeled after the successful Base Realignment and Closure (BRAC) commission. I believe that Congress will need to rely more heavily on outside experts and on a fast‐​track mechanism that allows for silent approval (instead of an affirmative vote) to reform old‐​age entitlements. I’ve also advocated for Congress to advance this model as a fail‐​safe mechanism that would trigger if Congress didn’t agree to reforms.

Instead, the Fiscal Commission Act is modeled after the Greenspan commission which helped Congress avert automatic Social Security cuts when the trust fund was about to be depleted in 1983. I worry that without such a similarly hard deadline that threatens severe consequences if Congress fails to act, the Fiscal Commission Act may not have enough teeth to persuade majorities in both chambers to agree to politically difficult reforms before we approach the current trust fund exhaustion dates (2031 for Medicare and 2033 for Social Security).

Delaying reforms will bake in higher debt and taxes and reduce options available to Congress for restraining spending. That would come at a high cost to US workers and taxpayers who will suffer lower incomes and fewer opportunities as a result.

Colin Grabow

The George II is a case study in Jones Act dysfunction. Delivered in December 1980 by a now‐​defunct Louisiana shipyard, the forty‐​three‐​year‐​old containership—long in the tooth even by the standard of ships operating under the 1920 law—would normally have been recycled long ago. Internationally such vessels are sent to shipbreakers at an average age of approximately twenty‐​seven. But thanks to shipping protectionism and Chinese shipyards that help maintain aging vessels of the US domestic fleet—including the George II—the ship will almost certainly keep operating for years to come.

It’s an outcome that makes sense neither from the viewpoint of economics nor national security.

That foreign ships are more frequently scrapped and replaced with new vessels is a matter of simple economics. Ships become more expensive to maintain and operate as they age. At a certain point—typically after age twenty, although sometimes even earlier—the math favors selling the ship for scrap value and purchasing a newer, more efficient one.

Jones Act ships, however, face a more different calculus. While internationally‐​flagged ships can be bought from overseas shipyards, the 1920 Jones Act requires that vessels engaged in domestic commerce be constructed in the United States. The cost difference is enormous.

In 2022, for example, three 3,600 TEU containerships were ordered from a US shipyard for $333 million each. The previous year, meanwhile, the going price for an even larger (4,250 TEU) containership from a foreign shipyard was $65.5 million.

These costs are a significant deterrent to fleet modernization. As the then‐​CEO of a Jones Act shipping company stated in a 2005 interview, “As a result of [the relatively high cost of building vessels in the US], the vessels in Jones Act markets…are quite old.” Recently another Jones Act CEO stated that while tankers from the international fleet are typically used for 20–25 years, those in the Jones Act fleet typically have lifespans of 30–40 years.

The last seventeen ships removed from the Jones Act fleet had an average age of forty‐​three.

Which brings us back to the George II. Rather than scrap the ship, owner Pasha Hawaii opted to perform extensive upgrades, including the installation of a liquified natural gas (LNG) fuel system that will ensure the vessel’s compliance with international emissions rules. That certainly was not cheap. Although a dollar figure has not been made public, Jones Act shipping company Matson has disclosed that upgrading its twenty‐​year‐​old containership Manukai to run on LNG will cost the company approximately $60 million.

For perspective, two slightly smaller brand‐​new containerships (1,450 TEUs versus 2,378 TEUs for the Manukai) with LNG fuel systems were ordered last year from an overseas shipyard for $49 million each. That may make the Manukai’s LNG upgrade seem relatively expensive, but it’s less than one‐​third the price of building a similar‐​sized containership in a US shipyard.

So, old ships keep sailing.

A further wrinkle to this story is where these ship overhauls are taking place. While both Pasha Hawaii and Matson are board members of the American Maritime Partnership, a Jones Act advocacy group that portrays the law as a bulwark against China, both companies rely on the country’s shipyards to maintain and upgrade their vessels. Indeed, in 2019 Matson officials gathered in Nantong, China to celebrate the company’s 50th ship repair at the state‐​owned COSCO shipyard. The Manukai is in Nantong right now for its LNG overhaul, while the George II departed the same shipyard after its upgrade earlier this month.

In other words, Jones Act shipping firms repair their vessels in low‐​cost Chinese shipyards and then use the savings to advocate for a law that prevents using shipyards in allied countries to expand and modernize the US domestic fleet. All in the name of stopping China.

The policy failure is multifold. First, the use of older vessels that are costly to upgrade and maintain contributes to elevated shipping costs that are passed along to consumers. Second, the presence of aging ships undermines the Jones Act fleet’s already limited military utility. Indeed, the primary subsidy program used to ensure commercial ships are available to the military prohibits ships over twenty‐​five years of age. Third, the use of old vessels boosts demand for repair services in shipyards owned by the government of China, the very country Jones Act supporters contend the United States must maintain vigilance against.

