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ECB Must Apply ‘Forward Guidance’ Carefully

George Selgin

At its policy meeting today, the European Central Bank is expected to announce that it will extend its current quantitative easing program, which involves the monthly purchase of €80 billion of securities, beyond its original March deadline.

Just what form this extension will take is, however, anything but certain. The right choice may help get the Eurozone on the path to full recovery, but the wrong one could find it riding an unpleasant roller coaster.

Although all the touted plans involve a later deadline, that deadline itself is uncertain (though a six-month extension is most likely). While some officials would have the ECB maintain its current level of purchases, others want it to scale back to a lower monthly amount. Still, others favor letting the value of securities purchased each month vary with changing conditions.

Why should such details matter? They matter because the ECB is playing a difficult (and dangerous) game. It wants to reassure its more hawkish critics, including German representatives on its Governing Council who voted against the current purchases, that its quantitative easing deadlines aren’t meaningless.

The ECB also wants to give the public some “forward guidance,” by committing itself to a definite policy course in the future. Besides countering uncertainty, which itself acts as a drag on investment and growth, an advanced commitment to future easing is intended to enlist the public’s help in boosting spending and interest rates by raising today’s inflation forecasts.

As important as having the right target is, it’s no less important for the central bank to have an unwavering commitment to achieve it.

The danger lies in the fact that central bankers can’t know in advance how much easing will be needed, nor for how long, to achieve their targets. Milton Friedman famously warned that “long and variable lags” separate today’s monetary policy actions from those actions’ future effects on economic activity. 

 Consequently, central bankers, by placing too much emphasis on current conditions, can end up contributing to economic instability instead of combatting it. When central banks commit to future policy actions in advance, as they do when they make use of forward guidance, they’re even more likely to end up regretting their actions.

ecent events illustrate the sort of risks involved. In the U.S., Donald Trump’s election, which was itself a surprise, has been followed by an equally surprising rise in equity prices and interest rates. Of course, the Fed could not have anticipated these developments. 

Suppose that it had committed itself many months before, based on “forward guidance” grounds, to another round of quantitative easing, and that round had been scheduled to last long after the election. The Fed would then have been compelled either to break its promise, or risk pouring more fuel on an already hot equity market.

The ECB finds itself in precisely the opposite situation. Partly in response to recent European political upheavals, it’s poised to extend its commitment to future easing. Who’s to say that Europe won’t enjoy some more favorable news, political or otherwise, in the coming months?

Does this mean the ECB must either leave the public in the dark about its future actions, or risk destabilizing the Eurozone? It doesn’t. There is a way for the ECB, or any other central bank, to provide forward guidance without committing itself to actions that might prove destabilizing.

That solution involves making a firm and credible commitment, not to stick to a particular schedule of securities purchases, but to buy as many securities as it needs to, for as long as it needs to, to achieve a definite policy target.

The target could be 2 percent inflation, or 3 percent nominal GDP growth, or some other economic indicator. As important as having the right target is, it’s no less important for the central bank to have an unwavering commitment to achieve it.

Achievement does not mean committing itself to any particular pattern of quantitative easing because no central banker can possibly know in advance what purchases it may take to reach the central bank’s target.

Instead of announcing a plan to buy €80 billion, €60 billion, or any definite value of securities each month until September or December, the ECB should announce that it will buy as many (or as few) securities as it takes, for as long as it takes, to get the inflation (or spending) rate to a targeted percent, and to keep it there indefinitely.

George Selgin is the Director for the Center of Monetary and Financial Alternatives for The Cato Institute.

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Trump’s Team Should Ditch the ‘Clash of Civilizations’

Emma Ashford

If there is one common thread that connects President-elect Donald Trump’s foreign-policy appointments, it is the belief that the United States is engaged in a civilizational war against “radical Islamic terrorism.” Indeed, while Trump himself—with his ambivalence towards books—may not even know it, the incoming administration seems to have fully embraced the ideas of Samuel Huntington, not only on the clash of civilizations, but on American decline, the idea of a West encircled by enemies, and even on immigration.

Throughout the campaign, Trump and his surrogates often used rhetoric that suggests an imminent clash of civilizations. Gone is the Obama administration’s focus on more generic “violent extremism,” replaced by a specific focus on Islamist terrorist groups. As Politico noted last month, Steve Bannon, Trump’s new chief strategist, has argued that the West is in “the very beginning stages of a brutal and bloody conflict … against jihadist Islamic fascism,” while KT McFarland, his new deputy national security advisor, has argued that we are engaged in a “long war” against radical Islam. Key figures in the new administration have also been worryingly equivocal about whether they see Islam itself—as opposed to violent jihadi groups—as a threat.

It’s certainly easy to see why Huntington’s ideas, particularly the idea that terrorism is being driven by some larger clash of civilizations, would appeal to Trump, with his limited knowledge of foreign affairs.

But the links to Huntington’s ideas go deeper than mere acceptance of his clash-of-civilizations thesis. After all, Huntington posited not only conflict between civilizational groupings, but also the idea that post–Cold War Western dominance was likely to lead to conflict between the West and “the Rest.” This idea has been explicitly endorsed by Trump’s designee for National Security Advisor, Michael Flynn, whose views are likely to shape policy in the new administration. In his recently published book, Flynn and his coauthor posit the existence of an anti-Western alliance, which ties together terrorist groups like Al Qaeda, Hezbollah and ISIS with states including China, Russia, Syria, Iran and Venezuela.

