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Paul Matzko

I had the opportunity to work with two economists on a paper testing a proposition from my book on conservative broadcasting in the 1960s. I had argued that listening to right‐​wing radio hosts like Carl McIntire, Clarence Manion, and Billy James Hargis helped voters who had traditionally identified as Democrats to consider pulling the lever for the GOP instead.

I backed that book with a lot of research—I visited 20 archives in 13 states—but I’m not a numbers guy. I could tell you that Carl McIntire’s radio show aired on a remarkable 400+ stations by 1964 with an estimated listening audience of 20 million (or as many as listened to Rush Limbaugh a generation later), but I couldn’t *prove* the extent to which such programs influenced the voting behavior of listeners beyond the weight of archival anecdote.

Thankfully, there are quants like my co‐​authors Oliver Engist and Erik Markus who are numbers guys. It was their idea to test the idea after reading Tianyi Wang’s groundbreaking study of Father Charles Coughlin, which showed persistent anti‐​New Deal effects in areas that had a radio station airing Coughlin’s program in 1936.

But in the quarter of a century since Coughlin, right‐​wing radio had grown dramatically beyond any single broadcaster. So we compiled radio stations that aired any one of the “Big Three” Radio Right broadcasters (McIntire, Manion, & Hargis), and who broadcast on more than a hundred stations each by the early 1960s. We then checked to see if the presence of a station that had recently added one of these programs affected GOP vote share in subsequent election cycles. It did!

To parse the graph, the addition of a right‐​wing radio program to a station raised GOP vote share in the county where it was located (and neighboring counties) by 3 percent within two congressional elections relative to other counties that were not near one of these stations. Later on the effect partially wore off as 1) other counties caught up and 2) the Radio Right declined as a result of a massive government censorship campaign in the mid‐​to‐​late 1960s.

To put that in historian‐​speak, we now have quantitative evidence that right‐​wing radio accelerated several trends related to the rise of modern conservatism, from the transformation of the Solid South to the rise of Sunbelt politics and cowboy conservatism.

As I wrote in my book, the ability to supply conservative ideas had as important a role to play in the politics of the 1960s as did changes in the demand for those ideas. “Ideas do not just float through the ether like spores infecting human hosts in an ideological invasion of the body snatchers.”

For more data and analysis, you can check out the full, open access article.

Post adapted from the author’s Substack. Click through and subscribe for more insights from the intersection of history and policy.

David Inserra

A recent report by the Future of Free Speech highlights the sustained and concerning trend against freedom of expression across democracies. Studying the speech‐​related actions of twenty‐​two democracies across the world from 2015 to 2022, the report found that 78 percent of the major actions taken were to restrict expression. Worryingly, the number of annual speech restrictions put into place is growing almost every year, from nine in 2015 to forty‐​five in 2022. 

The study also looked at why and how these restrictions were put in place. Almost 20 percent of these restrictions were explicitly made based on national security or public safety, not including another nearly 6 percent due to COVID-19. Almost 18 percent of restrictions were to defeat hate speech, with another 10 percent to combat disinformation or defamation. 

It is worth repeating that these aren’t speech restrictions in authoritarian states. These are infringements on freedom of expression in open democracies that are supposed to protect the rights of their citizens. Unfortunately, as we’ve seen in polling even in the US, an increasing amount of people often on both sides of the aisle believe that certain forms of expression are too dangerous to be allowed. As we see in this study, security, hate speech, and misinformation are common reasons why governments have justified restricting speech. But these terms are not simply defined as supporters for intervention often think. 

This is clear beyond even this report as we look at the developments of 2023 and what could be coming in 2024. For instance, there is the Irish Incitement to Violence or Hatred and Hate Offenses bill. The legislation had passed the lower house of parliament earlier in 2023, but the government doubled down in its support for such legislation after a major immigration protest and riot. The government cited the need to stop hatred and ensure public safety after an Algerian immigrant stabbed several children and bystanders in downtown Dublin in November, promoting significant anger and rioting on the back of other immigration protests in 2022 and 2023. 

The bill makes it illegal to communicate or behave in such a way that “is likely to incite hatred” against others due to their protected characteristics. Now it goes without saying that hatred is not good for our societies, but, as is always the challenge with hate speech laws, the government does a poor job of effectively defining what is “hate.” Indeed, this bill does not specify what is considered hatred. Even mere possession of materials that are likely to incite “hatred” could leave you in an Irish jail. The bill also makes it illegal to condone, deny, or trivialize genocides, war crimes, or other crimes against humanity.

Even if one were to applaud the bill’s intentions to decrease the incidents of hateful speech, this bill will curtail lawful expression that is naturally a part of debates over important issues of the day. For example, strongly worded opposition to immigration could be considered incitement to hatred under this proposal.

One wonders if comparing Donald Trump to Hitler might be considered trivialization of Nazi war crimes? Or if a Catholic priest preaching millennia‐​old church doctrine that there are only two genders might be considered incitement to hatred? Or if support for Palestinian resistance or Israeli military action might be classified as condoning or trivializing war crimes or crimes against humanity?

Worryingly, the bill also makes it a crime to not provide police with your passwords or encryption keys if they come to seize your “reckless” memes. Individuals will be forced to speak and forced to incriminate themselves under penalty of imprisonment. Such undermining of encryption leaves nothing safe from government seizure and will be highly abusable by the government for any reason it considers a matter of public safety or security. 

The law could also be weaponized against many people and not just by law enforcement. Any visitor, including a university speaker, business traveler, or even an average tourist, could be arrested for things they have said on social media that are interpreted to fall under this broad and vague hate speech law. Activist groups could abuse the law to encourage Irish law enforcement to bring cases against their political opponents or those with unpopular beliefs. 

This is just the latest example of a concerning trend away from free expression in recent European laws and around the world. Other high‐​profile restrictions on expression from 2023 include the EU’s censorship‐​inducing Digital Services Act, which has been criticized by many human rights and free expression groups because of the harmful effect it will have on online speech. We also saw Denmark’s recent adoption of a sacrilege law, making it illegal to desecrate a religious text. 

On the other side of the globe, the Australian government sought to advance a bill that would give government agencies increased power over the moderation of misinformation by social media companies that is “likely to contribute to” a wide array of “serious harms.” Under this standard, political opposition to COVID-19 lockdown policies, based on contested or emerging scientific evidence, could be labeled misinformation that contributes in some way to the serious harm of Australian public order or health.

Notably, Australia’s own human rights commission said the bill guaranteed that the government’s position could never be considered misinformation, and thus only dissenting views could be targeted. Even more explicitly, documents recently released under freedom of information laws revealed that the Australian Communication Minister pushing the bill told the Prime Minister that the legislation would allow her to direct investigations into whatever the government considered misinformation. While widespread pushback to the bill’s broad and vague censorship meant the bill is being revised, this revelation should frighten all Australians with the possibility of blatant political suppression of speech.

