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Rebel Farmers and Government Cartels: How the New Deal Cartelized U.S. Agriculture

Trevor Burrus

Marvin Horne doesn’t look like a man in open rebellion against the United States government, but the 70-year-old raisin farmer and his wife Laura have had enough. If they get their way, they’re not going to let the U.S. Raisin Administrative Committee take their raisins anymore.

Yes, there’s a Raisin Administrative Committee.

This week, the Supreme Court heard arguments in Horne’s case challenging the Raisin Administrative Committee. It’s the New-Deal case that took 80 years to bring.

Like an agency pulled from the pages of an Ayn Rand novel, the Raisin Administrative Committee (RAC) oversees many parts of U.S. raisin production. The 47-member committee consists of different representatives from the raisin industry, including “handlers,” those who pack the raisins and prepare them for sale, and “growers,” those who grow and dry grapes. They meet in an office in Fresno and issue “marketing orders,” which decide, among other things, how many raisins should be diverted into the National Raisin Reserve each year. By taking raisins off the open market, the RAC maintains an artificially high price for raisins and keeps many, but obviously not all, raisin farmers happy. Think of it as a raisin cartel, a raisin OPEC.

Under federal law—the Agricultural Marketing Agreement Act of 1937 (AMAA), amended in 1949 to include raisins—raisin handlers are obligated to divert whatever percentage of raisins the RAC demands, and then take whatever compensation the committee offers, which is often nothing.

Marvin Horne is one of the unhappy raisin farmers who feels that the RAC has outlived its usefulness, if it ever had any to begin with. More than ten years ago, Horne refused to hand over his raisins to the RAC. In response, the RAC fought back, including hiring private investigators to stake out the Hornes’ farm. Now Marvin Horne stands on the precipice of dealing the RAC a near-fatal blow—a Supreme Court opinion ruling that, under the Fifth Amendment’s Takings Clause, the RAC has to pay just compensation whenever it takes a farmer’s raisins.

The Hornes, who currently owe the government about 1.2 million pounds of raisins and approximately $700,000 in fines, have few options left except for a Supreme Court victory. Their fight against the RAC, however, is part of a proud tradition of individuals fighting against government-created cartels, especially in agriculture. Those cartels collude against consumers in ways that would be blatantly illegal in industries that don’t enjoy government sanction. Occasionally, someone will fight back against the cartel, and the industry will circle the wagons to protect its unique, anti-competitive privilege.

The New Deal

Over 200 years ago, famed economics sage Adam Smith understood the dangers of allowing competitors to collude. In The Wealth of Nations, Smith wrote, “People of the same trade seldom meet together, even for merriment and diversion, but the conversation ends in a conspiracy against the public, or in some contrivance to raise prices.” Most importantly, wrote Smith, the law should not encourage such collusive, anti-competitive behavior: “But though the law cannot hinder people of the same trade from sometimes assembling together, it ought to do nothing to facilitate such assemblies; much less to render them necessary.”

During the New Deal, Smith’s wise words were wholly forgotten. From the moment President Franklin D. Roosevelt arrived in office, he had cartels on his mind. Competition, he thought, was too fierce, and it was causing prices and wages to fall too low. While competition could be good, “destructive competition” was bad. The answer, thought FDR and his famed brain trust, was to use the law to promote cooperation between members of the same industry in order to ensure that competition was “fair.”

The result was the National Industrial Recovery Act (NIRA), signed by FDR on June 16, 1933. In essence, the NIRA tried to cartelize the entire economy. Businesses were encouraged to meet together in “a conspiracy against the public,” in Adam Smith’s words. But their agreements, rather than being mere handshake deals carried out in smoke-filled backrooms, were to have the force of law. An industry’s agreed-upon “code of fair competition” would be signed by the president himself, and violators could be fined or even jailed for violating the code. Just a few decades previously the federal government had passed anti-monopoly “trust busting” laws like the Sherman Anti-Trust Act in order to combat anti-competitive collusion. During the New Deal, however, the government entirely changed course. What was once an unmitigated evil was seen as a necessary step on the road to recovery.

Without the force of government backing up the rules, cartels are notoriously difficult to maintain. Voluntary collusion always presents opportunities for someone to shirk the agreement in order to make extra cash while his competitors hold their prices steady. In the worst situations, shirkers are countered with mob-like tactics, from slashing tires, to breaking kneecaps, to burning down stores. When the government gets involved in enforcing cartels they essentially take-over the job of busting kneecaps. Cronies with lead pipes are replaced by bureaucrats and police officers.

But often their tactics are similar. After the “code of fair competition” for Ohio’s tire companies was passed under the NIRA, smaller tire companies found that the government’s enforcers were hardly better than the mob’s. F.H. Mills, president of Master Tire and Service, Inc. out of Youngstown, wrote to Senator William Borah, an opponent of the NIRA, of his plight. He complained in particular about a Mr. Frank Blodgett, an administrator from the National Recovery Administration. Mills “explained my conditions” to Mr. Blodgett, “and showed where it would be impossible to stay in business and comply with his request.” In response, Mr. Blodgett “demanded that he be given the right to go over my books and run my business according to his ideas.” When Mills refused, the “furious Mr. Blodgett then stated that he would put his heel upon the neck of our little company and twist it with all the force at his command.”

The little companies had it the worst. Businesses are hardly uniform, and each company faces different pressures depending on its brand name, geographic location, and other variables. The “codes of fair competition” under the NIRA did not countenance such variation. The Ohio tire code, for example, was largely written by Goodyear, Firestone, and Goodrich, and it thus primarily benefited those large companies. Before the NIRA, small manufacturers like Master Tire and Service could only survive by undercutting the nationally recognized brands in price. After the NIRA, they were compelled to raise their prices to the large manufacturers’ level. Large companies had advantages in economies of scale and service, and the NIRA stripped small companies of their only competitive advantage. And of course Goodyear, Firestone, and Goodrich wanted it that way.

Mongrel-agencies like the RAC are cave dwellers, they hate to be brought into the light.”

Bringing Down the NIRA

All of this is important backdrop to the case that brought down the NIRA, which, like the Hornes, featured businessmen who were fed-up with government-enforced cartels.

The four Schechter brothers ran two fairly large butcher shops in Brooklyn. As Jewish immigrants, they ran a kosher shop, mostly selling poultry to retailers. They slaughtered their chickens ritualistically, in compliance with Jewish dietary law.

Their specialized company and unique clientele were the type of aberrant business that the NYC chicken cartel was ill equipped to deal with. Under the “Code of Fair Competition for the Live Poultry Industry” for NYC, the Schechter brothers’ business model was basically illegal. In order to prevent “destructive price cutting” the code prohibited “killing on the basis of grade.” In other words, customers did not have the right to “make any selection of particular birds.” As silly as it sounds, the code required the butcher to reach into the chicken coop and grab the first chicken that touched his hand, any specific selection was prohibited. If a customer wanted to buy a half coop, the butcher could only break the coop in half. Because kosher rules require that unhealthy birds be discarded, the code essentially made kosher butchery illegal.

Although the brothers tried to follow the rules, it proved nearly impossible to run their business. And neither the code enforcers nor the U.S. attorneys had much sympathy for the brothers’ situation. The government charged them with selling “unfit chickens” to two men, and they went to trial. The trial was a confusing ordeal of strange questions posed to the Schechter brothers, who spoke halting English—at one point, brother Martin was ominously asked “There is a lot of competition between you and your competition, is there not?”—and attacks on the brothers’ education levels. In the end, the judge fined them $7,425—over $100,000 today—and sentenced all four brothers to between one and three months in jail.

The chicken cartel’s mob-like enforcers seemed to have done their job.