Similarly, Huntington’s ideas about American decline and about the dangers of unchecked immigration are in many ways a precursor to Trump’s rhetoric throughout the campaign. While his work on the clash of civilizations and on civil-military relations is perhaps best known, Huntington’s most controversial work was his last book, Who Are We?, whose content one critic pithily described as “Patrick Buchanan with footnotes.” Indeed, Huntington’s argument in the book—dismissing shared liberal values as the common basis for American identity in favor of a protestant, Anglo-Saxon cultural identity—is strongly reminiscent of many of Trump’s nativist, anti-immigration policy stances.

It’s certainly easy to see why Huntington’s ideas, particularly the idea that terrorism is being driven by some larger clash of civilizations, would appeal to Trump, with his limited knowledge of foreign affairs. It’s a seductively simple theory that purports to explain a complex world. Likewise, the idea that all of America’s problems around the world are caused by a grand alliance working in concert against us is temptingly uncomplicated, if unrealistic.

This simplicity also explains the paucity of any detailed foreign policy proposals emanating from Trump’s advisors. Flynn’s book advocates a grab bag of policies including “exposing their weaknesses” and “organiz[ing] all our national power”; KT MacFarland’s proposals are even more generic; she argues that we can win the war on terror through the use of “banking” and “alliances.” About the only concrete policy most of Trump’s advisors appear to agree upon is that Iran—or as Flynn refers to it, the “lynchpin” of the global anti-Western network—must be dealt with in some fashion. Yet exactly how regime change in Tehran would solve the problem of Sunni extremist groups like ISIS remains unstated and unclear.

Unfortunately, for all its appealing simplicity, Huntington’s worldview is a remarkably poor frame through which to understand a complex world. It cannot explain intracivilizational conflicts; indeed, Huntington himself argued that Russia and Ukraine were unlikely to come to blows because of cultural similarities. And it ignores the vast range of other potential causes of war. The ongoing turmoil in the Middle East is the result not only of the failures of the Arab Spring, but of the political repression, economic malaise and popular discontent that preceded it. And the reductionism of Huntington’s arguments about Islam—defining it purely by Arab opposition to the West—ignores centuries of history and cultural achievements.

Yet perhaps the biggest concern posed by Trump’s embrace of this doctrine is that Huntington’s civilizational thesis can all too easily become a self-fulfilling prophecy. Both the Bush and Obama administrations took care to avoid framing the War on Terror as a conflict between the West and the Muslim world. Ironically, Huntington’s thesis is already explicit in the pronouncements and publications of groups like Al Qaeda and ISIS, who believe that they are foot soldiers in a civilizational war. Trump’s pronouncements about Islam have been welcomed by extremists in both groups. As one ISIS commander noted, “His utter hate towards Muslims will make our job much easier because we can recruit thousands.”

Whether wittingly or not, the incoming administration seems intent on adopting Huntington’s clash of civilizations as a core plank of Trump’s foreign-policy approach. Yet it is a dangerous approach: it defines large segments of the world as hostile, blows many threats out of all proportion, and is highly likely to lead to further conflict in the Middle East and elsewhere. Indeed, in his book, Flynn argues that “we’re in a world war, but very few Americans recognize it, and fewer still have any idea how to win it.” He should be careful what he wishes for—he just might get it.

Emma Ashford is a Research Fellow in Defense and Foreign Policy Studies at the Cato Institute.

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Environmental Fears over DAPL Overblown

Patrick J. Michaels

The Dakota Access Pipeline (DAPL) is more than just a pipeline. It is a political hot potato. There are a lot of issues underlying the DAPL conversation, including indigenous peoples’ access to ancestral lands, environmental concerns of a potential spill, water rights, and social justice.

One false assumption is that rejecting the DAPL would result in fossil fuels staying in the ground. The lack of a pipeline has not stopped growth in oil production from the Bakken shale formation yet. This oil is currently transported by rail or road, where it has a significantly higher chance of spillage, explosion or tragedy. Higher prices will be passed on to consumers, a regressive policy that inordinately affects the poorest citizens.

Climate change activists have also entered the fray. Anti-fossil fuels advocate Bill McKibben said the pipeline couldn’t pass “a climate test” and the Center for Biological Diversity has made DAPL a touchstone of its aggressive climate campaign. Wouldn’t it be great to see the numbers behind the rhetoric?

The environment is important, but not as important to environmentalists as a large coalition.

There are several calculators that use the EPA’s own model — the Model for the Assessment of Greenhouse Gas-Induced Climate Change (MAGICC) — to determine the effects of various policy proposals. The model requires we know how much additional oil DAPL will transmit, which is rather difficult to predict. The pipeline’s capacity is currently rated at 470,000 barrels per day from the Bakken shale formation. This is about half of the Bakken’s current production.

Moving this oil by pipeline is about $7/barrel cheaper than current transport by truck and rail. For the sake of argument, assume that an additional 470,000 barrels come out of the Bakken as a result of the pipeline. (Note: In reality, production changes are determined by a host of unrelated market conditions).

Plugging that figure into the MAGICC model will tell you how much that oil will raise global temperatures by the year 2100 — just 0.006 degrees Celsius. A rise of 0.006°C is roughly the temperature change we experience every few seconds, even in a thermostatically controlled environment.