These blows to free expression are history repeating itself. After the development of new technologies that expand access to expression, those in power have historically panicked. The printing press, which raised literacy and dramatically increased the availability of ideas, played a huge role in the massive changes brought by the Renaissance and Reformation. Pope Innocent VIII issued a papal bull in 1487 calling for “regulation” to stop “the misuse of the printing press for the distribution of pernicious writings.” Similarly, the Ottoman Empire shunned the printing press for nearly three centuries.

The telegram, despite reducing communication time from days or weeks to seconds, was condemned in the New York Times as “superficial, sudden, unsifted, too fast for the truth… How will its uses add to the happiness of mankind?” The same leading journalists at the Times believed the telephone was harming the hearing of its users (or at least their manners), and that radios were a “loud and unnecessary noise.” And there has been no shortage of political figures condemning popular movies, music, and video games for changing values or as the cause of modern violence.

We must not accept this prevailing and pessimistic narrative and cave to calls for government intervention in this important value of a free society. Yes, such change is disruptive and some speech will make all of us uncomfortable. But giving greater information and expression to more people is a powerful force for human progress.

So, while we currently find ourselves in a free speech recession, we can and must remind our societies that a better future is built on the rich diversity that is only possible with freedom of expression.

Alex Nowrasteh

Border Patrol agent Freddy Ortiz died in an on‐​duty vehicle accident on November 14, 2023, while on patrol in Douglas, Arizona. John Modlin, chief patrol agent of the US Border Patrol’s Tucson Sector, wrote, “US Border Patrol Agent Freddy Ortiz’s on‐​duty death is a tragedy and a stark reminder of the dangerous nature of our mission.” It’s certainly true that Border Patrol agents die in the line of duty, but how dangerous the mission is can be partly gleaned from how often agents die in the line of duty. 

Raul H. Gonzalez, Jr. was the last Border Patrol agent to die in the line of duty in 2022, on December 7, in a vehicle accident. This blog post is an update of earlier posts that examined the number and causes of Border Patrol deaths and compared them to police officer deaths in the line of duty.

The government and the Officer Down Memorial Page record all Border Patrol agent and Customs officer deaths in the line of duty. I analyzed the deaths from January 1, 2003, through December 31, 2023, and excluded Customs officers. That left fifty‐​eight Border Patrol agents who died while on the job (Table 1). The deadliest year was 2021 when fifteen agents died, or one Border Patrol death for every 1,302 agents in that year. Of those fifteen deaths, thirteen died of COVID-19 and two from car or vehicle accidents.

Counting Border Patrol agents who died from COVID-19 as a death in the line of duty seems fraught with uncertainty. The Customs and Border Protection (CBP) website states how Border Patrol agents die in the line of duty in the case of homicide, accidents, drowning, or other such causes that occur while on the job. Those are unambiguous deaths in the line of duty. 

Almost 1.2 million Americans died of COVID-19 by December 2023, but only some of those cases counted as work fatalities. In cases of a Border Patrol agent dying of COVID-19, the CBP says “[t]he circumstances of [the] passing were reviewed by an executive panel and the CBP Commissioner who determined that this death occurred in the line of duty.” My job is not to look under the hood of those cases to guess whether this was a legitimate call or not, so I included them as deaths in the line of duty. 

The National Center for Health Statistics published a report on COVID-19 death rates by occupation and industry for 2020. It is not a report of COVID-19 fatalities on the job but of deaths clustered by occupation and industry. The COVID-19 death rate for protective services, which includes Border Patrol and other law enforcement officers, was the highest of any occupation group included at 60.3 per 100,000. In 2020, the COVID-19 death rate for Border Patrol officers was 15.3 per 100,000. 

From 2003 through 2023, the annual chance of a Border Patrol agent dying in the line of duty was about one in 6,553 per year. Another way of presenting the data is that the Border Patrol deaths in the line of duty rate was 15.3 per 100,000 Border Patrol agents during the entire 21‐​year period. Furthermore, the number of deaths per apprehension is also low. One Border Patrol agent has died in the line of duty for every 297,848 illegal immigrant apprehensions or encounters during the twenty‐​one‐​year period. 

I determined the cause of death for each Border Patrol agent from the online blurbs on CBP’s website and from the Officer Down Memorial Page. The leading cause of death for Border Patrol agents was car or vehicle accident at 40 percent (Figure 1). The second‐​highest leading cause of death was COVID-19, at 28 percent. Other health accidents such as heatstroke or heart attack account for 14 percent of deaths. Murder or assault accounts for 10 percent. The last Border Patrol agent to be murdered in the line of duty was Isaac Morales, who was murdered in May 2017. A jury found the accused killer not guilty.

The danger of being a Border Patrol agent must be judged in comparison to similar occupations. About one in 6,553 Border Patrol agents died in the line of duty per year from 2003 through 2023 for an annual rate of about 15.3 per 100,000. That compares favorably to all police and law enforcement officers nationwide. 

From 2003 through the end of 2022, 4,406 law enforcement officers died in the line of duty which translated to a one in 3,705 per year chance of dying or about 32.5 deaths per 100,000 (all data are not yet available for 2023). During the same period, law enforcement officers were about 113 percent more likely to die in the line of duty than Border Patrol agents were. The data on all police deaths includes Border Patrol deaths.

Police officers were also much more likely to be murdered than Border Patrol agents. Of the 4,406 law enforcement deaths nationwide, 1,874 (43 percent) were murdered or died in violent altercations (Figure 2). An additional 20 percent died in accidents and another 20 percent died of COVID-19.

Border Patrol agents volunteered for a job that routinely places them in danger, either from other people, the environment, or accidents. However, that heightened danger does not translate into a higher chance of dying in the line of duty compared to other law enforcement officers. Every unnecessary death is a tragedy, but it’s important to keep them in perspective when forming public policy.

David J. Bier

President Biden has requested that Congress give him $13.6 billion to increase deportations of people crossing the border illegally, but congressional Republicans are reluctant to comply because they believe Biden has intentionally opened the borders and can’t be trusted. However, data from the Trump era clearly show that, if he were in office, Trump would not be deporting any more border crossers than Biden has.

As I previously demonstrated, President Biden removed a higher percentage of border crossers in his first two years than Trump did during his last two years (51 percent versus 47 percent), despite Trump having to deal with many fewer total crossings (Table 1). Congress right now is in a bipartisan state of denial about these three central facts:

The reason people are being released is because of operational capacity to detain and deport them, not policy.
Biden has deported vastly greater numbers and a higher share of crossers, but it has not deterred people from crossing.
The logistics are such that once arrivals exceed the deportation machine’s capacity, people will find out and even more will come.

The data presented in Table 1 come from March 2023, and the situation may have changed now that the Centers for Disease Control and Prevention ended the national health emergency in May 2023, and the Department of Homeland Security (DHS) can no longer use the Title 42 health code authority to expel people to Mexico.

Therefore, it is worth revisiting what we could have realistically expected from a Trump‐​era deportation machine in this moment.