But the Schechters refused to back down, and they took their case to the Supreme Court. They argued that Congress’s power regulate interstate commerce did not reach the local NYC poultry industry. They also argued that the NIRA delegated too much legislative power to the executive branch.

During oral arguments at the Supreme Court, the justices struggled to understand that bizarre provisions of the code of fair competition. Just explaining the code elicited laughter from the courtroom audience and jokes from the justices. While the Schechters’ attorney, Joseph Heller, explained the prohibition on customer selection of chickens, Justice Harlan Fiske Stone asked “Do you mean that there can be a selection if he buys one-half the coop?” “No. You just break the box into two halves,” Mr. Heller responded. The laughter in the courtroom was amplified by Justice George Sutherland’s jape “Well, suppose, however, that all the chickens have gone over to one end of the coop?”

The Schechters won, and with their victory came the end of the National Industrial Recovery Act. It was not the end, however, of Roosevelt’s scheme to cartelize the U.S. economy.

Agricultural Cartelization

The Supreme Court may have temporarily halted Roosevelt’s plan for large-scale cartelization in business and industry, but he next set his sights on agriculture. In many ways, and certainly in the case of the Hornes, New Deal agricultural reforms are still with us today. The perseverance of bizarre things like the RAC are a testament to the permanence of even the silliest government programs.

The Hornes work under the Agricultural Marketing Agreement Act of 1937. Raisins weren’t included in the act, however, until 1949, when there was a pronounced post-war drop in demand for raisins. The government had been buying tons of raisins to send to the troops, and, after the war, raisin farmers felt somehow cheated by the return to normal levels of raisin demand. This is a recurring story in U.S. agricultural policy—farmers feeling that high, stable prices achieved during some time past were actually the “just” prices and that government should work to guarantee that price. In the New Deal, for example, the “fair” price for many agricultural commodities was determined to be the one achieved during 1910-14, a time of prosperity for farmers.

The dairy industry, in particular, was transformed by New Deal agricultural policies. As a result, the industry exists within a convoluted system of managed competition, a tangled web of subsidies and regulations where playing politics can be more important than being a good businessman who serves his customers well.

In the early 2000’s, another “agricultural outlaw” like Marvin Horne found himself fighting the dairy industry for the right to run his business as he saw fit. Hein Hettinga was a prosperous Western dairy farmer who decided to restructure his business around New Deal-era constraints. Like raisins, dairy farmers can be either “producers,” those who gather raw milk, and “handlers,” those who bottle and package milk products. Under the AMAA, farmers who only bottle milk from their own cows, so-called “producer-handlers,” can avoid paying into some of the government-imposed programs. Hettinga did just this, and he soon was undercutting the competition by up to 20 cents per gallon.

Drawing on the kind of spunky, can-do American spirit that made this country great, the dairy industry went whining to Congress. Hettinga should not be allowed to exploit that “loophole” in the law, they complained. “Loophole” is of course just cartel-speak for what would be normal business practices in a less-regulated industry.

The dairy industry has powerful lobbyists and the ears of many members of Congress. One was Harry Reid, the then minority whip, who had once snuck an amendment into a spending bill that exempted Las Vegas-area dairy farmers from some federal pricing rules. Despite the amendment, Reid’s precious Las Vegas dairy industry was still facing competition from a large milk plant that was under construction outside of town.

The horse trading went into full gear, and the patchwork of federal rules for Arizona (where Hettinga’s main plant was located), California, and Nevada presented many trading opportunities. Reid wanted exemptions for all Nevada producers, Arizona producers wanted to be protected from the threat of lower-cost Nevada milk, and California producers wanted Hettinga’s business throttled.

Lobbying money and campaign cash flowed. In the end, Hettinga was outmatched. Without even a committee hearing, the new milk bill was brought up by Reid to a nearly empty Senate chamber and passed by “unanimous consent,” which is Senate-speak for rubber-stamping backroom deals. The bill closed the Hettinga “loophole” but, ironically, or perhaps expectedly, opened up the exact same loophole for Reid’s Nevada producers.

Hein Hettinga tried to bring a legal case, but he was quickly shot down by the D.C. Circuit Court of Appeals. The courts of appeals are bound by Supreme Court precedent, which wasn’t on Hettinga’s side. Judges Janice Rogers Brown and David Sentelle, however, added a stem-winder opinion explaining how silly they thought the law was. “Given the long-standing precedents in this area no other result is possible,” they wrote, but there was a larger lesson to be learned:

The Hettingas’ collision with the MREA [Milk Regulatory Equity Act]—the latest iteration of the venerable AMAA—reveals an ugly truth: America’s cowboy capitalism was long ago disarmed by a democratic process increasingly dominated by powerful groups with economic interests antithetical to competitors and consumers. And the courts, from which the victims of burdensome regulation sought protection, have been negotiating the terms of surrender since the 1930s.


And that’s how America produces milk, grows its raisins, and, once, slaughtered its chickens. Actually, it is how nearly all American agriculture is done. Silly policies that originated in failed New Deal ideas—policies that the justices themselves couldn’t help making fun of—became the law of the land. Now, the RAC exists because it exists, and, like all artificial government agencies, its first instinct is survival.

Of the two amicus briefs filed in support of the government, one was tellingly written by Sun-Maid, the largest raisin marketer in the world. The brief is a shameless defense of the RAC, of which Sun-Maid producers or handlers hold 13 of the 47 seats. The RAC, the brief explains, allows “industry participants to collectively decide whether to regulate their respective industries.” It “benefits the entire raisin industry, including petitioners, by avoiding price volatility.” In other words, let us regulate ourselves because we benefit from it. Hettinga’s big dairy competitors or the Schechters’ big poultry opponents couldn’t have said it better.

Occasionally people like the Hornes, the Schechters, or the Hettingas help expose agricultural cartels and crony capitalists for what they are—government agencies that help big businesses and hurt consumers. This happens rarely, however, because it is usually easier to work with the government than to work against it, and cartelization is usually agreeable to those in the cartel.

Mongrel-agencies like the RAC are cave dwellers, they hate to be brought into the light. They prefer to hide behind a prolix U.S. agricultural code that is essentially printed chloroform, to borrow a phrase from Mark Twain. Like bacteria specially adapted to live in harsh environments, the code is their sustenance. Only a few industry specialists really understand how the code works, and they want to keep it that way.

Trevor Burrus is a Research Fellow in the Cato Institute’s Center for Constitutional Studies.

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Raisin a Laugh at the Supreme Court

Trevor Burrus

It’s not a good sign when Supreme Court justices laugh at the law the government is trying to defend.

When it comes to defending the Raisin Administrative Committee, however, it’s hard not to laugh.

On April 22, the Supreme Court heard a challenge to the Raisin Administrative Committee’s despotic power over U.S. raisin farmers. What is the Raisin Administrative Committee (RAC)? Think of it as Raisin OPEC, a cartel maintained by the Department of Agriculture that has the power to take raisins from farmers and offer nothing in return.

Like OPEC, it does this to keep the price of raisins artificially high. Unlike OPEC, however, the RAC has an enforcement division, the U.S. government, and if you cross the RAC, they can come after you in court.

When it comes to defending the Raisin Administrative Committee, it’s hard not to laugh.”

That’s what happened to Marvin Horne, who, a little over 10 years ago, decided he’d had enough of the RAC’s shenanigans and refused to turn over his crop. In response, the RAC came after him, going so far as to hire private investigators to stake out the Horne’s farm.

When you cross the RAC, you better be prepared to pay the price. For Marvin Horne, the price is $700,000—a steep fine for refusing to give the government what belongs to him.