It’s also too small to measure on a global scale. In addition, the MAGICC model assumes, along with the EPA, the “sensitivity” of global surface temperature to a doubling of atmospheric carbon dioxide is around 3.0°C. There are dozens of reality-based experiments in the recent peer-reviewed literature showing that assumption to be a serious overestimate.

A large reason for the prominence of the #NoDAPL movement is due to a concerted effort by environmental groups to include minorities and the economically disadvantaged in their association. By melding environmentalism and social justice into “environmental justice,” environmentalists are able to swell their ranks.

They have incorporated issues plaguing minority groups, like systematic racism and poverty, with the specter of apocalyptic climate change. These priorities were on full display in the November defeat of Initiative 732 in Washington — a carbon tax many environmentalists rallied against due to its lack of wealth redistribution. The environment is important, but not as important to environmentalists as a large coalition.

We should note that, come January 20th, Donald Trump will be president. The Army Corps of Engineers’ process will find itself under the guidance of a new executive — one boisterously behind domestic energy production. We find it difficult to believe President Trump won’t address the DAPL.

Trump has publicly voiced his support for the project. This reroute of the project will merely delay the inevitable — oil flowing from the Bakken shale to consumers with no detectable effect on earth’s climate.

Patrick J. Michaels is the director of the Center for the Study of Science at the Cato Institute.

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Heading for Trade War with China

Steve H. Hanke

The US has recorded a trade deficit in every year since 1975. This is not surprising — America spends more than it saves, and this deficit is financed by means of a virtually unlimited US line of credit with the rest of the world. Economies that save more than they spend, and which record corresponding trade surpluses, ship funds to the US to finance America’s insatiable spending.

Japan and, more recently, China have been the primary creditors for the savings-deficient US. Rather than a straight-forward barter-like transaction, Asia’s exports to the US are paid for by credits to the US. The result is a huge trade surplus for Asia, largely in manufactured goods, and a build-up of dollar claims against the US. The US runs a trade deficit and a capital account surplus with these economies. China and Japan have been responsible for the lion’s share of the US trade deficit. Japan’s contribution has fallen from a peak of just under 60% in the early 1990s to around 10% today, while China’s contribution has steadily risen from around 20% in the early 1990s to 48% today.

Hardly a day goes by without Trump railing against China, accusing it of unfair trade practices and currency manipulation.

The US savings deficiency has contributed to the hollowing out of American manufacturing. This is one subject which President-elect Donald Trump has never mentioned. Instead, he claims that American manufacturing has been eaten alive by foreigners who adopt unfair trade practices and manipulate their currencies to artificially weak levels. This argument is nonsense.

To appreciate why Trump — and many others in Washington, including Charles Schumer, the newly-elected Senate minority leader — are so misguided and dangerous, one should look to Japan. From the early 1970s until 1995, Japan was viewed as America’s economic enemy. The mercantilists in Washington asserted that unfair Japanese trading practices caused the trade deficit and destroyed US manufacturing. Washington also asserted that, were the yen to appreciate against the dollar, America’s problems would be solved.

Washington even tried to convince Tokyo that an ever-appreciating yen would be good for Japan. Unfortunately, the Japanese caved into US pressure, and the yen appreciated. The currency moved from 360 yen to the dollar in 1971 to 80 in 1995. This massive appreciation didn’t put a dent in Japan’s exports to the US, with Japan contributing more than any other country to the US trade deficit until 2000.

In April 1995, Robert Rubin, then Treasury secretary, belatedly realised that the yen’s overdone rise was driving the Japanese economy into a deflationary quagmire. In consequence, the US stopped hounding the Japanese government about the value of the yen, and Rubin began to evoke his now-famous strong-dollar mantra. While this policy switch was welcome, it was too late. Even today, Japan continues to suffer from the mess created by the yen’s appreciation.

Two decades later, China rather than Japan is America’s economic enemy. China-bashing is in vogue. Hardly a day goes by without Trump railing against China, accusing it of unfair trade practices and currency manipulation. Against the background of his threat to impose punitive tariffs on the Chinese, the spat over Trump’s Friday phone call with Taiwan President Tsai Ing-wen, breaking decades of diplomatic protocol, offers an uncomfortable foretaste of more squalls ahead.

Trump’s spending and tax promised will widen the gap between America’s spending and savings. This will cause America’s trade deficit to balloon. When that happens, in view of China’s high contribution to the deficit, Trump will undoubedtly point an accusatory finger at China. A trade war between the world’s top two economies looks increasingly likely.

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.

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Body Cameras Especially Urgent under Trump Administration

Matthew Feeney

There are strong indicators that President-elect Donald Trump plans to govern as a tough-on-crime executive. In addition to his fire and brimstone law and order rhetoric during the campaign, he has nominated Sen. Jeff Sessions (R-Ala.) as Attorney General, which has civil libertarians deeply concerned. As such, it’s worth asking how a Trump administration will approach the issue of body cameras, one of the most discussed and promising new law enforcement tools.

If Trump’s and Sessions’ comments are anything to go by, it looks as if body camera funds could be reduced or redirected as the federal government oversees a more aggressive War on Drugs.

Body cameras have featured prominently in debates on criminal justice reform since late 2014, when it was announced that Ferguson, Missouri police officer Darren Wilson, who was not wearing a body camera, would not face charges over his killing of Michael Brown. An increasing number of police departments have been outfitting their officers with body cameras, which if governed by appropriate policies can prove invaluable in misconduct investigations.