Table 2 shows the pre‐​Title 42 removal rate (share of border encounters in fiscal years 2019 and early 2020 that were removed by March 31, 2020) for each major demographic group. These rates are then applied to the most recent border encounters for November 2023. As it shows, based on how they performed in 2019 and 2020, before Title 42, we would expect a Trump administration to have removed 29.2 percent of the people who crossed the border illegally in November 2023. In other words, even under Trump, over 70 percent of crossers would not be removed.

We would expect that of the 191,113 Border Patrol arrests, a Trump administration would have removed 55,784. This is almost exactly the number of crossers who were not granted humanitarian release by Border Patrol in November 2023: 57,122. The DHS does not publish exact monthly removals, but it says that it deported “over 400,000” people over the last seven months. That equals about 57,000 removals per month, exactly what we’d expect from a Trump administration.

Of course, this assumes that a Trump administration could maintain a consistent removal rate despite the higher rate of arrivals, and this is unlikely. The removal rate significantly dipped from about 50 percent in 2018 to 32 percent in 2019 when border encounters almost doubled from half a million to nearly a million. Now, arrests are on track to double the 2019 level. It stands to reason that, faced with this increase in arrivals, the rate of removals would’ve fallen again. The fact that it did not fall is a testament to the extraordinary lengths to which the Biden administration has gone to sustain high removal rates, even after the expiration of Title 42.

President Biden has negotiated a shocking and unprecedented deal with Mexico to permanently deport some Cubans, Haitians, Nicaraguans, and Venezuelans there. This is very different from Trump’s Remain in Mexico policy that returned some crossers there temporarily until their cases were decided. Biden has also obtained permission from the governments in Venezuela and Cuba to accept more deportations, and he has imposed a presumptive ban on asylum.

But this strategy hasn’t worked in the past and won’t work now because, as we saw during Title 42, even the total suspension of asylum law and a much higher rate of removal did not deter crossers because there was still a reasonable possibility of success, and the US economy was doing so well. Biden needs to refocus on reforming legal immigration to fix the problems at the border.

Walter Olson

Before the U.S. Court of Appeals for the D.C. Circuit this week, Donald Trump is arguing sweeping claims of immunity from prosecution for acts he committed as president. The case raises questions of whether and when high officials may be held accountable for crimes they commit, to what extent an exception should be made for the office of the presidency, and where the line should be drawn between acts an officeholder may take in execution of his prescribed duties and those he may take in a private capacity. Here’s a brief overview.

Trump, as we know, is charged with having violated four federal statutes in his efforts to stay in office notwithstanding his 2020 defeat at the polls. He moved to throw out the case on the grounds of purported immunity, Judge Tanya Chutkan of the district court rejected his claims, and Trump is now appealing that ruling.

Surprisingly or not, the Supreme Court has never previously ruled on the claim of a president to be immune from prosecution for criminal conduct in office. It did rule in the 1982 whistleblower‐​firing case Nixon v. Fitzgerald that former presidents are immune from civil lawsuits over the carrying out of their official duties. Trump’s lawyers now urge the courts to extend that precedent from the civil context to that of criminal prosecution.

The Fitzgerald court worried that exposure to tort‐​style liability might chill presidents’ willingness to act decisively in the exercise of their official duties, as well as burden them with a profusion of complaints after their return to private life. It also considered that alternative remedies were typically available to individuals aggrieved by White House action. Whistleblower Ernest Fitzgerald, for example, could and did pursue claims against lower‐​level federal functionaries over his firing.

Presidential immunity has long occasioned an ideological divide at the high court, with the conservative wing generally friendlier toward it than the liberals. Fitzgerald itself generated a 5–4 split, with Justices Byron White, Harry Blackmun, William Brennan, and Thurgood Marshall warning that the majority’s logic could leave the President above the law.

*

In addition, Trump is advancing a second, long‐​shot pair of immunity theories based on his acquittal on impeachment charges by the U.S. Senate in February 2021, after he had left office. (57 of 100 senators voted to convict, short of the two‐​thirds needed.) He now argues that the acquittal must bar further prosecution.

Part of his argument nods toward the idea of double jeopardy, an analogy so weak I doubt it will convince a single judge. (There’s a lot of precedent on what counts as double jeopardy and what doesn’t, and it’s very unlikely that this is it; it’s kind of like arguing that if you persuaded your government colleagues not to fire you over misconduct on the job, you also can’t be prosecuted for it.) It’s especially jarring in this case, in which nearly all the 43 senators who took Trump’s side cited reasons for their vote other than factual innocence, notably doubts as to whether senators could properly impeach an official who was already out of office. Sen. Majority Leader Mitch McConnell (R‑KY), for one, specifically said he expected the criminal justice system to sort out Trump’s misconduct.

Trump’s lawyers also cite a more colorable but still far‐​fetched theory based on the Constitution’s Impeachment Judgment Clause, which provides that the effects of Senate conviction do not extend beyond removal from office and disqualification, “but the Party convicted shall nevertheless be liable and subject to Indictment, Trial, Judgment and Punishment, according to Law.” They claim that by negative implication this language must also mean that an official not so convicted may not be subject to later criminal process. This is highly implausible for many reasons, one of which is that the federal government has long prosecuted errant officeholders who weren’t impeached first even when they had held impeachable offices (see, e.g., pp. 7–9).

*

Given the composition of the U.S. Supreme Court, it would not be surprising if the Fitzgerald analogy attains traction with some justices there, even conceivably a majority. And yet a win on this front might not in the end be of much practical use to Trump. That’s because, as he himself concedes (see p. 26), it is uncontroversial that a former President can remain criminally accountable for unofficial conduct; that is, conduct going beyond the exercise of the prescribed duties of the presidency. 

Courts, I suspect, are likely to view with favor the proposition that most or all of the lawbreaking alleged in the indictment was taken in Trump’s capacity as a candidate for a second term, as when he asked Georgia Secretary of State Brad Raffensperger to “find” him 11,780 votes, or when he helped organize teams of pretend electors to file papers holding themselves out as genuine.

Last month, in the context of a civil suit over Jan. 6, a cross‐​ideological panel of the D.C. Circuit ruled on what is effectively this same point. It found that Trump’s speech to the White House crowd on that day was made as an “office‐seeker, not office‐holder” and, not being “in furtherance of a presidential function,” did not enjoy immunity under Fitzgerald itself. Assuming this ruling stands, it signals that even a favorable ruling from the Supreme Court on extending Fitzgerald would still not extricate the former president from his legal jeopardy.

Even the most extravagant boosters of the imperial presidency seldom dare to argue for the absolute‐​monarchy premise that supposes the holder of the office is legally untouchable, even for crimes he may commit in a private capacity – say, as a participant in a road‐​rage incident, a jealous spouse, or, as here, someone restless and ambitious to remain in an office he has lost in a free election. And that implies that the courts are unlikely to interpret immunity doctrines in such a way as to excuse Trump from accountability.

James A. Dorn

Joel Mokyr’s widely acclaimed book A Culture of Growth (2018) has important parallels to the work of Peter Bauer (1915–2002), a pioneer in development economics. Both economists recognize the importance of culture and a competitive market for ideas in fostering economic development.