Collusion like this usually takes place in a smoke-filled backroom, away from the prying eyes of the SEC or the Federal Trade Commission. If any other business colluded like the RAC, they would be prosecuted for blatant violations of the Sherman Anti-Trust Act. Yet, on Wednesday, the government stood before the Supreme Court and defended the RAC because it works for the benefit of the farmers.

That is, of course, the point of a cartel—to benefit the colluders and hurt consumers.

Horne is arguing to the Supreme Court that, under the Fifth Amendment’s Takings Clause, which says private property can’t be taken for public use without just compensation, the RAC owes him something for his raisins. Judging by yesterday’s argument, he will probably win his case.

In addition to asking pointed and probing questions of the unfortunate government attorney charged with defending the case, the justices couldn’t resist making fun of the program entirely.

Chief Justice John Roberts joked that the government probably comes and takes the raisins “in the dark of night.” Justice Antonin Scalia joked that, while maybe the government could prohibit dangerous things from entering into commerce, these would have to be some “dangerous raisins.” Justice Elena Kagan simply asked, “We could think that this is a ridiculous program?” after which Justice Scalia said, “It doesn’t help your case that it’s ridiculous, though. You acknowledge that.”

This wasn’t the first time a group of Supreme Court justices laughed at silly government-created cartels. Eighty years ago, a different set of Supreme Court justices were laughing at the live poultry cartel for the city of New York. The poultry cartel was a product of the National Industrial Recovery Act (NIRA), which was the cornerstone of President Franklin Roosevelt’s New Deal.

Roosevelt was obsessed with cartels as the solution to the nation’s economic woes. While the Court struck down the NIRA, cartelization policies continued to be enacted, especially in agriculture.

The RAC began in 1949 as an amendment to a New Deal-era law called theAgricultural Marketing Agreement Act of 1937. The New Deal was the genesis of our modern agricultural policies which, to put it mildly, are insane.

And although no reputable economist believes that U.S. agricultural policy makes any sense whatsoever, we seem to be stuck with organizations like the RAC, as well as hundreds more that few people have heard of—a testament to perseverance of government-granted privileges.

Explaining New Deal policies is a risible endeavor. Contrary to what schoolchildren learn, the New Deal didn’t save the country. Instead it forced the economy into a Keystone-Cops movie of regulatory madness. The Benny Hill theme is the best soundtrack for the New Deal, not “Brother Can You Spare a Dime?

Of course, Roosevelt’s failed and laughable policies had very unfunny repercussions on the poorest Americans. They also have repercussions today, such as the Raisin Administrative Committee.

Organizations like the RAC hide behind a prolix agricultural code that, to borrow a phrase from Mark Twain, is like reading printed chloroform. But those with a stake in the game understand that the code supports them. Like bacteria that feed off of sulphur vents, it is their unique form of sustenance.

They’d prefer to keep their existence a secret, but thankfully cases like Horne’s help drag them into the light.

Trevor Burrus is Research Fellow in Constitutional Studies at the Cato Institute.

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The Economics of Scott Walker’s Immigration Reversal

Alex Nowrasteh

A curious thing happened to Wisconsin Gov. Scott Walker on his way to Republican primary: he confused everybody with a statement on immigration. The essence of Walker’s statement is that he talked to Sen. Jeff Sessions (R-Alabama), the chief opponent of legal immigration, and said that the “next president and the next congress need to make decisions about a legal immigration system that’s based on, first and foremost, on protecting American workers and American wages.” Understandably, people on every side of the immigration issue assumed Walker’s statement indicated opposition to increased immigration.

In 2013 Walker supported legal immigration, stating that “[i]f people want to come here and work hard and benefit, I don’t care whether they come from Mexico or Ireland or Germany or Canada or South Africa or anywhere else.” Now, by adopting some of Sessions’ talking points on immigration, Walker has seemingly moved to the polar opposite of his 2013 position. After all of the abuse heaped on him by liberals and Democrats, for Walker to buckle almost immediately to the Know-Nothing wing of his party is rather startling.

But did Walker actually change his mind? He said he did and gave a reason why: He “talked to Senator Sessions and others out there” on the immigration issue. So he did actually switch to opposing legal immigration.

The Immigration Research Says

Walker should have stuck with the opinion of economists and, increasingly, that of the American people.”

Now that Walker has consulted with the Senate’s most entrenched opponent of immigration, it’s only fair that he should now investigate the vast economic literature that overwhelmingly finds immigration to be beneficial to the economy. Now it’s time to ask some economists and chat with some Gallup pollsters.

Walker’s statement about protecting the economic prospects of Americans shouldn’t translate to opposing immigration. The economic research is fairly one-sided. Immigration of lower-skilled workers has very little effect on American wages. The most negative finding in the peer-reviewed academic literature is from Harvard University economist George Borjas. His 2003 paper finds that the wages of high-school dropouts fell by 8.9 percent, relative to workers in other skill levels, from 1980 to 2000. Overall, he found that the wage of the average American worker declined by 3.2 percent due to immigration at that time. Borjas’ paper is ground-breaking theoretically but it assumes a fixed supply of capital in the economy—a condition that limits its usefulness for policy analysis.

But even holding the supply of capital as fixed, extending Borjas’ time period of analysis to 2010 essentially voids his findings. This recent paper used Borjas’ methods but includes the wage data up through 2010, finding effects so small that they are insignificant. That is a serious rebuttal to Borjas’ findings. Furthermore, Borjas admits that immigration does help Americans more than it harms them, but with some distributional consequences. The results from Borjas’ research are far more positive than his most enthusiastic supporters care to admit.

Economists Gianmarco Ottaviano and Giovanni Peri take up Borjas’ challenge and assume that capital adjusts in response to immigrant inflows. They find that immigrants have a very small effect on the wages of native-born Americans without a high school degree (-0.1 percent to +0.6 percent) and an average positive effect on all native workers of about +0.6 percent.

About that Supposed Negative Wage Effect

The negative wage effects of new immigrants are concentrated on older immigrants who have skills, language abilities, and other characteristics that are substitutable with those of newer immigrants. The negative wage effect for older immigrants was -6.7 percent. Unsurprisingly, new immigrants compete with older immigrants who both share similar skills while native-born Americans benefit from a larger supply of lower-skilled workers.

The editors at National Review cherry-pick statistics from these two very different studies. They are fond of pointing out that new immigrants lower the wages of older immigrants by 6.7 percent but neglect the positive wage impacts on native-born American workers from the very same academic paper. Instead, they get their more pessimistic data from the different Borjas study that holds the supply of capital as constant. Both academic papers need to be considered in the immigration debate, but cherry-picking of this sort obscures the evidence rather than illuminating it.

How can it be that an increase in the supply of workers also increases wages? Research by Giovanni Peri and Chad Sparber sheds light on that. They find that increases in lower-skilled immigration induce lower-skilled natives to specialize in jobs that require communication in English, a skill they have, while the immigrants specialize in jobs that are more manual-labor intensive.

Communication jobs are more highly compensated than manual-labor jobs. This more efficient division of labor by skill, called complementary task specialization by economists, reduces the downward wage pressure because natives react by adapting and specializing in more highly paid occupations, not by dropping out of the job market. This effect decreases wage competition between lower-skilled natives and immigrants by around 75 percent. Related to those findings, Peter Henry found that low-skilled immigrants to an area induced natives to improve their school performance so that they wouldn’t have to compete with lower skilled immigrants. Instead of forcing Americans out of the labor market, immigrants push Americans up the skills ladder.

And the Immigration Surveys Say

Aside from the academic evidence, economists have a more positive view of immigration than the general public. In an older poll, 96 percent of labor economists believe the economic gains from immigration exceed the costs. A more recent poll found that only 17 percent of economists believe that current U.S. immigration levels are too high and 30 percent are neutral on the matter.