As a rent‐​seeking exercise, the Jones Act performs brilliantly. As a means of meeting US economic and national security needs, however, the law is a self‐​inflicted wound.

Jennifer Huddleston

Last week, I spoke on a panel at the Consumer Electronics Show (CES) about the intersection of tech and competition policy. While many headlines will focus on the cool and sometimes unusual products that debut at the world’s largest tech show — including transparent televisions and single‐​passenger helicopters — CES illustrates that tech remains an incredibly dynamic industry, with entrepreneurs and innovators providing new solutions to consumer needs and continuing to compete in a significant market.

Many people will be watching what some of the big names in tech must reveal, but the small businesses and startups also provide a great deal of excitement and an important perspective on the current state of innovation.

Eureka Park showcases over 1,400 startups, granting them opportunities to market their product to both investors and those who may otherwise help them reach more consumers or further development. The panels also provide an opportunity to learn from the experience of these entrepreneurs, innovators, and policymakers about the struggles they may be facing in the industry as well as the opportunities that technology provides.

For example, Alfred Mai, the CEO of ASM games, discussed on my panel that after developing a drinking card game, various traditional retailers turned down the product; however, the tools available for small businesses on Amazon and other online platforms allowed him to launch the product that now has reached a best seller status.

Technology platforms are just one example of the type of tool that has lowered barriers for entrepreneurs and innovators. As Alfred expressed, it was a choice to use Amazon’s platform over any number of other options. One can also think of the ways other services — like app stores or user‐​generated content on social media and review sites — can help small businesses find their customers without the barriers they would have had in an earlier era.

Not only does CES highlight how tech remains dynamic in the continued rise of startups and small businesses, but it also highlights how “tech” is not just internet companies like Google and Amazon, but a wide array of other industries. Some of these are generally understood, like connected cars and autonomous vehicles, but other industries such as agriculture, health, and retail may receive less notice.

In considering policies around issues such as data privacy or artificial intelligence, these “non‐​tech” industries could also be impacted and, as a result, lose valuable potential improvements from such innovation or be discouraged from offering the tech‐​enabled experience consumers want for fear of regulation.

Finally, CES illustrates that innovation is often our best competition strategy and the market is broader than we might think. Artificial intelligence came up on many panels and was very present throughout the show, highlighting how innovation is often our best competition policy. Furthermore, the presence of innovators and companies from around the globe shows how America’s leading tech companies are not just competing with one another but with challengers from around the world.

The light‐​touch approach and its ability to respond to consumers is what has made these companies successful and supported their ability to continue to innovate.

It’s hard to walk away from CES and not feel excited about the future, but it should also be hard to see all these new, creative innovations and think of the industry as stagnant or dominated by only a few companies.

Marc Joffe and Krit Chanwong

California Governor Gavin Newsom’s proposed 2024–2025 budget includes a provision to raise taxes on the state’s Medicaid‐​managed care providers. This proposed provider tax will generate nearly $5 billion in net revenue for the California state government. Newsom intends to use this revenue to balance California’s budget, among other goals. Unfortunately, this tax will ultimately cost all US taxpayers because it exploits a Medicaid financing loophole to extract more federal funds.

Under Medicaid, state governments pay providers for healthcare expenditures incurred on behalf of beneficiaries. The federal government then reimburses a percentage of these expenses. The rate at which the federal government reimburses states is based on each state’s per capita personal income. These reimbursement percentages for 2024 are reproduced in Figure 1.

State governments can pay their share through their general tax revenues. Or they can use a wide variety of what healthcare economist Brian Blase calls ‘financing gimmicks’ to pay for their state share. As seen in Figure 2, states are making more use of this latter option.

One type of financing gimmick is a provider tax, under which the state levies a tax on healthcare providers and uses the tax revenue to pay for Medicaid. These taxes attract a federal match and thereby shift more Medicaid costs onto federal taxpayers. As Fig. 3 shows, states usually pay Medicaid providers more than the taxes they extract. States can use some of the extra federal money for other budget priorities.

California’s new provider tax does exactly this. A May 2023 California Legislative Analyst’s Office brief reports that revenue from the Medicaid provider tax “would be used to offset General Fund spending in Medi‐​Cal and help address the state’s budget problem.” Another May 2023 primer published by the California Department of Health Care Services states that the tax will be paired with “increases [in] the rates the state pays to Medi‐​Cal managed care plans to account for the tax. As such, there is no net impact to Medi‐​Cal managed care plans.”

States have been using provider taxes to tie down more federal funds since the 1980s. In 1991, Congress began to crackdown on the use of provider taxes. A 1993 regulation implementing Congress’ stance specified that a provider tax was permissible only if it met the following criteria:

Broad‐​Based: A provider tax has to be applied to all providers of the same class. For example, a tax on providers must be applied to both Medicaid and non‐​Medicaid providers.
Uniform: A provider tax must be applied at the same rate to all providers of the same class. This means that a provider tax cannot be higher for Medicaid providers than for non‐​Medicaid providers.
Hold‐​Harmless Ban: A provider tax cannot hold the taxpayer harmless. This means that the taxpayer cannot receive a “pay‐​out” back from the state equal to, or exceeding the amount, of the taxes levied.

