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Viewing All Challenges Through an Inequality Lens Distorts Focus on the Big Issues

Fri, 05/17/2019 - 10:51

Ryan Bourne

To a man with a hammer, everything looks like a nail. To a political leader who believes in equality of economic outcomes, differences between groups look like injustices.

Jeremy Corbyn has made reducing disparities a central goal of his political programme. Whether thinking about gender outcomes, income inequality, or regional divides, he sees a world not conforming to his priors as automatically unjust.

For him, there’s no room for positive explanations for differences in economic outcomes, such as free choice, hard work, or welfare-enhancing entrepreneurship. No, as the Pope once claimed, inequality is an “evil” that must be stamped out. In fact, economic inequality is the egalitarian Left’s explanation for most social and economic ills that afflict us, including our current political turmoil.

Such a world view has never had much truck with the public. Yet usually careful analysts and journalists are increasingly suspending their critical faculties in the allure of this monocausal thinking. Starting with Richard Wilkinson and Kate Pickett’s book The Spirit Level and pushed on by Thomas Piketty’s bestselling tome Capital In The Twenty-First Century, it’s now common to hear or read that, left unchecked, inequalities threaten slower growth, health crises and the future of capitalism and democracy.

It’s in this context that to great fanfare, the Institute for Fiscal Studies launched a major inequality review this week, chaired by economic Nobel Prize winner Angus Deaton. They promise us “a comprehensive understanding of inequalities” covering “living standards, health, political participation and opportunity, not just between the rich and poor but by gender, ethnicity, geography and education too”.

Its first paper provides interesting data on all these issues, but is at pains to point out that the trends analysed need not be thought problematic. Indeed, a key aim of the project is disentangling which inequalities we worry about, which we should worry about, and which are benign.

Yet reading the report, something struck me. The most concerning trends are nothing to do with inequality, and should occupy us regardless of which groups they affect. Meanwhile, the issues about economic inequalities are often the least worrying.

In shoehorning together disparate issues under an umbrella “Inequality Review”, the IFS therefore risks faulty interpretation of their work’s message — with people claiming economic inequality causes the bad outcomes they highlight and over-dramatising what policy should do to correct them.

Some media reporting and political reaction to the paper shows these fears are justified.

Take mortality rates. The IFS noted that among the middle-aged (45 to 54-year-olds), death rates have risen for both men and women since the early 2010s following previous continuous improvement. This recent trend has been driven in part by higher “deaths of despair” — suicides, overdose and alcohol-related liver disease — combined with a plateau in previously falling death rates from cancer and heart disease.

This is obviously deeply concerning. But there is no evidence for the conclusion of the BBC that “Inequality [is] driving ‘deaths of despair’” — not least because most measures of UK economic inequality, other than the top 1pc income share, have plateaued for 25 years. More fundamentally, the loss of human life in middle-age would be a tragedy worth addressing irrespective of whether death rates were unevenly distributed across regions, genders, income or educational attainment levels.

The IFS team also shows the home ownership rate for 25 to 34-year-olds collapsed from 55pc in 1997 to 35pc in 2017. But presenting that as an intergenerational inequality rather than a housing market dysfunction risks the perception that previous generations’ good fortunes are responsible for current difficulties. That might see calls for a “levelling” through, say, laws against multiple-home ownership, rather than the first-best solution of changing land-use laws to make housing supply more responsive to demand for all.

In other words, I’ve a similar fear from all this to that expressed by the former financial secretary to Hong Kong, John Cowperthwaite. He refused to measure the island’s GDP, warning that once you track something, politicians try to manage it. Framing and measuring inequalities rather than assessing the efficacy of individual markets can likewise lead to a focus on reducing gaps rather than dealing with the underlying problem in ways that improves outcomes for all.

We already see this with the way Corbyn talks of income and wealth inequality. He infers both are “bad” per se, with little analysis given to what has caused the shape of a distribution. When talking of the top 1pc of chief executives, he doesn’t distinguish entrepreneurial activity, which might raise inequality, from getting wealth unjustly from rent-seeking. Perhaps if he did, he’d realise that eliminating cronyism is desirable whatever its effects on the income distribution.

Motivated reasoning on economic inequality comes thick and fast in UK debates these days too. Despite the flatlining in most UK measures for a quarter of a century, commentators assert with very weak evidence that income disparities have caused more contemporary phenomena, such as the financial crisis, mental health trends and even Brexit.

This spreading belief in the all-powerful inequality explanation is probably an American import. But even data-driven journalists and commentators with strong statistical groundings genuflect to the conventional wisdom. The original BBC online headline to this report was itself entitled “Inequality threatens democracy”. This was an assertion for which no evidence was presented in the article or the IFS paper.

Therein lies the difficulty. If the Deaton review tackles these issues with the nuance, context and analytical reasoning they deserve, it could be a groundbreaking project. My fear is that its framing will prove catnip to those such as Corbyn with monocausal faith that inequality is the font of all ills, distracting us from important economic and social challenges and the best solutions.

Ryan Bourne holds the R Evan Scharf chair for the public understanding of economics at the Cato Institute.