Another survey reported by economist Bryan Caplan asked economists whether various factors can explain why the economy is not doing better. A score of 0 means “no reason at all,” 1 means a “minor reason,” and 2 means a “major reason.” Economists on average rated immigration as a 0.20 compared to Americans who rated it as a 1.22. Those who are informed about immigration and who study its economic effects for a living do not think it is a problem.

Of those three groups, polls of the general public reveal the most hostility—but they are not as negative as portrayed. John Hinderaker uncritically pasted a press release or email from Sessions’ staff about public polling on the issue. According to a recent Gallup poll, 60 percent of Americans are dissatisfied with the current immigration system, while 33 percent are satisfied. Of those dissatisfied, 39 percent wanted less immigration and 7 percent wanted more. However, that 39 percent figure is down from 65 percent in 1995—a remarkable decrease in just 20 years.

Rather than the U.S. public opinion swinging against immigration as the number of green cards grows, the opposite is happening. Below is the historical Gallup polling data versus the number of green cards issued.



In a recent Washington Post op-ed, Sessions wrote that the pro-legal immigration “elite consensus is crumbling.” Before writing that op-ed, Sessions should have looked at the numbers. Economists and, more importantly, the American people have a far more positive view of immigration than he does.

Walker bravely stood up to the bad economic ideas Democrats have put forward. But a successful Republican presidential candidate also needs to stand up to the lousy economic ideas put forward by members of his own party. Although Walker’s statements do not necessarily mean that he now opposes legal immigration, it’s more probable than not that he’s shifted toward the anti-immigration caucus in the GOP. Walker should have stuck with the opinion of economists and, increasingly, that of the American people.

Alex Nowrasteh is an immigration policy analyst at the Cato Institute’s Center for Global Liberty and Prosperity.

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Greece: Down and Probably Out

Steve H. Hanke

Led by the charismatic Alexis Tsipras, the Syriza party took office in Athens on January 26th. The most prominent member of the new Prime Minister’s cabinet is Yanis Varoufakis, the Finance Minister. He is an economics professor, with a complete repertoire of anti-capitalist rhetoric. And with government spending amounting to 58.5% of Greek GDP, Varoufakis’ hot anti-austerity harangues have turned the meaning of the word “austerity” on its head. After three months in office, the Syriza coalition has accomplished virtually nothing. There have been no commitments — credible or not — to do anything.

As Greece’s economic drama (read: crisis) moves towards its final stage, people are anxious to see how it will end. “I looked up the answers in the history books,” writes John Dizard in the Financial Times, “it works better than trying to get inside information from the cabinet, since there is no information on the inside.”

It turns out that this is not the first time Greece has been in financial hot water. Indeed, that Balkan country has been a serial deadbeat. Following its recognition as a state in 1832, Greece spent most of the remainder of the 19th century under the control of creditors. The pattern started with a default in 1832. In consequence, Greece’s finances were put under French administration. Following Greece’s defeat at the hands of Turkey in 1897, Greece’s fiscal house was entrusted to a Control Commission. During the 20th century, the drachma was one of the world’s worst currencies. It recorded the world’s sixth highest hyperinflation. In October 1944, Greece’s monthly inflation rate hit 13,800%.

Fast forward and we observe Greece’s entry into the European Monetary Union (EMU) on January 1st, 2001, two years after the eleven original members established the EMU. Greece’s entry was under a cloud because most either knew or suspected that it came with some accounting trickery. Still, the Greeks were enthusiastic new members of the “club.” If Greece could enter without following the rules and free ride — the other members of the “club” would have to pay the bill. That was the thinking in Athens. But, Greece got into trouble when others stopped picking up the tab. This is a classic recipe for a fiscal time bomb, and time is running out.

The International Monetary Fund (IMF), as well as the European Union (EU) and other creditors have supplied plenty of fissionable material for the bomb. As for the IMF, it has never before extended credit to any country on such a scale. Under normal conditions, the IMF is supposed to be limited to lending up to 200% of a country’s quota in a single year and 600% in cumulative total. Under the IMF’s “exceptional access” policy, however, there are virtually no limits on lending. Greece has talked its way into IMF credits worth an astounding 1,860% of its quota. In consequence, Greece owes the IMF about $30 billion, with big chunks of the debt due relatively soon.

The creditors have a Greek problem. In the words of former President George W. Bush: “this sucker is going down.”

To understand why, one needs a theory of national income determination. Unfortunately, most of what is written about Greece fails to offer much by way of such a theory. Indeed, the financial musings about the Greek crisis adhere to my “95% Rule”: 95% of what appears in the financial press is either wrong or irrelevant.

The monetary approach fills this void. It posits that changes in the money supply, broadly determined, cause changes in nominal national income and the price level. Sure enough, the growth of broad money and nominal GDP are closely linked.

Greece is in a depression. During the 2008-13 period, GDP has dropped by almost 30%. Last year, GDP managed to stabilize, with growth of less than 1%. But, this year looks very grim. A review of the accompanying chart explains these dismal data. The broad money measure for Greece (M3) has contracted dramatically since the onset of the 2009 financial panic. Indeed, it’s been contracting at a 6.04% annual rate. In consequence, the monetary approach to national income would predict a serious contraction in GDP — just what has occurred in Greece. We can expect further contraction of the Greek economy. It’s already baked in the cake. Broad money (M3) growth has been in negative territory since December 2014, and it’s currently contracting at a 9.77% rate.


The total money supply can be broken down into its state money and bank money components. State money is the high-powered money (the so-called monetary base) that is produced by central banks. Bank money is produced by commercial banks through deposit creation. Contrary to what most people think, bank money is much more important than state money. In Greece, for example, bank money makes up 84.26% of the total money supply.

So, let’s take a look at Greek banks — the all-important producers of money. To do that, we analyze the state of Greece’s four largest banks which account for 87% of the total bank assets in Greece (see the accompanying table).


We use a little known, but very useful formula to determine the health of the Big Four. It is called the Texas Ratio. It was used during the U.S. Savings and Loan Crisis, which was centered in Texas. The Texas Ratio is the book value of all non-performing assets divided by equity capital plus loan loss reserves. Only tangible equity capital is included in the denominator. Intangible capital — like goodwill — is excluded.

The ratio measures the likelihood of failure by comparing a bank’s bad assets to its available provisions for bad loans plus its capital. When the ratio exceeds 100%, a bank does not have the capacity to absorb its losses from troubled assets. In consequence, it will either require a fresh capital injection, or it will fail.


At the close of business last year, the Texas Ratios exceeded 100% for the Piraeus Bank, Alpha Bank, and the Eurobank Ergasias (see the accompanying table). And the national bank of Greece wasn’t much better, with a ratio of 98.7%. Since the first of the year, the deposit bases of the banks, as well as the economy, have deteriorated markedly, suggesting that the Texas Ratios have also deteriorated. The banks are in big trouble, as indicated by their stock prices. Given that these prices (see the accompanying charts) are well below each bank’s book values, the idea of raising fresh capital in the private markets is out of the question. After all, it would result in a massive dilution of existing shareholders. The state could inject new capital into the system. But, the state has no funds. So, Greece’s banking system, which produces about 85% of Greece’s money supply, is on the verge of being forced to shut down.

Another Greek debt default is just around the corner. And given that money dominates, the specter of an economic collapse is not out of the question.


Steve H. Hanke is a professor of Applied Economics at The Johns Hopkins University in Baltimore and a Senior Fellow at the Cato Institute in Washington, D.C. You can follow him on Twitter: @Steve_Hanke

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Can Republicans Stick to Their Principles on the Minimum Wage?