Mokyr was primarily interested in explaining the factors that led to the Enlightenment and the Industrial Revolution, while Bauer was concerned with the transformation of a subsistence economy into an exchange economy. His careful observation of less developed countries (LDCs) in Southeast Asia and British West Africa in the 1940s and 1950s convinced him that many of the leading ideas regarding the determinants of economic growth were wrong. He presented strong evidence that poverty was not self-perpetuating, that external trade was beneficial both in enlarging consumption opportunities and spreading new ideas, and that culture matters on the road to prosperity. He recognized the failure of state-led development and the promise of freedom, individual choice, and limited government.

The Economist praised Mokyr’s book, saying, “It is refreshing that an economist is taking seriously the idea that ideas and culture make a difference to economic growth.” This article examines some of the key ideas of Mokyr’s book and shows that Bauer shared similar views with regard to the importance of ideas and culture in fostering economic growth.

Mokyr on the Origins of the Modern Economy

The key role of useful knowledge in promoting growth lies at the heart of Mokyr’s quest to discover the origins of the modern economy. As he writes, the notion that “useful knowledge” could “transform the economy” was “the driving force in bringing about the Great Enrichment” (p. 267). Economic growth requires a competitive market for ideas. The institution that helped foster a vibrant market for ideas in the United Kingdom and Europe in the 17th and 18th centuries was the so-called Republic of Letters (see Mokyr, chap. 12).. Scholars could exchange ideas via an active network of informed individuals, who could also move from one jurisdiction to another to avoid suppression of free thought. The Scientific Revolution led the way for the Enlightenment and Industrial Revolution, which transformed the West into a modern economy.

A Model of Cultural Change

Mokyr defines culture broadly as “a set of beliefs, values, and preferences, capable of affecting behavior, that are socially . . . transmitted and that are shared by some subset of society” (p. 8). Those beliefs, values, and preferences can change over time as people acquire new knowledge. In that sense, Mokyr argues they are “a matter of choice” (p. 12).

The role of “cultural entrepreneurs,” such as Francis Bacon and Isaac Newton (see Mokyr, chaps. 7–8), spurred the Scientific Revolution with its emphasis on the scientific method, the laws of nature, and the promise of improvement. Enlightenment thinkers spread optimism about the possibilities for progress—provided government power was limited and human (natural) rights protected.

Mokyr develops “a model of cultural change that explains why the Enlightenment took place in Europe.” His model rests firmly on two factors: the emergence of a Republic of Letters and the fact that a fragmented Europe allowed the market for ideas to develop as jurisdictions competed for talent (pp. 339–41). A culture of growth replaced the stasis that had enveloped Europe as “changes in the market for ideas” widened the range of knowledge and allowed “cultural entrepreneurs” to flourish. Regions that allowed greater freedom in the exchange of ideas led to “choice-based cultural evolution” and prosperity (chap. 6).

In a nutshell, Mokyr holds that economic development requires a commitment to “pluralism and competition with a coordination mechanism that allows knowledge to be distributed and shared, and hence challenged, corrected, and supplemented” (p. 340).

The Market for Ideas

Many economists have pointed to the importance of institutions on incentives and behavior in studying the factors that influence growth. However, less attention has been paid to the importance of a free market for ideas. Mokyr argues that “the central messages of the Enlightenment that mattered to subsequent economic change were products of the competition in the market for ideas and were a direct continuation of the Republic of Letters” (p. 268).

In particular,                

The liberal ideas of religious tolerance, free entry into the market for ideas, and belief in the transnational character of the intellectual community were essential to Enlightenment thought. These were the cultural underpinnings of the institutions that not only supported a functioning market for ideas, that is, a market in which innovators had a fair chance to persuade their audiences. They also actively encouraged intellectual innovation and thus laid the foundation for the emergence of the modern economy (Mokyr, p. 178).

The lesson from Mokyr is that a government that protects persons and property and supports a free market for ideas best serves to promote human welfare. From a study of the European Enlightenment, he understood that “to advance the material conditions of humanity,” it is necessary to be open to new ideas and to constrain the power of government for the good of society. Those two ideas “and their triumph in the market for ideas,” argues Mokyr, “created a massive synergy that led to the economic sea changes we observe.” Notably, “from industrialization and the growth in physical and human capital to the discovery and mastery of natural forces and resources” that could not have been imagined in the mid-18th century (p. 341).

Bauer’s Approach to Economic Development

Like Mokyr, Peter Bauer placed importance on cultural factors and the market for ideas. In particular, he pointed to cultural changes that widened the range of choices open to people and improved their lives. His studies of the rubber industry in Southeast Asia (Bauer 1948) and small traders in British West Africa (Bauer 1954) convinced him that poor people could lift themselves out of poverty with hard work, entrepreneurial activities, and internal and external trade—provided they had the freedom to do so. He exposed wrong ideas offered by the elite in diagnosing economic development, and he used close observation and careful reasoning to confirm classical liberal theories to help explain the wealth of nations.

The Principle Objective and Criterion of Economic Development

For Bauer, “the principle objective and criterion of economic development” is “the extension of choice, that is, an increase in the range of effective alternatives open to people” (Bauer 1957: 113; Dorn 2002). Measures that increased freedom of choice and limited the power of government, thereby protecting persons and property appealed to Bauer, both from a moral and practical perspective. In this sense, he was in line with classical liberalism.

This view of development put Bauer at odds with post-second World War experts who favored state-led development and foreign aid and those who opposed free trade. The failure of central planning and the lack of development in countries that practiced protectionism proved Bauer to be correct. The World Bank recognized his importance by including him in its first edition of Pioneers in Development (1984).  

Tenets of Postwar Development Orthodoxy

In the 1950s, it was widely held that there was a “vicious circle of poverty.” Most development economists assumed that low incomes in LDCs, together with the lack of foresight, would constrain saving and investment, which were seen as essential for growth. Poor people were seen to be incapable of responding to market incentives, and external trade was considered to be ineffective or even harmful. Poverty was therefore regarded as self-perpetuating. The only way out of this “poverty trap,” according to postwar development orthodoxy, was by following the path of central planning or relying on foreign aid (Bauer 1984: 1).

Case Studies

Bauer questioned the tenets of postwar development orthodoxy based on his knowledge of classical economic principles and close observation of LDCs. His early studies of Southeast Asia and British West Africa in the 1940s and 1950s convinced him that economic development mostly depended on “the individual voluntary responses of millions of people to emerging or expanding opportunities created largely by external contacts and brought to their notice . . . primarily through the operation of the market.” He went on to say that, “These developments were made possible by firm but limited government, without large expenditures of public funds and without the receipt of large external subventions” (Bauer 1984: 5).

What Bauer observed first-hand was that “the ordinary people of the LDCs were not necessarily torpid, rigidly constrained by custom and habit, economically timid, inherently myopic or generally deficient in enterprise.” For example, illiterate peasants in Southeast Asia and West Africa “planted millions of acres to produce new cash crops,” some of which (e.g., rubber, cocoa, and kola trees) took five years before yielding marketable products. Those direct investments, argued Bauer, were “made possible by voluntary changes in the conduct, attitudes and motivations of numerous individuals” (Bauer 1984: 5).