Whatever policies Trump’s DOJ decides to pursue, criminal justice reformers should continue to argue for the increased deployment of body cameras, something that will be especially urgent if the War on Drugs intensifies.

In October 2015 Trump revealed that he was open to the federal government helping police departments buy body cameras, adding that the tools can be used to exculpate officers who have been falsely accused of wrongdoing. However, more recent comments from the president-elect suggest that his administration would seek to withhold funding from so-called “sanctuary cities.” Such a move could have an impact on police departments that have already received body camera grants or those interested in seeking federal funding.

The Obama administration has, through the DOJ’s Bureau of Justice Assistance, awarded millions of dollars of body camera funds to police departments across the country. Unfortunately, some of these funds have been awarded to departments that do not have policies in place that promote the increased transparency and accountability many citizens want to see in police departments.

So Trump will inherit a funding scheme for body cameras that could be expanded, but also needs improvement. In the early days of the Trump administration we will see whether a Trump’s Department of Justice (DOJ) will be awarding body camera grants to “sanctuary cities” and if federal officers will be regularly wearing body cameras.

The federal government has been slow to outfit officers with body cameras, and a Sessions DOJ may redirect funds away from body cameras for local police and towards the increased militarization of police, something we have seen happen via Community Oriented Policing Services (COPS) grants.

But it’s not only police militarization under a Session DOJ that should concern criminal justice reform advocates. Throughout his career Sessions has made sure to maintain impeccable tough on crime and law and order credentials, including loyal support for the failed War on Drugs. In April, Sessions said, “We need grownups in charge in Washington to say marijuana is not the kind of thing that ought to be legalized.”

With Sessions at the helm of the DOJ we can expect that federal law enforcement agencies such as the Drug Enforcement Administration (DEA) will be playing a more active role in states where residents have voted to legalize recreational or medical marijuana. This could include DEA raids on marijuana dispensaries that are legal at the state level. Marijuana remains illegal under federal law, so while sending federal officers to arrest marijuana storeowners in states where marijuana is sanctioned would be bad policy, it would be legal.

This only bolsters the need for good body camera policies across the country. If the Trump administration does decide to continue fighting the destructive, immoral, and hopeless War on Drugs, officials should at the very least require that DEA officers conducting raids wear body cameras, thereby providing investigators looking into allegations of misconduct with more evidence while also providing increased accountability and transparency.

In the few weeks since the election, Trump has sent confusing signals about policy. During one of the presidential debates he said that Hillary Clinton would “be in jail” under his administration. Yet his recent conversation with New York Times editors and columnists suggests his penchant for putting Clinton behind bars has diminished somewhat since election night. So too has his skepticism of the Patient Protection and Affordable Care Act, President Obama’s signature piece of legislation. It’s possible that Trump’s policy fickleness could extend to law enforcement. But whatever policies Trump’s DOJ decides to pursue, criminal justice reformers should continue to argue for the increased deployment of body cameras, something that will be especially urgent if the War on Drugs intensifies.

Matthew Feeney is a policy analyst at the Cato Institute.

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Obama’s Legacy: Murder.gov

A. Trevor Thrall

In the waning days of his second term, a president’s thoughts turn to his legacy. His focus the last few weeks and months often tells us a great deal about how he wants to be remembered by the American people. It is, therefore, surprising and disappointing to see that President Obama is busy institutionalizing the targeted killing apparatus constructed piece by piece after the 9/11 attacks. Obama’s last-minute efforts to ensure that the costly and counterproductive war on terror continues will certainly help cement his legacy – as the president who authorized hundreds of secret drone strikes that killed thousands of people, many of them civilians. But they also serve as a terrible reminder of just how far off course American national security policy has gotten.

The primary fruit of this effort is a new task force – “Counter-External Operations Task Force,” designed to give Joint Special Operations Command (JSOC) an expanded ability to track and kill terrorists around the world. On the surface, the new entity simply represents the evolution of U.S. efforts to organize more efficiently to confront terrorist groups, a threat that existing national security organizations and processes were poorly suited to manage before 9/11. “Ex Ops,” as it is called in the Pentagon, is an attempt to bring all the necessary intelligence, targeting capabilities, and military capabilities under one roof, instead of leaving them distributed across a large number of different organizations, agencies, and combatant commands as has been the case historically.

Whether or not it was Obama’s intention, his expansion and institutionalization of the war on terror will be a major element of his legacy

If Ex-Ops were only a matter of reorganization it would be a potentially important but generally unremarkable exercise. But it’s much more than that.

At root, Obama’s move illustrates how American national security has been hijacked by the war on terrorism. Though terrorism is certainly a concern, the United States faces many other, more significant foreign policy challenges now and over the longer term. Russia, China, North Korea, and the proliferation of nuclear weapons come to mind, for example. Nonetheless, it is terrorism — specifically the effort to destroy Al Qaeda and the Islamic State abroad — that seems to drive much, if not most, of the White House national security agenda, including the creation of Ex-Ops.