Michael D. Tanner

Last week, while most Americans were scrambling to make sure that their taxes were paid on time, protesters across the country took to the streets to demand that the minimum wage be increased to $15 an hour. The protests — which featured fast-food workers, Walmart employees, home-care workers, and a truly oppressed group: adjunct college professors — took place in some 350 cities and received widespread media attention.

There is no doubt that the protests resonate with the American public. Voters might not be quite ready for a $15-an-hour minimum wage, but, according to a Pew poll from last year, they support an increase in the base wage by a 73-to-25 percent margin. In 2014, even as Republicans swept to victory in Congress, voters in such deep-red states as Alaska, Arkansas, Nebraska, and South Dakota raised their state minimum wages.

Yet, at the same time, the evidence continues to build that, on this issue at least, the voters are wrong.

There’s no shortage of evidence that minimum-wage increases hurt workers.”

Anecdotal evidence has started to trickle in from Seattle and San Francisco, both of which voted to raise their minimum wages to $15. Both cities have seen an unusual increase in the number of restaurants going out of business since the hike, although it is extremely hard to link the closings directly to the new minimum wage, which hasn’t yet been fully phased in. It is likely still too early to tell.

Still, a survey of Seattle-area small businesses did find that 42 percent of surveyed employers were “very likely” to reduce the number of employees per shift or overall staffing levels as a direct consequence of the law. Similarly, 44 percent reported that they were “very likely” to scale back on employees’ hours to help offset the increased cost of the law. There has also been a sharp fall-off in the number of firms seeking a business license in the city that has roughly corresponded with the passage of the minimum-wage hike.

Better evidence comes from a Government Accountability Office report on minimum-wage hikes in American Samoa. Three 50-cent hikes in the territory’s minimum wage since 2007 have been followed by an 11 percent decrease in overall employment. Employers, especially in the important tuna-canning industry, attributed cutbacks directly to the increased minimum wage.

If that’s not enough, the body of economic literature showing the relationship between an increase in the minimum wage and job loss continues to pile up. For instance, a National Bureau of Economic Research working paper by Jonathan Meer and Jeremy West found that, while we may not see an immediate hit from raising the minimum wage, “minimum wage reduces job growth over a period of several years. These effects are most pronounced for younger workers and in industries with a higher proportion of low-wage workers.”

We also know that the type of minimum-wage earner highlighted by the protesters, struggling to support a family on $7.25 an hour, is the exception, not the rule. Fewer than 5 percent of minimum-wage earners are adults working full-time trying to support a family. Minimum-wage earners might not be college kids earning summer beer money anymore, but neither are they hard-pressed single parents. In fact, the average family income for a minimum-wage worker is $53,000/year.

We also know that few workers earn the minimum wage for long. Of those starting a job at minimum wage, two-thirds will be earning a higher wage within a year.

But it’s not just that a minimum-wage hike is an inefficient way to raise wages for the poor. A hike may actually hurt the very people it’s designed to help. A study by Jeffrey Clemens and Michael Wither of the University of California, San Diego, found that large minimum-wage hikes reduced employment, average income, and the economic mobility of low-skilled workers. Most troubling, low-skilled workers affected by minimum-wage increases were 5 percentage points less likely than other low-wage workers to reach lower-middle-class earnings over the medium term, meaning that raising the minimum wage could actually block the road to the middle class for some workers.

All of this poses a problem for GOP candidates. So far, among presidential candidates or near-candidates, only Rick Santorum supports an increase in the minimum wage. Bobby Jindal has said he is not “ideologically opposed” to raising the federal minimum wage, but he opposes doing so now, while the economy is weak. Marco Rubio’s position is similar, saying that he is not opposed to the minimum wage conceptually but opposes proposed increases. Most of the other leading candidates, including Ted Cruz, have also come out against any increase, although only Rick Perry and, surprisingly, Jeb Bush, called for eliminating the federal minimum wage altogether. Bush takes a federalist approach, saying that he would let each state set its minimum, although he would prefer to “leave it to the private sector.” Rand Paul could also be put in that camp. He has not explicitly advocated repeal but says that setting wages “is none of the government’s business.” Scott Walker, on the other hand, has said that while he thinks the minimum wage “serves no purpose,” he would not repeal it.

With Hillary Clinton firmly in favor of a minimum-wage hike, the eventual Republican nominee is going to have to find a way to marry good policy with what might be bad politics. Whether candidates can stick to the right position even when voters lean the other way, and whether they can explain their reasons why, will be a good test for GOP primary voters.

Michael Tanner is a Senior Fellow at the Cato Instititute and author of Leviathan on the Right: How Big-Government Conservatism Brought Down the Republican Revolution.

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Monetary Stimulus Creates Only Pseudo Wealth

James A. Dorn

The European Central Bank’s decision to follow the Federal Reserve’s footsteps and embark on a massive program of quantitative easing to lower interest rates, encourage risk and inflate asset prices seems to be working for the moment.

New wealth appears to be created even though simple economic logic tells us that monetary stimulus cannot permanently increase a nation’s productive capacity or real income. Central bankers are engaged in pseudo, not true, wealth creation.

With ultra-low rates, savers have little incentive to postpone current consumption. There will be less saving, less capital accumulation and slower growth of real income.

The wealth effect of central bank “stimulus” will be short-lived. When rates return to normal, as they must, asset bubbles will burst, major losses will be incurred and the distortions in capital markets will become evident.

Economic freedom, not central bank intervention, is the driving force of wealth creation and widespread prosperity.”

The Eurozone’s negative real interest rates are not natural; they are the result of government policy — in particular, the ECB’s unconventional monetary policy.

In a normally functioning market economy, with monetary equilibrium, nominal interest rates will be close to natural rates. However, when central banks cause an excess supply of money or an excess demand, monetary disequilibrium leads to a divergence between nominal and natural rates.

The Gold Era

In the market for loanable funds, the nominal rate of interest is determined by the demand for funds and the supply of funds. If there are no monetary disturbances, the supply of funds will depend on the time preferences of savers and the demand for funds will depend on the productivity of capital, technological progress, the security of property rights, and expected profits.

Ultimately, preferences, technology and resources determine real interest rates, not the central bank.

During the classical gold standard (1880-1914), the average level of money prices was relatively stable, as were interest rates. With a stable anchor for the price level, real rates reflected long-run productivity and time preferences.

Nominal and real rates cannot be negative as long as (1) borrowers and lenders expect long-run price stability, (2) consumers prefer current to future consumption and (3) productivity growth is positive.

The main factor today resulting in negative real rates (i.e., financial repression) is the failure of central banks to adhere to a monetary rule. We live in a world of pure discretionary government fiat monies, and a political environment in which the focus is short-term palliatives rather than long-run solutions.

The ultralow interest rates engineered by the Fed and other central banks were purposefully intended to shift investors into risky assets to stimulate the economy and lower unemployment. The risk of creating asset bubbles has been downplayed as have the high costs imposed on savers.

Alan S. Blinder, former vice chairman of the Federal Reserve, contends that keeping the federal funds target rate near zero for more than six years and engaging in three rounds of QE have not led to “financial hazards.” Hence, “patience is the right policy.”

His sanguine view, however, ignores the mounting risks of failing to normalize monetary policy and interest rates. The driving force behind high U.S. stock and bond prices has been the expectation of prolonged low rates — not robust economic growth.

Driving Prosperity

The longer the Fed waits to end its still strong asset purchases (its maturing securities are being rolled over even though officially QE has ended) and adjust its benchmark rate upward, the higher the risk of a severe recession when wealth bubbles evaporate.

The growth of leveraged loans to highly indebted firms and other questionable “investments,” plus a large government debt that will eventually have to be financed at higher rates, point to future financial hazards that are now being ignored.