Determinants of Economic Development

Although Bauer was skeptical about the possibility of constructing a general theory of development (as was Mokyr), he did think it was feasible to recognize patterns in the process of economic development and make predictions about the consequences of alternative policies intended to improve economic performance (Bauer 1976: 24).        

After studying a number of LDCs, Bauer concluded:

Economic performance depends on personal, cultural, and political factors, on people’s aptitudes, motivations, and social and political institutions. Where these are favorable, capital will be generated locally or attracted from abroad, and if land is scarce, food will be obtained by intensive farming or by exporting other goods (Bauer 2000: 29).

Bauer also argued that a large and growing population is not a detriment to economic progress, nor is a high population density—provided the institutional setting is favorable to freedom and responsibility. In his view, “Economic achievement and progress depend on people’s conduct, not on their numbers.” He criticized the use of national income per capita as a measure of personal welfare since “it ignores satisfaction people derive from having children or from living longer…. Ironically, the birth of a child is registered as a reduction in national income per head, while the birth of a calf shows up as an improvement” (Bauer 2000: 30–31).

Bauer pointed to the positive effects of external contacts. He argued that international trade with more developed economies exposes LDCs to the possibility of advancement. It undermines “attitudes and customs” that “inhibit material advance.” External contacts also “promote new ideas, attitudes and modes of conduct, as well as new crops, wants and improved methods generally, besides encouraging production for sale” (Bauer 1976: 38).

In sum, if people are left alone to exchange goods and ideas in international markets, they will benefit by “voluntary adjustment to new opportunities.” However, protectionist policies will restrict those opportunities and perpetuate poverty (Bauer 1976: 85).

Conclusion

Bauer and Mokyr, like Deirdre McCloskey, both sought to understand the process of development from a wider perspective than simple growth models. They both viewed culture and the market for ideas as important noneconomic variables that account for the wealth of nations.    

Bauer (1976: 84) was convinced that “economic development requires modernization of the mind.” He recognized the importance of free people and free trade in widening the range of choices open to people. He predicted that central planning and foreign aid would fail to bring about material advancement and that market-led development was the best path toward a harmonious society. In particular, he held that state-led development destroys an “experimental turn of mind” (Bauer 1976: 84, 86).  

Bauer’s life work was vindicated as development experts found that many of his criticisms of orthodox development theory proved to be correct. His inclusion in the World Bank’s Pioneers in Development is testimony to his many contributions to development economics. As Amartya Sen noted, in his introduction to Bauer’s final book, From Subsistence to Exchange,

Bauer has been a consistent and cogent defender of the role of the market economy in bringing about economic development. No one has done more in clarifying the reach of Adam Smith’s thesis regarding the creative contributions of exchange. . . . The role of culture in economic development and change is a recurring theme in Bauer’s writings (Sen 2000: x).

Mokyr was very influenced by McCloskey on the importance of culture, which is a factor that is still overlooked by many economists. But while Bauer was a development economist and not an economic historian like Mokyr and McCloskey, he was an outstanding example in his field that made related points decades ago. As Sen (p. ix) reminds us, although Bauer’s ideas are gaining adherents, “the new enthusiasts . . . often do not give him enough credit” (see Vasquez 2007 for why Bauer’s work was neglected for so long). A reference to Bauer in Mokyr’s book would have added to its distinction.  

Jennifer Huddleston and David Inserra

The beginning of a new year is often a time for reflection and prediction. Technology continues to evolve in ways that improve the lives of consumers and has quickly become so commonplace that we either forget what life was like before or look back on it with nostalgia.

With this approach in mind, let’s look at some of the key takeaways in tech policy in 2023 and some likely new or continuing tech policy conversations in 2024.

Three Reflections on Tech Policy in 2023

The courts have remained strong on the First Amendment in the context of online speech.

Numerous policies to limit speech online have been introduced, particularly at the state level. Many of these policies initially appear to be well‐​intentioned on issues such as protecting children online, but often would have dire consequences for freedom of speech more generally. Additionally, 2023 saw the targeting of specific platforms for speech in attempts at both a state and federal level to ban popular social media platform TikTok for all users.

Despite the concerning trends towards laws that would likely violate the First Amendment, the courts have held to constitutional principles, issuing preliminary injunctions and emphasizing the importance of speech in the online context in various rulings. This included injunctions against California’s Age‐​Appropriate Design Code and Montana’s TikTok Ban. Additionally, the courts are also holding the government itself to account for its censorship by proxy against private tech companies.

In 2023, we wrote a great deal about this and selected articles are below:

https://​www​.cato​.org/​b​l​o​g​/​s​u​p​r​e​m​e​-​c​o​u​r​t​-​t​r​e​a​d​s​-​c​a​r​e​f​u​l​l​y​-​g​o​n​zalez
https://​www​.cato​.org/​b​l​o​g​/​j​u​d​g​e​-​b​l​o​c​k​s​-​j​a​w​b​oning
https://​www​.cato​.org/​c​o​m​m​e​n​t​a​r​y​/​c​a​n​-​m​o​n​t​a​n​a​-​s​t​o​p​-​c​l​o​c​k​-​t​i​k​t​ok-ban
https://​www​.cato​.org/​c​o​m​m​e​n​t​a​r​y​/​w​h​a​t​-​r​e​c​e​n​t​-​s​u​p​r​e​m​e​-​c​o​u​r​t​-​r​u​l​i​n​g​s​-​m​e​a​n​-​f​u​t​u​r​e​-​o​n​l​i​n​e​-​s​peech
https://​www​.cato​.org/​c​o​m​m​e​n​t​a​r​y​/​a​n​o​t​h​e​r​-​c​o​u​r​t​-​c​a​l​l​s​-​o​u​t​-​g​o​v​e​r​n​m​e​n​t​-​p​r​e​s​s​u​r​e​-​b​i​g​-​t​e​c​h​-​i​t​s​-​n​o​t​-​e​nough
https://​www​.cato​.org/​c​o​m​m​e​n​t​a​r​y​/​c​o​u​r​t​s​-​r​e​v​e​r​s​a​l​-​m​o​n​t​a​n​a​s​-​t​i​k​t​o​k​-​b​a​n​-​s​h​o​u​l​d​-​b​e​-​w​a​rning

2. Artificial Intelligence is becoming increasingly the focus of tech policy.

Last year was marked by a growing interest from both the general public and policymakers regarding artificial intelligence. While AI has been a part of our lives for far longer than the average consumer may realize, the launch of products like ChatGPT and AI add‐​ons to popular services like Microsoft’s Bing and Google search made AI seem more present than ever before.

This new opportunity also saw many policymakers call for regulation around the world, and there were many pessimistic outlooks on the new technology. As we discussed in our writings throughout 2023, however, the tradeoffs of a heavy‐​handed regulatory approach could have negative consequences for the plethora of beneficial applications, and the light‐​touch regulatory approach the US has traditionally taken should be adaptable to this new, disruptive technology.