California’s new provider tax is not broad‐​based, since it is only levied on a single tier of California’s Medicaid plans. Moreover, California’s new provider taxes are not uniform. Under the 2024–2025 proposed taxes, Medicaid plans would pay around 94 times more per beneficiary than non‐​Medicaid plans. So, it seems that California’s new provider taxes would be impermissible under these regulations.

However, the federal government can waive the broad‐​based/​uniform requirements if the proposed healthcare tax is “generally redistributive,” i.e. if the tax “derives [Medicaid] revenue from taxes imposed on non‐​Medicaid services.” To test whether a tax is “generally redistributive,” the federal government applies a three‐​step “B1/B2” test:

B1 Regression: In this baseline linear regression, the percent share of the total tax paid by all taxpayers during a 12‐​month period is the dependent variable. The independent variable is the amount of Medicaid taxes a provider has to pay over 12 months if the tax were broad‐​based and uniform. The coefficient of this regression is B1.
B2 Regression: In this auxiliary linear regression, the percent share of the total tax paid by all taxpayers during a 12‐​month period is the dependent variable. The independent variable is the amount of Medicaid taxes a provider has to pay in the proposed tax plan. The coefficient of this regression is B2.
If the value of B1/B2 is one or greater, then the federal government automatically accepts the tax as being “generally redistributive.”

A linear regression is a technique that yields the best‐​fitting straight line between points. The coefficient of the line is called the “slope.” The slope represents how a one‐​unit change in the independent variable leads to a one‐​unit change in the dependent variable. The main assumption of the B1/B2 test is simple: if two regression lines have similar slopes, then the underlying data must be similar.

A linear regression, however, depends on many assumptions. If these assumptions are not met, then a linear regression will not be a good description of the underlying data. This is why a good chunk of a statistical analyst’s time is spent on trying to verify a linear regression’s assumptions. The B1/B2 test skips this crucial step, incorrectly assuming that similarity in regression slopes implies similarity in the underlying data.

This raises the question of whether the California provider tax conforms to the spirit of the law and regulations. The tax itself is obviously not generally redistributive: almost all the tax revenues are collected on Medicaid plans. However, California’s new provider taxes still passed the B1/B2 test. This shows the folly of using linear regression without any consideration of its theoretical basis.

The federal government now recognizes the flaws of the B1/B2 test. In a letter sent to California’s Medicaid administrator, the federal government states:

The results of the statistical tests, in these instances, do not appear consistent with either the definition of generally redistributive or reflective of the expected results based on the intended design of the statistical test. Therefore, CMS intends to develop and propose new regulatory requirements through the notice‐​and‐​comment rulemaking process to address this issue.

This change, however, is unlikely to prevent states from finding other ways to exploit loopholes and extract more federal funds. The problem stems from the perverse incentives that are caused by Medicaid’s open‐​ended matching structure. As such, the best solution is to eliminate these incentives by turning Medicaid into a block‐​grant program. Our colleague, Michael F. Cannon, has written extensively about the many fiscal and health advantages of block‐​granting Medicaid.

Jeffrey Miron

US higher education has been much in the news lately, and not in a good way. The growing polarization and acrimony, moreover, seem likely to get worse under current government policies toward higher education.

In Libertarian Land, all colleges and universities are private. Governments do not fund research, subsidize student loans, or operate colleges or universities.

Relatedly, the tax code never taxes “business income” as such, instead attributing all income to individuals. This eliminates any need to distinguish between for‐​profit versus non‐​profit activities and thus removes any preferential tax status for higher education. University endowments are treated no differently than the assets of other economic entities.

Under this regime, all expenditure on higher education and research comes from private sources (tuition revenue, private research funding, donations) and higher ed gets no help or hindrance from the tax code.

This means government in Libertarian Land does not have the justifications that Congress currently uses to interfere with higher ed. Colleges and universities are free to practice affirmative action in admissions, restrict speech, divest from fossil fuels, support research that uses stem cells, rename buildings, exclude students of a particular race, gender, or religion, determine their own policies toward sexual harassment or bullying, and everything else.

Each institution operates as it sees fit, subject only to the discipline of the marketplace.

This policy regime does not guarantee that Congress and state legislatures will never intervene in higher education; policymakers regulate innumerable activities that receive no subsidy.