Moreover, the doubling down on JSOC as the lead organization in the fight against terrorism reveals the sad fact that the United States is still committed to military interventionism despite the clear failure of this approach over the past fifteen years. At best, giving JSOC more power to take on terrorist groups abroad will be irrelevant to the safety of Americans at home. Remember that in the time since 9/11, the only successful Islamist-inspired attacks on American soil have been those carried out by people living in the United States — many of them American citizens. And though few will lament the eventual destruction of Al Qaeda franchises and the Islamic State, no reorganization of the targeted killing program is going to be able to do anything about homegrown terrorists. Indeed, according to an internal F.B.I. study, killing more terrorists abroad appears to have the effect of increasing the number of U.S. residents angry and motivated enough to consider terrorism in the first place.

Obama’s institutionalization of this counterproductive strategy is disturbing evidence that the White House and Pentagon have either lost the ability to interpret information about the world in an objective manner or that there is so much bureaucratic and political inertia in Washington, D.C. that analysis no longer plays an important function in crafting national security policy. Neither scenario is comforting. And either way, it appears that the war on terror will grind forward without any obvious exit strategy.

Most ominously, Obama’s moves should terrify those who worry about Donald Trump’s readiness for the role of Commander-in-Chief. Though Trump has clearly expressed opposition to large-scale military intervention and nation-building, he has just as clearly expressed aggressive tendencies when it comes to terrorism. Trump’s selection of hawkish security advisers raises the prospects that his administration will look for ways to step up the fight against terrorism. By streamlining the process of hunting and killing terrorists, Obama may well be gift-wrapping Trump’s favorite new toy just in time for Christmas.

Trump remains mercurial and hard to read on foreign policy, but it does not seem much of a reach to predict an increase in drone strikes and other special operations missions once Trump takes office in January. Whether or not it was Obama’s intention, his expansion and institutionalization of the war on terror will be a major element of his legacy.

A. Trevor Thrall is a senior fellow for the Cato Institute’s Defense and Foreign Policy Department. Thrall is an associate professor at George Mason University’s Schar School of Policy and Government.

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Beware Police Drones

Matthew Feeney

Although not as ubiquitous as other law enforcement technologies, drones will be a routine part of police officers’ toolkits in the coming years. This poses a wide range of serious privacy worries, not least because police have not disguised their enthusiasm for invasive surveillance. But many Americans are apparently unfazed. An upcoming Cato Institute/YouGov poll* reveals that almost half of Americans are not as worried as they should be about police drones.

In a nationally representative survey of 2,000 American adults, 46 percent of respondents claimed that they were not worried about police drones invading their privacy. Republicans are the least troubled, with only 43 percent claiming that police using flying snooping machines prompted privacy worries, compared to 57 percent of Democrats and 59 percent of independents.

This relative lack of concern may be because Americans are used to viewing drones as far-off tools of foreign policy or as toys. Hobbyist photography drones are readily available to the American public and they are popular gifts, with 2015 holiday season drone sales increasing 445 percent from the same period in 2014. Last year, an FAA official said that 1 million drones would be sold during the holidays. As things stand, Americans are more likely to have seen a toy drone than a police drone.

Drones are one of the latest technologies that require us to consider how much privacy we are willing to cede in the name of security and safety.

But police drones are no joyous party gift. As they make their way into more police departments across the country, we should be prepared to face the difficult civil liberties concerns they present.

Police departments have made clear that they value aerial surveillance. Reporting in August revealed that police in Baltimore had for months secretly taken advantage of aerial cameras designed by Persistent Surveillance Systems (PSS), a company that — unsurprisingly — makes surveillance equipment. This equipment was attached to Cessna aircraft and allowed PSS analysts to access to what its developer called “Google Earth with TiVo.” The cameras mounted on a single airplane can cover an area of around 30 square miles. After a crime is committed analysts can focus on the scene and fast-forward or rewind footage to see where the suspect came from or is hiding. PSS has not just been deployed in Baltimore; it has also been used in Philadelphia, Compton, and Dayton, Ohio.

Dayton police chief Richard Biehl expressed admiration for the technology in 2014, saying, “I want [the public] to be worried that we’re watching […] I want them to be worried that they never know when we’re overhead.” This passion for constant surveillance is not unique to Biehl. Indeed, law enforcement agencies across the country have used a wide range of tools such as cell-site simulatorssocial media trackers, and others to spy on citizens.

It’s easy to imagine how drones could be used for surveillance. Drones provide an aerial platform for surveillance tools and are much cheaper than airplanes or helicopters. They are also easier to operate than manned aerial vehicles, requiring much less training.

In the private sector, drone technology is improving at a dramatic rate. Facebook recently announced that its internet-delivery drone, which has a wingspan larger than a Boeing 737’s, had successfully completed its first test flight. The hope is that the drone will be able to stay aloft for months at a time. We should expect such developments to spill over into law enforcement. 

Military drone surveillance technology currently exists that allows users to see six-inch details in an area the size of a small city. While presently too expensive for many law enforcement agencies, we shouldn’t be in any doubt that when this technology is affordable police would seize on the opportunity to put it to use. Such equipment on a drone that can stay airborne for months ought to worry citizens who are used to going about their business without having their every move caught on flying cameras.

It’s possible that some of the survey respondents not worried about police drones infringing on their privacy take a “I’ve done nothing wrong, so I have nothing to hide” approach. They should reconsider their position. As drone technology improves law enforcement will be able to gather a wide range of data on citizens engaging in perfectly legal activity that they may not want police to know about, such as participating in an extramarital affair, visiting a gun show, protesting, or attending a mosque or an Alcoholics Anonymous meeting. It’s true that persistent surveillance technology attached to an airplane or drone could help investigators track where a suspected burglar or murderer lives, but absent oversight there’s no reason why the same technology couldn’t be used to track protesters, gun owners, Muslims, and others.