Federal Reserve Bank Chairwoman Janet Yellen was successful in having the word “patient” removed from the March Federal Open Market Statement. But in her press conference she reassured financial markets by noting that “just because we removed the word patient from the statement doesn’t mean we are going to be impatient.”

U.S. markets have cheered the Fed’s unconventional monetary policies, as have economies closely linked to the dollar such as Hong Kong. European markets, likewise, are applauding European Central Bank President Mario Draghi’s announcement that the ECB will purchase 60 billion euros worth of bonds a month until September 2016.

German 10-year bonds now yield only 0.16% and two-year yields are negative. No wonder Germany’s stock market is booming.

It would be nice if monetary policy alone could create permanent real growth and wealth, but alas that is not possible. The impact of monetary stimulus may be positive in the short run, but sustainable long-run growth requires sound money and institutional changes that strengthen property rights, reduce high taxes on labor and capital, and limit the size and growth of government.

Economic freedom, not central bank intervention, is the driving force of wealth creation and widespread prosperity. Waiting a little longer with a hope that central banks know how to create wealth is a dangerous gambit. Wishing away the asset bubbles that are now so evident can only result in tears.

James A. Dorn is vice president for Monetary Studies and a Senior Fellow at the Cato Institute in Washington, D.C.

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Climate Change’s False Illusion of Progress

Patrick J. Michaels and Paul C. “Chip” Knappenberger

On November 11, 2014, President Obama announced an “historic agreement” with China on greenhouse gases. Most people assumed it would be some sort of commitment to reduce emissions. And most people were wrong.

Rather, the joint communique coming out of Beijing repeatedly said China “intends” to hold its carbon dioxide emissions constant “around” 2030. By then, their emissions will be between two and three times the U.S.’s current emissions.

For its part, the U.S. announced in November, and then again on March 31, that we “intend” to reduce our emissions 17 percent below 2005 levels by 2020 and 26-28 percent below by 2025. The first is an easy target because the base year (2005) predated the natural gas revolution and the substitution of cheap gas for coal in electrical generation. The second target is much more intrusive, likely requiring most passenger cars to have exotic and expensive powertrains.

Climate change initiatives have largely been used by politicians to create the false illusion of progress, leadership, and government competence.”

But intentions are not commitments, and are much more easily broken.

“Intentions” may be the price that the U.N. and Obama are willing to pay to reach some sort of agreement at the December climate fest in Paris. March 31 was the deadline for nations to announce what the U.N. calls their ”Intended Nationally Determined Contributions” (INDC’s) to reducing emissions of dreaded carbon dioxide caused by apparently pernicious economic activity.

Not that the UN cares a whit about the INDC’s legality within sovereign nations. In announcing the INDCs, it wrote that they were to do so “without prejudice to the legal nature of the contributions, in the context of adopting a protocol, another legal instrument or an agreed outcome with legal force under the Convention applicable to all Parties.”

Here the UN appears to be saying it will formalize international “intentions” with “legal force” under the “Convention,” which refers to the Framework Convention on Climate Change, written at Rio de Janiero in 1992. Any protocol to it requires approval by a two-thirds majority in the Senate, which is not going to happen.

Obama has wrongly asserted that whatever comes out of Paris will not require Senate ratification; rather he will act in accordance with it via more executive orders. Any legal challenge will outlive his term in office.

The president’s plan is actually nothing new. It’s similar to what we laid out in 2009 as our proposal at the UN’s failed attempt to do what it is now trying to do in Paris. Back then, we said we would reduce our emissions 30 per cent by 2025, 42 per cent by 2030 and 83 percent by 2050. On a per-capita basis, the 2050 emissions will be what they were in 1867. By 2100, thanks to population growth, they would be somewhere around what they might have been when the pilgrims landed.

The EPA’s own global warming model, which calculates the climate impact of various policy proposals, considers these numbers too small to measure. This might explain why they are curiously lacking in any public communications about climate policies.

Assuming (wrongly) as the EPA does, that surface temperatures will warm 5.4°F for doubling atmospheric carbon dioxide, the amount of warming that will be averted in 2050 is 0.08°F and in 2100 is 0.20, amounts that are too small to even measure reliably. Assuming (more correctly) that the warming will be 2.7°F, our “intentions” will forgo 0.05° of warming by 2050, and 0.12° by 2100.

Climate change initiatives have largely been used by politicians to create the false illusion of progress, leadership, and government competence. All we can hope for is that our leaders “intend” to one day get more realistic and tell us the real numbers.

Patrick J. Michaels is a climatologist and director of Cato’s Center for the Study of Science. Paul C. “Chip” Knappenberger is the center’s assistant director.

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Iraq 2.0: The REAL Reason Hawks Oppose the Iran Deal

Justin Logan

Let’s be honest for a second: 90-plus percent of supporters of the Iran framework would have supported any framework the Obama administration produced (this author included). Close to 100 percent of the opponents of the framework would have opposed any framework it produced.

What’s going on here? Why are we having this kabuki debate about a deal whose battle lines were established before it even existed? At Brookings, Jeremy Shapiro suggests that “the Iranian nuclear program is not really what opponents and proponents of the recent deal are arguing about.”

Shapiro says the bigger question is about what to do regarding “Iran’s challenge to U.S. leadership” in the countries surrounding Iran and whether to “integrate Iran into the regional order.”

Those terms are fuzzy enough to make me uncomfortable, especially if what we’re trying to do is clarify the debate. In Shapiro’s telling, deal proponents think it will help transform Iran’s intentions, while opponents simply want to squeeze Iran as hard as possible as soon as possible. I think Shapiro is basically right about opponents, but misses something regarding supporters.

There is a very good chance that blowing up the talks would buy the United States a non-refundable one-way ticket to another major war in the Middle East.”

First, consider the hawks. At the outset of the JPOA, they were pounding the table about imminent calamity. In 2013, former IAEA chief Olli Heinonen warned an Israel Project conference call that Iran was two weeks away from a bomb (Two weeks!). Lindsey Graham criticized the interim agreement, calling it a giveaway to Iran.  Similarly, Israeli Prime Minister Benjamin Netanyahu called it “the deal of the century” for Iran.

Now, those same people who were frantic about the ticking clock couldn’t care less that it’s been wound backward. Ten years with no Iranian bomb is treated like a dirty penny. For his part, Graham now says that the JPOA should be extended because it’s preferable to the P5+1’s framework agreement.

In unguarded moments, many hawks concede they are against an agreement in principle. As Israeli Prime Minister Binyamin Netanyahu’s strategic affairs minister Yuval Steinitz admitted recently, “we are against a deal in general.” Similarly, Senator Tom Cotton, author of the embarrassing letter imploring Iran’s Supreme Leader to scuttle the deal, admitted to an audience at the Heritage Foundation before writing the letter:

The end of these negotiations isn’t an unintended consequence of Congressional action, it is very much an intended consequence. A feature, not a bug, so to speak.

So, despite their protests that what they’re really after is a “better deal,” their own words betray the truth: They oppose any deal. Vox’s Max Fisher suggests that the reason is because their real desire is to change the Iranian regime by force, and a diplomatic deal makes that less likely. It’s as plausible an explanation as I’ve heard.

So what about us doves? Most of us would have supported any deal the Obama administration deemed good enough to get past Congress. Why? Because we recognize that international politics, and in particular dealing with Iran on this issue in 2015, is the realm of least-worst alternatives, not slam dunks.

Jeffrey Lewis explains the logic of supporting the framework agreement:

The thing is, there is no “good” deal. Any deal will be a compromise that leaves in place many dangers to Israel, as well as Iran’s neighbors and the United States. The essential thing is to delay as long as possible an Iranian nuclear bomb. Almost any deal will buy more time than if talks were to collapse… [T]here is no good reason to believe that walking away from a deal now puts the United States in position to get a better one in a few years.