The absence of funding or preferential tax treatment, however, raises the bar for interference. Title IX of the 1972 Education Amendments, for example, requires colleges that accept federal funds to adopt certain procedures for handling gender discrimination and sexual assault, implicitly allowing other schools to adopt different approaches. Title VI of the 1964 Civil Rights Act, which played a central role in the Supreme Court’s recent ban of affirmative action in college admissions, states:

No person in the United States shall, on the ground of race, color, or national origin, be excluded from participation in, be denied the benefits of, or be subjected to discrimination under any program or activity receiving Federal financial assistance. (Emphasis added.)

Congress and the Biden administration have justified their university investigations by pointing explicitly to the acceptance of federal funds.

A separate question is whether the policy regime proposed here is desirable overall since education and research might generate positive externalities. Reasonable people can disagree on this issue.

The arguments here, however, suggest that society cannot both subsidize higher education and avoid the controversy those subsidies exacerbate.

This article appeared on Substack on January 15, 2024.

Eugene Gholz

Last night’s US/​British strike against Houthi military targets in Yemen escalated operations to protect shipping in the Red Sea from an expensive and wasteful defensive project to an offensive that could draw the United States further into the Yemeni civil war. Even Saudi Arabia, which has been fighting the Houthis for years with support from the United States and with little success, did not favor the US/​British strike, stressing the need for “restraint and avoiding escalation.”

The US‐​led coalition,Operation Prosperity Guardian, which began December 18, costs the United States too much. Deploying Navy ships and aircraft to the Red Sea costs US taxpayers for fuel and munitions and other consumable items (e.g., radar decoys that might be deployed as part of the operations), and exposes those US ships and aircraft to greater (though still modest) risks of combat.

Some of the weapons against the Houthis are inexpensive by US standards (say, rounds from US destroyers’ 5‑inch guns or helicopter‐​launched rockets that might hit a Houthi speedboat or unmanned surface vehicle trying to attack a ship). But even those cost a lot compared to the cost that the Houthis (or their patrons) pay to mount the attacks, creating an unfavorable financial tradeoff for the United States.

Other US weapons likely engaged are much more expensive: Standard missiles that engage anti‐​ship ballistic missiles cost millions of dollars each, and even the cheaper air‐​to‐​air missiles potentially used against Houthi anti‐​ship cruise missiles (or, worse yet, drones) cost hundreds of thousands or even a million dollars each. (Though the Department of Defense has not confirmed the specific munitions used to thwart Houthi attacks, we know the types of weapons that the US forces generally use to defend against missile and drone attacks, whether the defensive weapons are launched from aircraft or surface ships.)

The Houthis have launched a total of 27 attacks since mid‐​November against shipping in the Red Sea, going after a small handful of cargo ships amid the thousands that have transited the area during this timeframe. While these attacks seem scary, their effectiveness is negligible. It is possible that a lucky shot could kill someone or impose significant cost if it happened to hit highly valuable cargo, but few of the attacks hit anything.

For example, the Houthis’ initial use of anti‐​ship ballistic missiles, which received much press attention because it was their first use of that type of missile, landed kilometers from the cargo ships and warships that it was allegedly targeting. The weapons are inaccurate.

Meanwhile, the bulk of the Houthi attacks have been with drones that do not pack much explosive punch: even if they hit a target (which they may not do, even if no one tries to intercept them), they might only damage a small handful of containers on a container ship amidst the thousands on a single ship (the average is about 15,000 containers, and large container ships can have some 24,000 containers). The risk of sinking or even disabling the target ships is low, though there is a somewhat greater risk of damage from larger anti‐​ship cruise missiles than from drone attacks.

That is why so many ships have simply continued about their business — and why we didn’t hear about substantial casualties or damage to target ships between the start of the attacks in November and the start of the protective Operation Prosperity Guardian in mid‐​December.

Moreover, the cost of diverting shipping away from the Red Sea is not very significant in the grand scheme of the global economy—particularly to Americans. It may be annoying for certain companies (shipping companies or companies waiting to receive shipped products), but overall, the costs are small, and companies deal with disruptions of one type or another all the time.

Ocean shipping is both wonderfully efficient and wonderfully flexible. Yes, it can take several weeks longer for cargo to circumnavigate Africa rather than going through the Suez Canal and Red Sea. The greater distance takes more fuel, and the merchant mariners aboard would draw more salary for the additional time at sea, but fuel and salary costs for cargo ships are trivial compared to the value of the cargo in the thousands of containers aboard (remember, each container might carry 20+ tons of goods across which those increased costs are amortized).

The real, though still minor, cost of the additional time at sea is that it takes a larger fleet of ships to maintain the pace of deliveries if each ship spends more time sailing. The good news is that there are already surplus cargo ships in the global shipping fleet.

The law of supply and demand means that shipping rates go up when you need more ships to deliver the same amount of cargo (because of the additional time in transit), but they won’t go up by much until the world really runs out of ships, which is not an imminent threat. The bottom line is that we can leave decisions about how to adapt to any risk from Houthi attacks to the shipping companies and their customers, whether that means diverting to longer shipping routes or simply accepting the slightly increased risk of damage to a few cargo containers while transiting the normal route through the Red Sea.