Drones are one of the latest technologies that require us to consider how much privacy we are willing to cede in the name of security and safety. They might seem relatively rare and harmless at the moment, but police drones will be more prolific and intrusive in the not too distant future. Americans pondering questions about police drones and their privacy must consider these factors, even if they think they have nothing to hide.

Matthew Feeney is a policy analyst at the Cato Institute.

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Five Ways Trump Can Use Fed to Aid American Workers

George Selgin

On the campaign trail Donald Trump lashed out at Washington insiders for favoring policies that were “good for Wall Street … but unfair to American workers” and of diverting money “into the pockets of a handful of large corporations.” Riffing on Franklin D. Roosevelt’s famous “Forgotten Man” radio talk, he promised to make Washington answerable to America’s “forgotten men and women.”

If Trump really means it, he should take aim at one government agency that has steered boatloads of money into the pockets of large Wall Street firms: the Federal Reserve.

To make a Fed more accountable to the people than to Wall Street, President-elect Trump and his team might start with these five reforms:

Shut the Revolving Door

Let’s hope the Trump administration really cares about America’s forgotten men and women, and that it puts its monetary policy reform agenda where its mouth is.

The Fed recently announced an expansion of a one-year ban on departing employees working at a financial institution that had been under their purview at the central bank. But this policy should go much further.

As policymakers focus on the need for diversity at the regulatory agencies, the most dangerous bias in Fed appointments is one that favors former Wall Street executives. For example, ties between the industry and the central bank are illustrated in how many presidents of the Fed regional banks used to work at a huge financial services company, with several of them having worked at one firm: Goldman Sachs. Four of the presidents — William Dudley of the New York Fed, Patrick Harker of the Philadelphia Fed, Robert Kaplan of the Dallas Fed and Neel Kashkari of the Minneapolis Fed — each at one time worked for Goldman.

To let Fed appointees help craft policies affecting their former firms is just asking for trouble.

The fix is relatively easy: In addition to the one-year ban on senior and mid-level Fed employees working at a financial firm, how about a similar if not longer “cooling off” period before the Fed board or regional banks can hire a senior executive from a major firm?

End Fed Bailouts for Good

Thanks to power under the Federal Reserve Act, the Fed lent billions of dollars to cherry-picked banks in the financial crisis. But this policy was disastrous. After the Fed made a loan to help rescue Bear Stearns, other big investment banks — including Lehman Brothers — thought that they could count on the Fed to get them out of hot water. Everyone knows what happened next.

The Dodd-Frank Act tried to constrain the Fed’s powers — known as its “13(3)” authority — by limiting emergency lending to instances that were broad-based rather than institution-specific. But this provision is so vague to be toothless. As long as any authority like this remains, the chaos of the financial crisis could happen again. It’s better to repeal section 13(3) altogether. After all, the Fed already has a way for supplying emergency funds broadly, by auctioning them to the highest bidder.   

Level Playing Field for Accessing Fed Funds

The Fed’s auctions, known as “open market operations,” have traditionally been open only to a score or so of Wall Street financial firms known as “primary dealers,” forcing other firms to seek needed liquidity through private-sector channels. That arrangement usually works; but when the primary dealers themselves get into trouble it can break down. Fear of such a breakdown is what caused the Fed to turn its 13(3) spigot wide open in 2008.

The primary-dealer system is a throwback to horse-and-buggy times, when auction participants had to actually show up at the New York Fed. Today, the internet makes that unnecessary. The European Central Bank routinely allows hundreds of European banks to participate in its auctions. The Fed ought to follow its example. To make 13(3) lending unnecessary, it can also let “systematically important” (i.e., too-big-to-fail) nonbanks take part. Finally, it can offer to trade cash for a broader set of securities, as it did temporarily using its “Term Auction Facility,” and as the Bank of England now does routinely.

Stop Paying Banks to Hoard Cash

As a way to set a floor on falling interest rates, the Fed has been rewarding banks for holding on to cash since October 2008 by paying them “interest on excess reserves.” But that policy never made sense. Credit was already rapidly drying up, but IOER made it dry up even faster. Paying such interest has worked like a brake on bank lending and the economic recovery ever since.

The policy also adds to the federal deficit by reducing the Fed’s net earnings, which are government income. The Fed also pays interest to foreign banks. In fact, U.S. subsidiaries of foreign holding companies hold a disproportionate share of excess reserves at the Fed. If Trump doesn’t want Americans to foot foreign nations’ defense bills, why have them prop up foreign banks?

Subject the Fed to GAO Audits

Most of the Fed’s monetary operations are exempt from ordinary audits by the Government Accountability Office. Fed officials claim that allowing such audits would undermine the Fed’s independence. But allowing unrestricted GAO audits of the Fed doesn’t alter Congress’ constitutional Fed oversight powers at all. Instead, by supplying needed information on the Fed’s programs, the GAO could allow Congress to exercise those powers more responsibly. If this means making Fed officials answer tougher questions, that’s a benefit instead of a defect.

Other monetary reforms could also help ordinary citizens. But this list is at least a start. Let’s hope the Trump administration really cares about America’s forgotten men and women, and that it puts its monetary policy reform agenda where its mouth is.

George Selgin is director of the Center for Monetary and Financial Alternatives at the Cato Institute.