The brutal fact is that there is no “good” solution to the Iranian nuclear program. As Lewis notes, we’re not going to get to zero enrichment. The Iranians are going to be left with capabilities that cause us concern. The nature of negotiations is not getting everything that you want, and there seems to be little question that Dick Cheney and Co.’s “we don’t negotiate with evil, we defeat it” posture was counterproductive to getting a better deal. To take one example, the Iranian bargaining chip went from a few hundred centrifuges to nearly 20,000 in the intervening decade.

So for doves the question becomes how to put as much time on the clock without producing a war that would cause a regional catastrophe and put less time on the Iran nuclear clock than the JPOA has. It may be the case that liberal deal supporters believe it will transform Iran, but I suspect there are a lot of realist supporters—here, for example—who support it because it lowers the probability of another costly war in the Middle East.

The reason we’re having this peculiar debate instead of the one I’ve described above is that doves and hawks have trapped each other in the mass politics of the issue. There is a very good chance that blowing up the talks would buy the United States a non-refundable one-way ticket to another major war in the Middle East, something that no American politician with any sense wants to own.

Similarly, hawks have a good line to use on doves. Any diplomatic agreement will leave opportunities for Iran—a regime rightly seen as wily and creative in its diplomacy—to cheat. Americans do not trust Iran, and do fear cheating.

The deeper debate would be how to judge the risk of another disastrous war in the Middle East if we collapsed the talks against the risk that Iran would be able to defy the framework agreement in the next 10 years and wind up with, or close to, a bomb.

Many doves think another U.S.-led war in the Middle East is intolerable, just as many hawks think giving up on such a war for a decade is intolerable. So when you hear the screaming about the framework agreement, remind yourself: this is what we’re really talking about.

Justin Logan is director of foreign policy studies at the Cato Institute.

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Leave School Choice to the States

Jason Bedrick

Like the guy who won his office March Madness pool by consulting goat entrails, the center-left think tank Third Way is right about federal vouchers for all the wrong reasons.

In a “memo” earlier this month, two Third Way analysts vigorously argued that Congress should not include a federal voucher program as a part of the Elementary and Secondary Education Act (ESEA) reauthorization. However, the five reasons they give to oppose federal vouchers range from flawed to erroneous. Nevertheless, though the evidence suggests that school choice programs benefit students and are popular among voters, Congress should leave it to the states.

1. The research literature shows school choice programs benefit students.

Third Way claims that there is “little convincing evidence that students who receive vouchers are better off for it.” However, Third Way relies on outdated studies and misleading analyses and ignores a mountain of evidence that school choice programs benefit students.

School choice is one of the most-researched education policies, and the best studies overwhelmingly find positive results for some or all categories of participants. Eleven of 12 random assignment studies found statistically significant positive outcomes for students who won a school voucher or scholarship lottery relative to students who entered the lottery but did not win. For example, a study of a pilot program in Charlotte, NC published in the Policy Studies Journal in 2008 found that voucher students scored eight percentile points higher than the control group in reading and seven percentile points higher in math.

Federal intrusion, however well-intended, risks undermining the hard-fought effort to expand educational opportunity to all Americans.”

Random assignment studies are the gold standard of social science research because they allow researchers to isolate the effect of the intervention, similar to medical trials where doctors randomly administer a drug to some patients but not others in order to determine the drug’s effectiveness.

Third Way, however, ignores the gold standard studies, omits the positive findings for low income and minority students from the very research it cites, and points instead to analyses that compare apples and orangutans. For example, Third Way points to a 2013 Politico article that claimed Milwaukee voucher students underperformed their public school counterparts on standardized tests. However, it is misleading to compare the mostly low-income voucher students to the general student population, which includes students from wealthy families. Previous random assignment studies by researchers at Princeton and the Brookings Institution found that Milwaukee voucher students scored significantly higher than the control group on math and reading exams. Moreover, the average cost per pupil in Milwaukee’s public schools is more than double the average $6,442 voucher.

Third Way concedes that there is “some evidence that voucher programs may be correlated with modest gains in graduation rates” but claims that “it is unclear whether the increase is a direct result of the voucher programs themselves or other kinds of reforms.” Their claim is based on a 2011 literature review, but they are apparently unaware that a 2013 gold standard study of Washington D.C.’s voucher program found that voucher students graduated at a rate 12 percentage points higher than the control group. In addition, a 2012 random assignment study by researchers at Harvard and Brookings found that African-American scholarship students in a New York City pilot enrolled in a four-year college at a rate 8.7 percentage points higher than the control group.

2. School choice makes schools directly accountable to parents.

While regulations vary considerably, most school choice laws (particularly scholarship tax credit laws) do not impose the public school testing regime on private schools accepting school choice students. Third Way asserts that this is “incredibly problematic” because it is “impossible to tell how voucher students or specific groups among them, like students with disabilities or students of color, are faring from school to school—let alone compared to their non-vouchered peers.” However, imposing standardized tests has the potential to stifle the very the diversity and innovation that gives choice its value.

When tied to the “annual goals” and potential “repercussions” that Third Way advocates, standardized tests drive what is taught, when it is taught, and how it is taught. Such so-called “accountability” measures create a powerful incentive for schools to conform, depriving parents and students of the ability to choose schools that chart a different course.

It is inappropriate to impose an accountability system designed to regulate a monopoly on a market. Private schools are directly accountable to parents, who have the ability to vote with their feet if the school fails to meet their needs. By contrast, public schools are accountable to politicians and bureaucrats, not parents. Indeed, many low-income families have no financially viable options besides their assigned district school. Without the crucial feedback loop that direct accountability to parents provides, states and localities (and even the feds) have imposed numerous regulations to improve quality, generally with little success. Unfortunately, these top-down regulations have become synonymous with “accountability” when they are but a pale imitation of direct accountability to parents.

3. There is no evidence that school choice programs “wreak havoc” on school district budgets.

Third Way laments that school choice could “destabilize district financial planning.” It is telling that they don’t point to a single example. Even more telling, their concern assumes that there would be a mass exodus from the public schools if families were given the option to leave and take the funds dedicated to their child with them. As David Boaz once observed, “Every argument against choice made by the education establishment reveals the contempt that establishment has for its own product.”

4. School choice empowers low-income families.

Third Way asserts that “letting the money follow the child” would “divert limited … resources away from districts needing financial assistance the most.” This assumes that a lack of resources is what ails low-performing schools. However, if funding were the main driver of performance, then at about $30,000 per pupil, Washington, D.C.’s public schools would be among the best in the nation instead of the worst.

There is little compelling evidence that resources drive performance. A 2012 report on international and state trends in student achievement by researchers at Harvard, Stanford, and the University of Munich found that “Just about as many high-spending [U.S.] states showed relatively small gains as showed large ones…. And many states defied the theory [that spending drives performance] by showing gains even when they did not commit much in the way of additional resources.”

Moreover, the available evidence suggests that the positive impact of choice and competition outweighs any potentially negative impact from lower resources. Twenty-two out of 23 empirical studies found that the performance of students at public schools improved after the enactment of a school choice law. One study found no statistically significant difference and none found any harm. School choice programs empower low-income families to choose the schools that work best for their children, which means that public schools have to be more responsive to their needs.

5. The public increasingly wants more choice.

Third Way claims “Americans overwhelmingly reject the idea that vouchers are an effective way to repair our country’s education system.” As evidence, they cite a 2013 PDK/Gallup poll, which found that 70 percent of Americans opposed vouchers. However, in a 2014 survey by Education Next and Harvard University’s Program on Education Policy and Governance, 60 percent of Americans favored scholarship tax credits and 50 percent favored universal school vouchers.