The economic cost of using the US military to try to block or deter the Houthi attacks is way higher than the commercial interests’ cost of adapting on their own. Using the US military takes those costs away from the goods’ consumers, makes them larger, and puts them onto the back of the US taxpayer.

Official US spokesmen explaining the strike against the Houthis point to the need to preserve freedom of navigation, as if the only way for ships to travel the oceans is if the US military protects them in transit. But we do not run a global convoy system, escorted by the US Navy. Ships routinely make their own decisions about risks and rewards. Of course, they appreciate protection when offered by the US Navy—as long as the shippers are not the ones paying for it. However, their appreciation does not make the US military operations a good investment for Americans.

Nor does the effort to “restore deterrence,” as it is often phrased by US politicians, make sense, if you are deterring rare events that do not cost much, if your efforts to deter the attacks are largely ineffective (that is, the low rate of attacks continues, which the administration admits), and if the political costs of striking Houthi targets are meaningful, potentially embroiling the US directly in the Yemeni civil war more deeply. (Our past culpability was mostly “limited” to intelligence and logistical support for Saudi and Emirati intervention.)

Using the US military to protect “freedom of navigation” sounds good in the abstract. When one boils this strike down to what it really is—spending a lot to potentially (but not very effectively) avoid a very small cost by putting yet another threat onto the US military’s punch list—it sounds considerably less wise.

Jack Solowey and Jennifer J. Schulp

After a decade of intransigence, the Securities and Exchange Commission (SEC) on Wednesday finally approved the first Bitcoin ETFs, exchange traded funds that allow shareholders to gain exposure to Bitcoin without directly holding it. While welcome news, these approvals follow years of chronic obstinacy by the SEC, capped this week by some acute bumbling, all of which undermined the agency’s reputation.

The SEC’s repeated rejections of Bitcoin spot‐​market ETFs illogically continued despite the agency approving related Bitcoin futures ETFs—an inconsistency that the DC Circuit last summer found to be “arbitrary and capricious.” The court’s condemnation paved the way for the January 10 approval. And in a fitting end to the saga, the SEC botched the big reveal this week, having left itself vulnerable to an unauthorized user hijacking the agency’s official X (f.k.a. Twitter) account to issue a fake approval announcement Tuesday, which SEC Chair Gary Gensler had to claw back.

While there’s reason to celebrate the SEC finally approving a financial product, which as SEC Commissioner Hester Peirce wrote of Wednesday’s approval, affirms “the right of American investors to express their thoughts on bitcoin,” there are also three important lessons to be drawn from the SEC’s Bitcoin ETF drama.

1. Don’t throw stones if you live in a glass house. Following Tuesday’s cybersecurity incident, many took the opportunity to hoist the SEC on its own petard, lambasting the agency for its own cyber deficiencies. In response to Chair Gensler’s damage control, Senator Bill Hagerty (R‑TN), for instance, directed Gensler to his own remarks regarding account security:

The SEC promulgates cybersecurity standards for the securities industry and is not shy about enforcing them. The agency also exercises authority over the cybersecurity practices of public companies. This has included bringing charges of securities fraud for the use of “password” as a password, as well as recently enacting cybersecurity rules for public companies requiring quick turnaround disclosure of cybersecurity incidents.

It’s not surprising, then, that Republicans on the House Financial Services Committee expressed their expectation that the SEC will hold itself to the same disclosure standards. Notably, this is not the first time the SEC has faced criticism for lax cybersecurity measures.

Underlying the (frankly, appropriate) schadenfreude and dunking on the SEC is an important substantive point. Public and private sector organizations face an evolving cyberthreat landscape, and effective cybersecurity is not merely a matter of having the right policies in place, but also of executing them.

Too often, regulators assume that implementation is effectively costless and conflate prescribing enlightened policies with effecting desired outcomes. In this case, the SEC clearly must get its own house in order—according to X Safety, the SEC’s account lacked the very multi‐​factor authentication Chair Gensler counseled investors to employ.

But at least as importantly, the commission must develop a deeper respect for the challenge and art of operations, particularly on the part of the market participants it regulates. This means the agency must consider the hard realities of implementing regulatory dictates at going concerns before it issues unworkable rules on an all manner of subjects.

2. Standing athwart market demand is often an unsustainable long‐​term strategy. While crypto critics accuse the technology of having no use case, or only being useful for speculation, others apparently see things differently. In fact, there’s evidently enough of a demand for exposure to cryptocurrencies like Bitcoin that asset managers—from the crypto‐​oriented Grayscale to the traditional BlackRock and Fidelity—are looking to provide Bitcoin ETFs to their customers.

While investment philosophies and individual risk tolerances differ—and this is emphatically not investment advice—one relatively well‐​established approach is to diversify into a mix of lower and higher risk assets in an attempt to efficiently manage overall risk. For some, risk‐​on alternative assets may include Bitcoin, and an ETF is a relatively straightforward way to gain exposure.