The year 2023 was just the start of such debates. AI is likely to feature heavily in the conversations around tech policy in 2024, both on its own as well as in conversations around ongoing topics such as competition, privacy, and speech.

Selected articles:

https://​www​.cato​.org/​b​l​o​g​/​c​o​n​s​e​q​u​e​n​c​e​s​-​r​e​g​u​l​a​t​i​o​n​-​h​o​w​-​g​d​p​r​-​p​r​e​v​e​n​t​i​ng-ai
https://​www​.cato​.org/​c​o​m​m​e​n​t​a​r​y​/​r​o​b​o​t​s​-​a​r​e​n​t​-​c​o​m​i​n​g​-​m​o​v​i​e​-​s​t​a​rs-yet
https://​www​.cato​.org/​b​l​o​g​/​w​h​a​t​-​m​i​g​h​t​-​g​o​o​d​-​a​i​-​p​o​l​i​c​y​-​l​o​o​k​-​f​o​u​r​-​p​r​i​n​c​i​p​l​e​s​-​l​i​g​h​t​-​t​o​u​c​h​-​a​p​p​r​o​a​c​h​-​a​r​t​i​f​i​c​i​a​l​-​i​n​t​e​l​l​i​gence
https://​www​.cato​.org/​t​e​s​t​i​m​o​n​y​/​n​e​e​d​-​t​r​a​n​s​p​a​r​e​n​c​y​-​a​r​t​i​f​i​c​i​a​l​-​i​n​t​e​l​l​igence
https://​www​.cato​.org/​t​e​s​t​i​m​o​n​y​/​a​i​-​e​l​e​c​t​i​o​n​s​-​d​e​m​ocracy
https://​www​.cato​.org/​m​u​l​t​i​m​e​d​i​a​/​c​a​t​o​-​d​a​i​l​y​-​p​o​d​c​a​s​t​/​b​i​d​e​n​s​-​b​i​g​-​e​a​r​l​y​-​m​o​v​e​-​r​e​g​u​l​a​t​e​-​a​r​t​i​f​i​c​i​a​l​-​i​n​t​e​l​l​i​gence

3. Courts are also rejecting attempts to shift the focus of antitrust away from the consumer welfare standard and recognize the continued competitive and dynamic nature of the tech market.

The year 2023 saw many actions filed against some of America’s leading technology companies alleging violations of competition laws. Many of these cases were based on presumptive theories of harm or other policy goals from agencies rather than the more objective basis of the consumer welfare standard. However, courts and judges repeatedly rejected these theories. Instead, innovation—such as AI and new social media platforms—have yielded competition in ways that we couldn’t predict even a year or two ago.

Selected articles on antitrust in 2023 include:

https://​www​.cato​.org/​b​l​o​g​/​g​a​m​e​-​o​v​e​r​-​o​r​-​g​a​m​e​-​r​e​g​u​l​a​t​o​r​y​-​s​c​r​u​t​i​n​y​-​m​i​c​r​o​s​o​f​t​s​-​a​c​t​i​v​i​s​i​o​n​-​a​c​q​u​i​s​i​t​i​o​n​-​f​u​t​u​r​e​-​g​aming
https://​www​.cato​.org/​b​l​o​g​/​a​r​e​-​l​a​t​e​s​t​-​f​t​c​-​c​a​s​e​s​-​a​g​a​i​n​s​t​-​t​e​c​h​-​g​o​o​d​-​c​o​n​s​u​mers-O
https://​www​.cato​.org/​b​l​o​g​/​w​h​a​t​-​t​h​r​e​a​d​s​-​t​e​l​l​s​-​u​s​-​a​b​o​u​t​-​s​o​c​i​a​l​-​m​e​d​i​a​-​c​o​m​p​e​tition
https://​www​.cato​.org/​b​l​o​g​/​c​h​a​n​g​i​n​g​-​r​u​l​e​s​-​f​a​c​e​-​i​n​c​r​e​a​s​i​n​g​-​l​o​s​s​e​s​-​i​n​i​t​i​a​l​-​t​h​o​u​g​h​t​s​-​n​e​w​-​p​r​o​p​o​s​e​d​-​m​e​r​g​e​r​-​g​u​i​d​e​lines
https://​www​.cato​.org/​c​o​m​m​e​n​t​a​r​y​/​m​i​c​r​o​s​o​f​t​-​v​i​c​t​o​r​y​-​c​o​u​r​t​s​-​g​o​-​e​p​i​c​-​k​i​l​l​s​t​r​e​a​k​-​a​g​a​i​n​s​t​-​f​t​c​-​a​n​t​i​t​r​u​s​t​-​a​genda

Three things to watch (or continue to watch) in 2024

The impact of European and UK tech policy on Americans and American companies.

Increasingly, some of America’s leading technology companies find themselves the target of foreign regulations that appear to be designed to directly apply to these US companies in the absence of those countries having their own leading technology companies. With the Digital Services Act, for example, a growing body of rules and regulations could chill free expression well beyond Europe’s borders, and provide cover for more authoritarian regimes looking to clamp down on free expression. It may feel a bit like alphabet soup sometimes, but this growing “Brussels effect” is likely to increasingly impact not only American companies, but American consumers, as well as global innovation and free speech.

This year will likely see further discussions of tech policy abroad that could impact not only American companies but all internet users’ experience. The AI Act will certainly lead to further discussion of various approaches to AI regulation. The post‐​Brexit UK is also increasingly acting on technology policy issues from the privacy and speech concerns in the Online Safety Bill to a “big is bad” presumption around competition policy proposals, including the DMCC.

For more information on where we’re starting this year, here are some of our relevant articles from 2023:

https://www.cato.org/blog/three-reasons-americans-should-be-concerned-about-united-kingdoms-online-safety-bill‑0
https://www.cato.org/blog/brussels-effect-potential-impact-speech-regulation-around-world-americans-online‑0
https://​www​.cato​.org/​b​r​i​e​f​i​n​g​-​p​a​p​e​r​/​w​h​a​t​-​u​n​i​t​e​d​-​s​t​a​t​e​s​-​c​a​n​-​l​e​a​r​n​-​u​k​s​-​s​t​r​u​g​g​l​e​-​d​e​r​e​g​u​l​a​t​e​-​p​o​s​t​-​b​rexit
https://​www​.cato​.org/​b​l​o​g​/​f​r​e​e​d​o​m​-​e​x​p​r​e​s​s​i​o​n​-​d​a​n​g​e​r​o​u​s​-​n​o​-​s​t​u​d​y​-​f​i​n​d​s​-​m​o​r​e​-​e​x​p​r​e​s​s​i​o​n​-​h​e​l​p​s​-​u​s​-​h​a​n​d​l​e​-​c​o​n​flict
https://​www​.cato​.org/​b​l​o​g​/​m​e​t​a​-​s​e​t​-​i​t​s​-​o​w​n​-​o​v​e​r​s​i​g​h​t​-​b​o​a​r​d​-​t​h​r​e​e​-​y​e​a​r​s​-​l​a​t​e​r​-​h​o​w​-​e​f​f​e​c​t​i​v​e​-​h​a​s​-​i​t​-been

2. The risk of a state patchwork in tech policy.

States have been considered the laboratories of democracy and federalism often provides more options for policy; however, in tech policy, a growing state patchwork risks splintering the internet and particularly raising potential barriers for smaller innovators and entrepreneurs who may not be able to afford to comply. A concerning state patchwork is already emerging in the data privacy space with many laws in effect or soon going into effect, but states are also acting on issues such as content moderation, artificial intelligence, and online safety that could have impacts on speech and privacy well beyond their borders.