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Tell the Children the Same Thing about Donald Trump as for Any President: Beware

Gene Healy

Two months before Election Day, Hillary Clinton tweeted: “the choice in this election is about who will have the power to shape our children for the next four years of their lives.” It was, I thought at the time, an insanely totalistic view of the president’s role, as well as a rotten thing to tell expectant parents, who’d spent a whole summer worried about the Zika virus.

Still, many of our fellow citizens share Clinton’s perspective, judging by the onslaught of post-election columns with titles like: “Donald Trump is our next president. What do we tell the children?” Apparently, that’s what a lot of parents are asking themselves—or their therapists—in the wake of Donald Trump’s startling victory.

Daniel Griffin, a D.C.-area psychologist, told the Washington Post that “many patients were walking into his office ‘shellshocked,’” wondering what they could possibly say to their little ones. “It never really hits you in the gut until you think about your own kids,” Will Bunch broods in the Philadelphia Inquirer, concluding that his son (age 22) and daughter (“24 and starting grad school”) were ready for the harsh truth: “Resist him.”

‘We Need to Talk about Donald’
There’s no doubt that “what do we tell the children?” is a genuinely difficult and wrenching question for some parents. Undocumented immigrants whose families face a greater risk of deportation, for example, or Muslim-Americans worried about increased fearmongering and public hostility, have good reason to think about how much their kids can handle at what age.

For most families, however, the “conversation” needn’t be so fraught with angst. It might even be the occasion for a valuable lesson: Tell your kids the truth: the president can be a bad person, even a terrible one. You don’t have to admire him if he doesn’t deserve it. And just because he’s a creep doesn’t mean it’s okay for you to be one too.

If you’re teaching your kids that the president reliably tells the truth and does the right thing, then the future citizens you’re raising may turn out gullible and easily led.

Up to a certain age, belief in Santa Claus is charming, and entirely harmless. Blind faith in presidential benevolence is neither. If you’re teaching your kids that the president reliably tells the truth and does the right thing, then the future citizens you’re raising may turn out gullible and easily led.

Why lie to them? After all, in living memory, presidents have conducted themselves abominably in their personal relationships, lied us into war, and, in former Nixon aide John Dean’s memorable phrase, “use[d] the available federal machinery to screw [their] political enemies.” Trump, who seems positively gleeful about the prospect of turning the federal machinery against his enemies, seems unlikely to set a higher standard of presidential character.

In a more innocent time, Americans raised their children to look up to the president—and they did. The political scientist Fred Greenstein interviewed hundreds of grade-schoolers for a 1960 article in the American Political Science Review, ”The Benevolent Leader: Children’s Images of Political Authority.” The children evinced “strikingly favorable” attitudes toward political leaders, especially the president.

In fact, Greenstein found it almost impossible to elicit any skepticism from the children he interviewed, despite “a variety of attempts to evoke such responses.” Far more typical were statements like “[the president] gives us freedom” and “he has the right to stop bad things before they start.”

That pattern of “juvenile idealization of the President” persisted in subsequent studies of children throughout the 1960s. Nor was it limited to juveniles: writing in 1970, presidential scholar Thomas Cronin observed that even college students’ textbooks of the era offered a comic-book vision of presidential “omnipotence” and “moralistic-benevolence.” “The student learns that the presidency is ‘the great engine of democracy,’ the ‘American people’s one authentic trumpet’?”; moreover, “if, and only if, the right man is placed in the White House, all will be well, and, somehow, whoever is in the White House is the right man.”

Putting away Childish Things
Americans grew up fast in the years that followed, however. Throughout the early 1970s, the public learned that presidents had lied about Vietnam, turned intelligence agencies against U.S. citizens, and abused their powers for political gain. Americans came to grips with the revelation that their president, our national father figure, could be a foul-mouthed, [expletive deleted] crook.

H.R. Haldeman, Nixon’s chief of staff, saw what was coming as early as 1971: warning the president about the effect of the Pentagon Papers leak:  “the implicit infallibility of presidents, which has been an accepted thing in America, is badly hurt by this, because it shows that people do things the President wants to do even though it’s wrong, and the President can be wrong.”

By the mid-’70s, even children had abandoned the childish belief in “the implicit infallibility of presidents”: subsequent surveys of grade-schoolers revealed that kids no longer viewed the president as an unambiguously benevolent leader. So too with later generations of American kids: in a 2002 study following Greenstein’s methodology, fourth through eight graders were “willing to grant importance to the office of the presidency, yet they are not willing to give unconditionally positive evaluations of the president.” The authors found “a consistent cynicism regarding the individual person of the president observable throughout all of the grade levels.”

For nearly eight years, President Obama has waged a War on Cynicism from the bully pulpit, railing against “those who question the scale of [government’s] ambitions,” and telling college students to reject the “voices” that “warn tyranny is lurking just around the corner.” Somehow, what the president decried as “cynicism” always sounded like healthy skepticism toward increased federal power. In Trump’s case, even Obama might be starting to appreciate the “cynics’?” point.

Gene Healy is a vice president at the Cato Institute and author of The Cult of the Presidency: America’s Dangerous Devotion to Executive Power.

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TPP, R.I.P.?