There’s a word for standing between both willing buyers and willing sellers—prohibition—and in the face of persistent demand, this tactic tends to lead to black or gray markets, or the prohibition’s eventual demise. Notwithstanding the wishes of regulators—including Chair Gensler who used his statement of approval of the Bitcoin ETFs to share his dim view of the cryptocurrency—demand tends to find a way. And stifling that demand in a manner that is, well, arbitrary and capricious, is not only unlawful, but also counterproductive, breeding long‐​term disrespect for the law.

3. The rule of law, as opposed to administrative diktat, is a cornerstone of efficient markets. “It is a fundamental principle of administrative law that agencies must treat like cases alike,” wrote DC Circuit Judge Neomi Rao in August when vacating the SEC’s rejection of Grayscale’s Bitcoin ETF application.

The court found that by rejecting Bitcoin spot‐​market ETFs (funds holding Bitcoin) while approving Bitcoin futures ETFs (funds holding Bitcoin derivatives), the SEC violated this fundamental principle of treating like cases alike. Specifically, the SEC “failed to reasonably explain” its inconsistent treatment of the two financial products notwithstanding their similar economic risks, congruent fraud prevention approaches, and tightly correlated underlying assets (Bitcoin and Bitcoin futures).

Inconsistent treatment without a reasonable explanation is a textbook case of unlawful arbitrary and capricious administrative action. This behavior is the antithesis of the rule of law: government action limited by fixed rules announced in advance and applied equally. The failure to adhere to a rule‐​of‐​law approach in financial regulation is not only unjust, but also distortionary. It substitutes the preferences of a regulator for the choices of market participants as the signal informing what financial tools get supplied.

Notwithstanding SEC Chair Gensler’s protestations to the contrary, a financial regulator in practice is not “merit neutral” where it arbitrarily suppresses financial products.

Conclusion

As investors piled into Bitcoin ETF products on the first day of trading, with volumes topping $4.6 billion worth of shares, it’s important to note that the approval “does not undo the many harms created by the disparate treatment of spot bitcoin products,” as Commissioner Peirce noted.

American investors may finally have the long‐​denied ability to make their own choices about investing in a Bitcoin ETF, but the SEC has work to do to ensure that the mistakes it made here are not repeated. Going forward, the agency must gain a new respect for the hard work of innovation and implementation, not substitute its preferences for consumer demand, and treat market participants equally.

Michael Chapman

Argentine president Javier Milei was sworn into office on December 10. In the last thirty days or so, the libertarian economist has consolidated eighteen government ministries into nine, fired 5,000 government workers, devalued the peso so it is closer to the market rate, and introduced a 350‐​page package of economic reforms that would make Milton Friedman and Friedrich Hayek smile. 

Milei’s vision, as he stated in his inauguration speech, acknowledges “the right to life, liberty, and property.” This echoes our Declaration of Independence, which says “all men” have certain rights, including “life, liberty and the pursuit of happiness.” In practice, Milei’s ideas reflect the limited government policies long advocated by the scholars at the Cato Institute. The circumstances are different, but the principles are the same.

Small government, individual liberty, economic and social freedom, and peace are the ingredients of a prosperous society. The Milei administration is trying to reach that goal by throwing off decades of socialist exploitation by the State. What’s happening is historic and US policymakers should pay attention. If pro‐​liberty change can occur in Argentina, it can happen in America too.

No doubt, some of Milei’s plans will be stalled by the courts or killed by the National Congress but some of them will succeed. Also, like anyone in a position of political power, Milei is likely to disappoint supporters of limited government and economic freedom sometimes. Nonetheless, there are reasons to be cautiously optimistic.

On his first day in office, President Milei signed a decree to reduce the number of federal ministries. Eighteen cabinet offices were absorbed into nine departments. For instance, the Ministries of Transportation and Public Works were transferred to the Ministry of Infrastructure; Tourism and Sports and the Ministry of Environment and Sustainable Development were transferred to the Ministry of the Interior; five other executive offices were placed under the Ministry of Human Capital.

Transferring or eliminating federal departments and agencies in the US is not as easy to accomplish as in Argentina, but it is a policy that Cato scholars support.

For instance, the Cato Handbook for Policymakers (9th Edition, 2022) explains why many federal agencies should be phased out or privatized. The US Agency for International Development (USAID) should be abolished and the US should withdraw from the World Bank, according to Cato’s Ian Vasquez, because the evidence shows there is “no correlation between aid and growth.” People need economic freedom, not subsidies. Currently, the US spends about $40 billion in overseas development aid.

Vasquez also says it is time to “privatize or abolish the Export‐​Import Bank, the Overseas Private Investment Corporation, the US Trade and Development Agency, and other sources of international corporate welfare.”