Here’s some of what we saw in state tech policy in 2023:

https://​www​.cato​.org/​b​l​o​g​/​d​a​t​a​-​p​r​i​v​a​c​y​-​d​a​y​-​2​0​2​3​-​w​h​e​r​e​-​d​a​t​a​-​p​r​i​v​a​c​y​-​p​o​l​i​c​y​-​s​t​a​n​d​s​-​s​t​a​r​t​-2023
https://www.cato.org/blog/patchwork-strikes-back-state-data-privacy-laws-after-2022–2023-legislative-session‑0
https://www.cato.org/blog/state-kids-online-safety-legislation-end-2023–2024-state-legislature-session‑0
https://www.cato.org/blog/what-else-was-trending-state-technology-innovation-proposals-2022–2023

3. What happens at the Supreme Court and what it means for the future of tech policy.

The Supreme Court has a higher‐​than‐​average number of cases in 2024 relating to technology policy and particularly the issue of online speech. The most notable are the cases brought by NetChoice and CCIA against the Florida and Texas content moderation laws. The court will also consider cases involving “censorship by proxy,” or the pressure government actors have asserted on private companies, as well as a case further exploring the nature of public officials’ social media profiles as spaces for constituent interactions and the issue of blocking constituents. These cases are likely to raise attention about Section 230 again but are all better understood as issues of the First Amendment. These decisions are likely to have significant consequences for users, platforms, and our understanding of free speech online.

But other cases may also produce a significant impact on the future of technology policy. Particularly those considering agency deference. While the US has so far avoided calls for a specific technology regulator in its bureaucracy, agencies such as the Federal Trade Commission (FTC) have often sought to regulate emerging technologies.

In many cases these actions have extended from an agency’s own interpretation of its authority and not from a direct delegation allowing them to have authority over a technology or issue from Congress. As such, questions of administrative law before the court this term are likely to impact many of the agency actions targeting tech companies or seeking to regulate technology more generally.

Some of our writings on these upcoming cases can be found here and we also recommend the filings by Cato’s Center for Constitutional Studies:

https://​www​.cato​.org/​c​o​m​m​e​n​t​a​r​y​/​w​h​a​t​-​r​e​c​e​n​t​-​s​u​p​r​e​m​e​-​c​o​u​r​t​-​r​u​l​i​n​g​s​-​m​e​a​n​-​f​u​t​u​r​e​-​o​n​l​i​n​e​-​s​peech
https://​www​.cato​.org/​c​o​m​m​e​n​t​a​r​y​/​a​n​o​t​h​e​r​-​c​o​u​r​t​-​c​a​l​l​s​-​o​u​t​-​g​o​v​e​r​n​m​e​n​t​-​p​r​e​s​s​u​r​e​-​b​i​g​-​t​e​c​h​-​i​t​s​-​n​o​t​-​e​nough

Neal McCluskey

If it felt like people in 2023 were more at each other’s throats over what public schools stock on bookshelves and teach, and how they conduct themselves, than anytime you can remember, it’s probably because they were. According to Cato’s Public Schooling Battle Map, 2023 was a record year for fighting with 465 conflicts, edging out 2022 with 463.

What were the biggest battlegrounds?

One hundred fourteen fights were about curricula, such as whether schools could use the conservative content of PragerU, or the disputed Advanced Placement African American Studies curriculum.

One hundred and eight fights were about gender equity, including conflicts about bathroom and locker room access for transgender students, and rules about which pronouns and names students and school officials use.

Coming in third, ninety‐​nine were disputes about reading material, in particular challenges to books such as Gender Queer and The Hate U Give, which some view as affirming marginalized groups, but others believe are immoral, politicized, or inappropriate for children.

You should take our year‐​to‐​year comparisons with a bit of salt. We have changed how we find battles over time, and no doubt that has made annual comparisons less than precise. We are also likely to find additional battles for 2023, but also possibly other years, going forward. Still, there is little question that the last few years have been particularly contentious for reasons including COVID-19 frustrations, recent racial reckonings, and more.

That said, it is also true that values and identity‐​based battles are not new to public schooling. By forcing people with diverse values and desires to fund a single system of government schools, public schooling always has fostered divisive conflict, and always will.

Nicholas Thielman

Though often ignored, the various loan and credit guarantees provided by the federal government via a series of off‐​budget enterprises are an insidious threat to American taxpayers. The oldest of these is the Federal Home Loan Bank (FHLB) system, a government‐​sponsored enterprise (GSE) created to support the housing market.

Since its foundation, the FHLBs have come to support more than just housing. The system’s mission creep, combined with the various privileges it enjoys from the federal government, has allowed it to cater to special interests and to inject moral hazard into the broader financial system. The system puts taxpayers at risk and should, at the least, be privatized if not eliminated.

The FHLB system, for those unfamiliar, was founded before the New Deal. It was the brainchild of Herbert Hoover, who hoped to promote homeownership while supporting the Savings and Loan industry through the turmoil of the Great Depression. Established in 1932, the system was modeled after the Federal Reserve, with twelve regional banks cooperatively owned by the various financial institutions within their respective districts. Its membership was initially restricted to savings and loan associations (thrifts), financial institutions that specialized in mortgage lending.

At first, the FHLB system only provided low‐​cost loans to thrifts to aid their mortgage origination. Over time, though, the system expanded to lend to commercial banks to support all kinds of lending. Recently it provided loans to Silicon Valley, Signature, and First Republic Banks, only one of which was connected to mortgage lending and even then only to a wealthy clientele.

Much like its younger siblings, Fannie and Freddie, the FHLBs enjoy a $4 billion credit line with the Treasury Department, and their debt is eligible for purchase by the Federal Reserve. Additionally, the system’s earnings and dividends are exempt from federal, state, and local taxes. Unique to the FHLBs is its “super lien” status which places it ahead of other creditors, including the FDIC, for getting paid back should a bank they lend to collapse.

These privileges allow the FHLBs to borrow from investors at near‐​Treasury rates, the proceeds of which are then lent to member institutions at below‐​market rates against eligible mortgage assets. Of course, lending rates charged by the FHLBs are still above the rates at which they borrowed, allowing them to earn substantial profits from these operations. These privileges mean that many market participants expect, correctly or not, that the federal government would stand behind the system’s debt.

These privileges also provide a sizable subsidy to member institutions, estimated at being between $6–9.3 billion per year. Such a lucrative subsidy has attracted the attention of a variety of industry and interest groups, including large financial institutions and community development and housing advocacy groups, all eager for a slice of government largesse.