Daniel J. Ikenson

President-elect Donald Trump has vowed to withdraw the United States from the Trans-Pacific Partnership (TPP) on his first day in office. That would be an especially excessive move, given that the TPP can have no effect, anyway, without the president’s signature affixed to legislation implementing the deal. A wiser approach would be for Mr. Trump to put the TPP on the back burner and keep open the option to reconsider it in the future, when the deal’s geostrategic imperative becomes more apparent.

THE UNITED STATES IN THE ASIAN CENTURY

Completed in 2015 after six years of rigorous negotiations, the TPP is an agreement to reduce trade and investment barriers among 12 Pacific Rim countries, including the United States. If implemented, the TPP would deliver real economic benefits to U.S. businesses, workers, consumers, and investors. Perhaps more important in a time of growing uncertainty about the direction of global affairs, the TPP would reaffirm the primacy of the rules and institutions established under U.S. leadership after World War II. That architecture provided the conditions for trade to flourish, relative peace to take hold, and unparalleled prosperity to persist for 70 years.

Indeed, the geostrategic rationale for TPP is much less about achieving overt economic and security objectives than it is about preserving—and strengthening—U.S. soft power. As the economic center of gravity shifts from West to East across the Pacific, those successful trade rules and institutions could yield to lesser, opaque, and discriminatory rules, which could become the norm in Asia without the TPP. And those rules could very well subvert the existing order, advance parochial objectives, and disadvantage U.S. commercial interests.

There could hardly be a better implement in the U.S. geostrategic toolbox than the TPP for projecting U.S. values, securing U.S. interests, and compelling China and others to play by the rules that will govern international commerce in the twenty-first century.

Ratification of the TPP is the greatest insurance policy against those outcomes. It would affirm the primacy of open trade, non-discrimination, and transparency. It would ensure that rules—and not the whims of autocrats—continue to govern global commerce, reducing uncertainty and the scope for denying U.S. entities rightful opportunities to partake of the benefits of Asia’s economic expansion in the decades ahead. In that sense, TPP implementation would extend Pax Americana deep into what has been called the Asian century.

Through eight successful rounds of multilateral trade liberalization under the auspices of the General Agreement on Tariffs and Trade between 1947 and 1994, the global economy shed the tightest shackles of protectionism. The last successful multilateral agreement—the Uruguay Round, held between 1986 and 1994—created the World Trade Organization, which enshrines the previous half century’s trade rules and serves as a beacon that guides disputes away from trade wars and toward resolution.

But in the last decade momentum for continued multilateral liberalization stalled and the ill-fated Doha Round was unofficially eulogized.

The TPP offers the last best chance to achieve a fresh round of comprehensive global trade liberalization under U.S. leadership. It reasserts the primacy of the rule of law in trade and expands its coverage to aspects of global commerce that didn’t even exist when the current rules were last updated, 22 years ago. As an agreement that includes countries on four continents and is open to new members that qualify, the TPP could evolve into a vehicle for achieving a much more broad-based round of multilateral trade liberalization.

Economies accounting for nearly 40 percent of global output and one-third of trade are among the TPP’s charter members, so the deal has achieved critical mass. That heft allows the TPP’s terms to be offered to prospective new members on a take-it-or-leave-it basis. If regional investment shifts from TPP nonmembers to TPP members, the incentive to join the agreement would only grow. Many countries, including Indonesia, South Korea, Taiwan, and Thailand, have already expressed interest in joining and have begun to undertake the domestic reforms necessary to qualify for the TPP.

With each new accession to the deal, the cost of remaining on the outside would only increase. That applies to China, too, which could watch some of its most important trade partners join TPP and, at some point, concede to having no better alternatives than to embrace the TPP, as well—and to accept the new rules that would rein in some of the abusive practices for which it is so frequently criticized.

The TPP was launched as the economic component of the Obama administration’s strategic “pivot” to Asia. There could hardly be a better implement in the U.S. geostrategic toolbox than the TPP for projecting U.S. values, securing U.S. interests, and compelling China and others to play by the rules that will govern international commerce in the twenty-first century. And there is no better way to dissuade China from bellicosity over its regional territorial disputes than to demonstrate a prosperous alternative to 1930s-style resource-driven expansionism in Asia. Rather than deploy a naval fleet, why not offer China and its neighbors a clear and plausible path to faster growth and security?

President-elect Trump has criticized free-trade agreements for being poorly negotiated. By putting the TPP on hold—rather than killing it—President Trump would buy himself some time to contemplate its geostrategic significance, as well as identify specific provisions to be renegotiated.

THE COST OF FAILURE

What Trump will come to understand is that, although failing to implement the TPP would not mean imminent regional conflagration, it would send an unmistakable message that the United States remains preoccupied and that the strategic pivot was just bluster. Suddenly anxious to remain in China’s good graces, TPP countries and others in the region would be compelled to seek closer ties with Beijing. (This is already happening, most obviously with the Philippines and Malaysia.)

Reformers in foreign governments who incurred political costs to push the TPP in their countries with expectations of U.S. participation wouldn’t soon forget who left them hanging out to dry. Any remaining expectations that the United States is still capable of leading the world to the economic liberalization it so desperately needs would erode. And with that diminished credibility, U.S. policy objectives would become more difficult or impossible to meet.

As the twenty-first century progresses, the United States will continue to exert disproportionate influence over the international order—unless it chooses to turn inward. U.S. failure to implement the TPP would serve as confirmation of such a fateful turn.

Daniel J. Ikenson is director of Cato’s Herbert A. Stiefel Center for Trade Policy Studies,