As for government spending, Cato’s Chris Edwards explains that all corporate welfare should end, including “subsidies for agriculture and energy businesses.” He also calls for ending “aid‐​to‐​state programs for education, housing, transportation” and “welfare,” and privatizing “postal services, passenger rail, electric utilities, air traffic control” and other activities that could operate in the private sector.

Medicaid could be converted to a block grant, says Edwards, and Social Security could be transitioned into a “system based on private accounts.”

The notoriously unreliable Amtrak, as an example of government waste, has never turned a profit and “consumed more than $50 billion in federal subsidies over five decades to 2020,” said Edwards. In 2021, Amtrak had a loss of $2.1 billion. It should be privatized.

As for the US Postal Service, privatize it as well, added Edwards. It employs about 640,000 people but has “lost more than $90 billion since 2007. Between 2001 and 2021 first‐​class mail volume dropped 51 percent, largely caused by the rise of email and the internet. “Afuera!” or Out! as Milei would say.

Other federal entities ripe for privatization, according to Edwards, include the Tennessee Valley Authority, Power Marketing Administrations, Army Corps of Engineers, and the Bureau of Reclamation. (Edwards documents the worldwide privatization revolution here, which both Argentina and America can learn from.)

In his reforms package Milei calls for a temporary suspension of public infrastructure projects, reduction in “energy and transport subsidies,” and an end to “export and import quotas and licenses,” reported Manhattan Institute fellow Daniel Di Martino. Milei also plans to privatize the national airline Aerolineas Argentinas.

As for US education, “the Constitution does not grant the federal government any authority to govern education, and for most of our history Washington stayed out of the schoolhouse,” wrote Cato’s Neal McCluskey in the Handbook. Today, we need to “eliminate federal involvement in K‑12 education except for supplying school choice in Washington, DC [and] funding education for students in military families and on Indian reservations,” he added.

In Argentina, Milei has long advocated school choice. As president, he transferred the Ministry of Education, which he had dubbed the “Ministry of Indoctrination.”

The US Congress should end the National Endowment for the Arts, the National Endowment for the Humanities, and the Corporation for Public Broadcasting, according to Cato’s David Boaz. “Taxpayer subsidy of the arts, scholarship, and broadcasting is inappropriate because it is outside the range of the proper functions of government,” he said. “Government funding of anything involves government control.”

Milei transferred the Ministry of Culture’s operations to the Ministry of Human Capital on his first day in office. It was not a complete elimination of the department but it was a move in the right direction.

Other changes he’s achieved, according to Ian Vasquez, include repealing a law that regulates the renting of real estate, repealing the “Buy Argentina” law, ending a regulation on how and what products can be stocked on store shelves, strengthening contract law, allowing transactions in dollars and other currencies, including bitcoin, and closing the Central Bank.

In his inauguration speech, Milei said, “Today we return to embrace the ideas of freedom, those ideas that are summarized in the definition of liberalism by our greatest hero of the ideas of freedom, Professor Alberto Benegas Lynch, Jr.”—a Cato adjunct scholar—“who says that, ‘Liberalism is the full respect for the life project of others, based on the principle of non‐​aggression, in defense of the right to life, liberty, and property, whose basic institutions are private property, markets free of government intervention, free competition, division of labor and social cooperation.’”

Those “ideas of freedom” are essentially identical to those named in the Declaration of Independence. Milei wants to “return to embrace” those principles, which incidentally have guided the Cato Institute since its founding: “the Declaration of Independence and the Constitution — on the bedrock American values of individual liberty, limited government, free markets, and peace.”

A once‐​unknown libertarian economist is slashing big government in Argentina armed with the same ideas that inspired Jefferson, Washington, and Adams. It is early on in the Milei administration but believers in limited government and economic freedom should keep their eyes on Argentina with interest and hope. “Long live freedom, damn it!”

Jeffrey A. Singer

The state and local revolt against the federal “crack house” statute (21 U.S.C. Sec. 856), which makes it federally illegal to establish and operate overdose prevention centers (OPCs), continues to gain strength. The statute states:

Except as authorized by this subchapter, it shall be unlawful to—

(1) knowingly open, lease, rent, use, or maintain any place, whether permanently or temporarily, for the purpose of manufacturing, distributing, or using any controlled substance;

(2) manage or control any place, whether permanently or temporarily, either as an owner, lessee, agent, employee, occupant, or mortgagee, and knowingly and intentionally rent, lease, profit from, or make available for use, with or without compensation, the place for the purpose of unlawfully manufacturing, storing, distributing, or using a controlled substance.

On November 30, 2021, New York City became home to the first two government‐​sanctioned OPCs. After the city’s mayor and the Department of Health gave the green light to the non‐​profit harm reduction organization OnPointNYC, the organization opened one center in Washington Heights and another in East Harlem. Last summer, the organization reported it had reversed more than 1,000 overdoses—that’s more than 1,000 people who might not be alive today had these OPCs not existed.