Thus, through a combination of lobbying and advocacy by the system’s leadership (including at one point its regulator) the system has been allowed to expand well beyond the boundaries of its original purpose.

Starting in 1989 a series of system expansions was log‐​rolled through Congress with bipartisan support, resulting in commercial banks, federal and non‐​federal credit unions, and community development financial institutions all gaining eligibility for system membership. In exchange for allowing these players access to the system’s facilities, the FHLBs were also tasked with providing support to affordable housing and community development programs.

Thus, each district FHLB is required to contribute 10 percent of its profits to fund the construction of affordable housing projects. The system also provides incentives in the form of discounted loans for member institutions to invest in housing or community development projects in low‐​income areas. Lastly, many regional FHLBs operate mortgage purchase programs for which a target percentage must have been originated for low‐ to medium‐​income households. Even more recently, the FHFA has announced plans to include climate resiliency requirements into the system’s lending programs.

The fact that all the FHLBs’ operations are off the federal government’s balance sheet means that politicians have less accountability than that which comes with regular congressional appropriations.

The primary beneficiaries of the system’s mission creep have not been homeowners, but rather a handful of large banks who have routinely received the majority of the loans made by the banks. At the end of 2019, for instance, the ten largest members of the system accounted for 30 percent of its lending, with Wells Fargo and JPMorgan Chase accounting for most of this increase. These loans supported a variety of lending activities, not just home mortgages. Low‐​income homebuyers have also benefitted from direct subsidies as the system expanded. But there has been no sustained increase in the rate of homeownership and housing itself has not become more affordable.

The FHLB system also creates a great deal of moral hazard. For example, the system’s structure creates incentives for risk‐​taking while simultaneously reducing the incentives of the banks’ bondholders and shareholders to monitor and constrain risky behavior. Two prime examples are the implicit guarantee of the system’s debt by the federal government and its “super lien” status. Bondholders understand these privileges as a signal that they are highly likely to be made whole if ever in danger of financial failure.

On the flip side, shareholders and FHLB executives stand to earn substantial profits from bank risk‐​taking. In 2022 the CEO of the San Francisco FHLB earned $2.4 million, a substantial portion of which was bonuses tied to growth in the bank’s lending. The effect of these perverse incentives has been that the FHLBs have made loans to failing institutions and have failed to properly manage their own risk‐​taking.

Taxpayers are the ultimate bearers of the system’s risk‐​taking, both through the implicit guarantee of FHLB debt, and the regular bank resolution process. To reduce the risks both to taxpayers and the broader financial system, the FHLBs should be privatized, if not eliminated.

To privatize the FHLBs, Congress should revoke their charters, thereby subjecting them to greater market discipline and greater incentives to constrain risk‐​taking. By removing these privileges, the distortions created by this New Deal relic can be eliminated.

Marc Joffe

With bankruptcy largely (but not totally) in the rearview mirror, Puerto Rico’s leaders are turning their focus once again to the island’s status. Many favor statehood, but that will require building support in Washington, DC. To increase the chance of Congress, the president, and states agreeing to admit Puerto Rico, the governor and legislature should consider a variety of pro‐​market fiscal reforms.

Mainland‐​based fiscal conservatives may be concerned about admitting a new state that does not have good credit. The last time one of the fifty states defaulted on a bond was ninety years ago. Indeed, there is no state bankruptcy process, and a lot of domestic opposition to creating one, so a future State of Puerto Rico should be fully out of bankruptcy court and able to avoid future bankruptcies on its own.

Puerto Rico required a bankruptcy process because it accumulated too much debt. By contrast, the fifty states have relatively little debt relative to their GDP. States generally do not borrow to cover operational costs, because 49 out of 50 of them have constitutional balanced budget requirements.

The 1952 Puerto Rico territorial constitution was also supposed to have a balanced budget requirement, but it was effectively voided due to a translation error. While the English version of the constitution limited Commonwealth expenditures to “total revenue,” this was translated as “recorsos totales” rather than “ingresos totales”. That led to a 1974 Attorney General opinion authorizing Puerto Rico to “balance” its operational budget with bond proceeds.

In the aftermath of the bankruptcy, Puerto Rico should amend its constitution to make clear that expenditures cannot exceed tax revenues, service charges, and grant funds. No other category of receipt should be considered when determining whether the Commonwealth’s budget is balanced.

The legislature could also consider other constitutional reforms to improve Puerto Rico’s fiscal sustainability. For example, South Carolina’s constitution requires a seven percent general fund reserve, while Colorado limits spending growth to the rate of population increase and price inflation combined.

Constitutional reform will increase the possibility of Puerto Rico being able to return to the municipal bond market, as potential investors see fiscal responsibility measures baked into the Commonwealth’s foundational document. Puerto Rico needs to become creditworthy because that is a requirement for winding down the Oversight Board and returning to normal governance.

Another financial practice watched by the bond market is the timeliness with which issuers produce their audited financial statements. On this score, Puerto Rico needs to improve. While most states produced their 2021 audits within 250 days of fiscal year‐​end, Puerto Rico took 712 days.

The 2022 audit may appear in January, about 570 days after the fiscal year ended. This is an improvement but still worse than the vast majority of states, and longer than normally required by the federal government (nine months) and municipal bond market practice (six months). The Treasury Department should continue efforts to accelerate Commonwealth financial reporting while ensuring that auditors have the necessary information to render a clean opinion.

Further, Puerto Rico needs to fully conclude the current bankruptcy process by reaching an agreement with a larger group of PREPA (Puerto Rico Electric Power Authority) creditors. A recent plan of adjustment offered an average recovery of 25 cents on the dollar, with some creditors potentially receiving as little as 12.5 cents. While PROMESA (Puerto Rico Oversight, Management, and Economic Stability Act) supporters, like this author, recognized that lenders would have to take a haircut, the current plan amounts to a scalping.

Since institutional investors in the municipal bond market will be among those determining whether Puerto Rico is once again creditworthy and thus able to emerge from oversight, it is not in the Commonwealth’s long‐​term interest to alienate them. Instead, the legislature should find more money to settle with PREPA (Puerto Rico Electric Power Authority) creditors by cutting other spending or using reserves.

Finally, the Commonwealth should actively monitor the credit of municipios and state‐​owned enterprises. Defaults and bankruptcies among these entities will cast a pall on public credit across the island and should be avoided through early identification and intervention. North Carolina, Ohio, New York, and Michigan offer various models of local government oversight. The monitoring effort could be reduced by streamlining the Commonwealth’s public sector through consolidation of smaller municipios and privatizing more state‐​owned enterprises.

Since passing PROMESA, the US federal government has provided extensive hurricane relief and pandemic‐​related funding. It is now up to Puerto Rico to improve its financial practices to show that it can be a solvent member of the union, able to shoulder the responsibilities normally expected of US states.

This article originally appeared in Spanish in the Puerto Rico newspaper El Nuevo Día on December 29, 2023.