Moreover, Americans are likely to support school choice at even higher levels over time. A 2014 poll by the Friedman Foundation for Educational Choice found the highest levels of support for school choice policies among Americans aged 18-35, with 74 percent favoring scholarship tax credits and 69 percent supporting vouchers. Even the 2013 Gallup poll found that 75 percent of 18-29 year olds and 59 percent of 30-49 year olds support school vouchers.

Federal vouchers are still a bad idea.

School choice programs benefit participating and public school students, increase accountability to parents, empower low-income families, and have the support of a growing majority of voters. So why not support a federal school choice law?

Even setting aside the constitutional issues, there are pragmatic reasons for opposing increased federal involvement in America’s education system. As David Boaz explained more than a decade ago in the Cato Handbook for Congress, the case against federal involvement in education:

is not based simply on a commitment to the original Constitution, as important as that is. It also reflects an understanding of why the Founders were right to reserve most subjects to state, local, or private endeavor. The Founders feared the concentration of power. They believed that the best way to protect individual freedom and civil society was to limit and divide power. Thus it was much better to have decisions made independently by 13–or 50–states, each able to innovate and to observe and copy successful innovations in other states, than to have one decision made for the entire country. As the country gets bigger and more complex, and especially as government amasses more power, the advantages of decentralization and divided power become even greater.

It is very likely that a federal voucher program would lead to increased federal regulation of private schools over time. Once private schools become dependent on federal money, the vast majority is likely to accept the new regulations rather than forgo the funding.

When a state adopts regulations that undermine its school choice program, it’s lamentable but at least the ill effects are localized. Other states are free to chart a different course. However, if the federal government regulates a national school choice program, there is no escape. Moreover, state governments are more responsive to citizens than the distant federal bureaucracy. Citizens have a better shot at blocking or reversing harmful regulations at the state and local level rather than the federal level.

With its proven policy success and public support, it’s understandable that a federal voucher program is politically tempting. Yet politicians should resist the temptation. School choice advocates are winning in state after state—just this month, Arkansas and Nevada became the 25th and 26th states to adopt school choice laws. Federal intrusion, however well-intended, risks undermining the hard-fought effort to expand educational opportunity to all Americans.

Jason Bedrick is a policy analyst with Cato’s Center for Educational Freedom.

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Certain U.S. Abortions Tear The Fetus Apart, ISIS-Style

Nat Hentoff

An April 8 New York Times front-page story reports that “a bill signed into law by Gov. Sam Brownback, a Republican and longtime abortion opponent, outlaws what it calls ‘dismemberment abortion,’ defined in part as ‘knowingly dismembering a living unborn child’ … (I)t appears to ban or require altercation of the method known as dilation and evacuation, which is used in nearly all abortions after the 12th to 14th week of pregnancy” (“Kansas Limits Abortion Method, Opening a New Line of Attack,” Erik Eckholm and Frances Robles, The New York Times, April 8).

And a lead editorial a few days later begins in utterly prejudicial and non-factual language: “During the past four years, the state of Kansas has become ground zero in the war to criminalize all abortions, and in the process to remove a woman’s ability to control what happens in her own body” (“Kansas Tries to Stamp Out Abortion,” The New York Times, April 10).

By contrast, here are the facts regarding Kansas becoming the first state to outlaw the dismemberment procedure, as reported by the National Right to Life Committee earlier this year: “In his dissent to the U.S. Supreme Court’s 2000 Stenberg v. Carhart decision, Justice (Anthony) Kennedy observed that in D&E dismemberment abortions, ‘The fetus, in many cases, dies just as a human adult or child would: It bleeds to death as it is torn limb from limb. The fetus can be alive at the beginning of the dismemberment process and can survive for a time while its limbs are being torn off’?” (“Dismemberment Abortion Ban in Kansas Leads 2015 Pro-Life Legislative Agenda,”, Jan. 14).

As I have reported previously, in this digital era it is possible to view the fetus, and I have. So it’s pertinent to add that when the dismemberment procedure occurs after the first trimester — as NRLC’s director of state legislation, Mary Spaulding Balch, emphasizes — and the fetus is torn apart, “the unborn child (already) has a beating heart, brain waves and every organ system in place. Dismemberment abortions occur after the baby has reached these milestones.”

That’s why the brutal torture of ISIS comes to my mind.

In answering the question, “Is dismemberment too harsh a description?” Justice Kennedy was very specific in his written opinion for Gonzales v. Carhart, a 2007 case in which the Supreme Court upheld a congressional ban on partial-birth abortions (another term for dismemberment abortions). This decision, wrote the Pew Research Center, “prompt(ed) many states to consider passing tougher restrictions on abortion” (“A History of Key Abortion Rulings of the U.S. Supreme Court,” Jan. 16, 2013).

Kennedy wrote: “After sufficient dilation, a doctor inserts grasping forceps through the woman’s cervix and into the uterus to grab a living fetus. The doctor grips a fetal part with the forceps and pulls it back through the cervix and vagina, continuing to pull even after meeting resistance from the cervix. The friction causes the fetus to tear apart. For example, a leg might be ripped off the fetus as it is pulled through the cervix and out of the woman …

“The fetus, in many cases, dies just as a human adult or child would” (“Oklahoma House passes Unborn Child Protection from Dismemberment Abortion Act by a vote of 84-2,” Dave Andrusko,, Feb. 27).

Also worth considering is the testimony of Dr. Anthony Levatino, a Las Cruces, New Mexico, obstetrician and gynecologist, before the House Subcommittee on the Constitution and Civil Justice on May 23, 2013: “Imagine, if you can, that you are a pro-choice obstetrician/gynecologist, like I once was. Your patient today is 24 weeks pregnant. At 24 weeks from (her) last menstrual period, her uterus is two finger-breadths above the umbilicus. If you could see her baby, which is quite easy on an ultrasound, she would be as long as your hand plus a half from the top of her head to the bottom of her rump, not counting the legs.

“Your patient has been feeling her baby kick for the last month or more, but now she is asleep on an operating room table, and you are there to help her with her problem pregnancy …

“The toughest part of a D&E abortion is extracting the baby’s head. The head of a baby that age is about the size of a large plum and is now free-floating inside the uterine cavity. You can be pretty sure you have hold of it if the Sopher clamp is spread about as far as your fingers will allow. … You can then extract the skull pieces. Many times a little face will come out and stare back at you. … If you refuse to believe that this procedure inflicts severe pain on that unborn child, please think again.”

I congratulate Kansas for being the first state to ban this brutal procedure, while Oklahoma just passed its own dismemberment abortion ban as well. Other states are planning to take similar steps, though they face many obstacles.

Now my customary question: Will any of the 2016 presidential or congressional candidates focus on, or even mention, this horrendous procedure?

If more of our citizenry comes to learn about dismemberment abortion, will there be sufficient sustained protest to protect future generations of the unborn from this appalling fate?

Finally, worth considering: “According to the National Abortion Federation Abortion Training Textbook — ‘D&E remains the most prevalent method of second-trimester pregnancy termination in the USA, accounting for 96 percent of all second-trimester abortions … roughly 100,000 unborn babies die each year after the first trimester” (“Frequently Asked Questions: Unborn Child Protection from Dismemberment Abortion Act,”

If this awful procedure were to continue, how would America come to be defined among all other civilized nations?

Nat Hentoff is a nationally renowned authority on the First Amendment and the Bill of Rights. He is a member of the Reporters Committee for Freedom of the Press, and the Cato Institute, where he is a senior fellow.