Also, in 2021, Rhode Island’s governor signed into law a bill that permits OPCs in the state, provided they are privately funded and coordinate with county health departments to collect and report data. Project Weber/​RENEW plans to open the Ocean State’s first OPC this year.

In May 2023, Minnesota’s governor signed a bill appropriating funds to establish OPCs in the state. A few days earlier, the governor signed a bill repealing Minnesota’s drug paraphernalia laws.

Now Vermont seems ready to join the rebellion. On January 10, the Vermont House of Representatives voted 96–35 to pass H.72. The bill immunizes organizations and people who establish and operate overdose prevention centers and the people who use them from state or local prosecution. It also appropriates funds for an overdose prevention center pilot program.

The House will vote on the bill once more before sending it to the state senate, where observers say it has strong momentum.

It is not necessary to use taxpayer dollars to fund harm reduction programs. However, it is very necessary to remove government obstacles that prevent people and organizations from employing harm reduction strategies to help save lives in their communities. The federal “crack house” statute and federal and state‐​level drug paraphernalia laws are among the biggest obstacles.

Unfortunately, California Governor Gavin Newsom vetoed a bill that California lawmakers passed in 2022 that would have permitted OPC pilot programs in San Francisco, Oakland, and Los Angeles. This denied harm reduction organizations in the country’s most populous state a chance to establish a major demonstration of the benefits of this proven harm reduction strategy.

As I explain in a Cato policy brief, overdose prevention centers are a proven harm reduction strategy that has been saving lives since 1986. As of the end of 2022, 147 government sanctions OPCs were operating in 91 locations and 16 countries, including 38 in Canada, 29 in Germany, and 14 in Switzerland—where the world’s first government‐​sanctioned OPC, established in 1986, still operates in Bern.

Hopefully, as lawmakers and leaders in other states join the movement, leaders in Washington claiming to be concerned about the overdose crisis will be moved to do something different from enacting the futile law enforcement measures they usually do and repeal the “crack house” statute.

David J. Bier

President Biden is asking Congress for $13.6 billion to fund border enforcement operations, a significant portion of which will go to Immigration and Customs Enforcement (ICE) to detain more immigrants. This strategy is reminiscent of President Trump’s administration, which also poured resources into ICE detention in 2018 and 2019, but that effort produced very little change in the number of ICE removals—the stated goal for both Trump and Biden.

Figure 1 below shows the daily average population detained by ICE each month and the total removals that month for fiscal years 2015 to 2024 (as of December). The key period for evaluating the Biden administration proposal is the surge in detention, which resulted in an increase from 24,000 prisoners per day in February 2015 to 55,000 in August 2019.

The average daily detention population grew from 28,449 to 50,165 from FY 2015 to FY 2019, while average monthly removals increased from 19,618 to 22,272.

Annual removals increased by just 31,845 from 2015 to 2019, while the number of people placed in detention for any period during the year increased from 307,482 to 510,854 (Figure 2). In other words, ICE imprisoned about 203,000 more people in 2019 than in 2015, but just 16 percent of those people were actually removed. The dramatic increase in detention primarily resulted in a much higher number of individuals being subjected to periods of imprisonment at a big cost to US taxpayers before being released into the United States.

From FY 2015 to 2019, detention bed capacity grew on an average day by 21,716, while removals for the entire year increased by just 31,845. This implies that one additional detention bed leads to, at the very most, 1.5 additional removals. Yet even this significantly overstates the effect of detention on the marginal case, as ICE typically receives and removes the easiest cases first. Consequently, the ratio of removals to detention beds would certainly decrease as harder cases were subject to detention.

For this reason, it is reasonable to assume that ICE will need at least one bed for each additional removal it hopes to carry out. Border Patrol is on pace to release about 1.5 million people in FY 2024, so ICE will likely need at least 1.5 million detention beds. ICE spends, on average, $157.20 per day on each bed it maintains for detention, but ICE is not detaining any families, and family detention is about twice as expensive.

With families and children composing about half of Border Patrol arrests, we can assume that the 1.5 million additional beds would come in at a rate of about $129 billion per year, 16 times ICE’s total annual budget.

In fact, President Biden is proposing to increase ICE detention by only 9,000 beds, from the current 37,000 to 46,000. The federal government should detain and deport individuals who pose national security and public safety threats to the United States, but it should not spend taxpayer dollars on useless anti‐​immigrant theater. Moreover, the Department of Homeland Security’s Office for Civil Rights and Civil Liberties has found that ICE detention sites routinely mistreat their detainees in ways that are “barbaric,” and there is no reason to expose anyone unnecessarily to this type of treatment.

A more effective approach to address the border issue is to facilitate legal immigration: let people come legally. This approach has been demonstrated to work, would reduce government expenditures, and make the immigration process more orderly.