School Choice Works -- for a Third of the Cost

Thu, 05/16/2019 - 09:50

Corey A. DeAngelis

School choice opponents frequently claim the Washington, D.C., school voucher program is a failure. But I have a hunch that’s going to change pretty soon.

The previous federal evaluation of the D.C. Opportunity Scholarship Program found negative effects on math test scores and no effects on reading test scores after two years. But the most recent evaluation, just released Wednesday, found that winning a lottery to use a voucher to attend a private school in D.C. had no effects on math or reading test scores after three years.

Though seemingly lackluster, these results are actually great news for school choice.

The most recent federal evaluation of the D.C. voucher program finds that it increases student satisfaction and safety, and decreases absenteeism, at a third of the cost of public schools.

Public schools in D.C. spend around $28,000 per student each year, while the average private school voucher amount is only around $9,600 per student each year in D.C.. That means a K-12 education costs around $364,000 for each child in D.C. public schools, but only about $125,000 for each voucher student.

That’s right — the federal evaluation reveals that private schools produce the same academic outcomes for only a third of the cost of the public schools. In other words, school choice is a great investment.

But that’s not all.

This study adds to the mounting evidence that school vouchers are tickets to safer schools. Students that won the voucher lottery to attend a private school were 34% more likely to report being in a very safe school than their peers in public schools. While students using vouchers took three years to catch up to their public school peers on math test scores, the federal evaluation found positive safety effects every year. Two other experimental evaluations have similarly found that school vouchers improve school safety.

The D.C. voucher program also increased students’ satisfaction with their schools by 18% and decreased chronic absenteeism by 27% after three years. Imagine that: When a student is satisfied with their school, and they feel safe while they’re there, they are more likely to show up to class each day.

But how do private schools compete with D.C. public schools with a third of the funding per student?

It’s pretty simple. Basic economic theory suggests we shouldn’t be surprised that private schools do more with less. Private schools must cater to the needs of their customers (families) if they want to keep their doors open. Public schools, on the other hand, hold strong monopoly power because of residential assignment and funding through property taxes.

The most recent federal evaluation of the D.C. voucher program finds that it increases student satisfaction and safety, and decreases absenteeism, at a third of the cost of public schools. That’s obviously a great investment. But why do students receive a third of the funding for simply choosing a school that works for them? And what kinds of benefits would the program produce if all students were equitably funded?

Corey DeAngelis is Director of School Choice at the Reason Foundation and an adjunct scholar at the Cato Institute.

Iran Says 'Hell No!' to Trump's Aggression

Thu, 05/16/2019 - 07:32

Doug Bandow

President Donald Trump says he wishes Iran would call him. All he wants, he insists, is “a deal, a fair deal.” Apparently, he’s realized he was wrong to believe that the regime he’s attempting to overthrow would grovel before him. So now the White House has announced that it’s given the Swiss government his phone number to pass along to Tehran.

They’re doing exactly what we would do in their situation and we should change course before it gets worse.

Of course, Switzerland probably feels whiplash. In 2003, Tehran offered to negotiate with George W. Bush through a Swiss emissary. The neocon-heavy, war-happy Bush administration dismissed the proposal out of hand.

The Trump administration is also unsuccessfully pushing Europe to stop resisting U.S. sanctions. Washington’s tone has alternated between imperious and whiny, neither of which has attracted much support. The usual warrior wannabe pundits, meanwhile, have made a similar suggestion: the Europeans should be as faithless as America and offer to join in receiving Iran’s surrender.

Tehran unsurprisingly disdains contact with Washington. Barely a year ago, the president cavalierly took the U.S. out of the Joint Comprehensive Plan of Action (JCPOA), the multilateral nuclear agreement and product of a highly complex international negotiation and difficult give-and-take within as well as between nations. At 159 pages, the JCPOA was the most detailed nuclear inspections regime ever created. (A month later, President Trump cheerfully accepted the substantively meaningless two-page Singapore summit statement as a definitive commitment by North Korea to disarm.)

Trump might enjoy posturing as negotiator-in-chief, but he has made it almost impossible for the Iranian government to engage him, let alone accept his demands. In truth, the administration’s confrontational approach has been a failure for America and a disaster for the Iranian people. The president’s policy has guaranteed continued tensions. His coterie of warmongering appointees are determined for regime change. The administration’s hypocrisy is also staggering: they accuse Iran of meddling in the Mideast—while Washington invaded Iraq, attacked Libya, and sought to oust the Syrian government—and of committing human rights violations—while the U.S. allied with autocratic Bahrain, Egypt, Saudi Arabia, and the United Arab Emirates.

The Trump administration has discouraged peaceful engagement in multiple ways.

  • Tossing out the JCPOA and insisting on massive and unilateral concessions. This demand would be dismissed by any other country, including America. What government, absent total military defeat, would accept a public call for de facto diplomatic surrender and national humiliation? Real estate developer Donald Trump certainly would not react well if someone demanded the same of him.
  • Misjudging the reason Tehran entered into negotiations with the Obama administration. Iran desired sanctions relief, but even more important was U.S. acceptance of the former’s right to continue enriching uranium, which the Trump administration rejects.
  • Unilaterally tearing up the JCPOA, thereby making Washington an unreliable negotiating partner. Even if a new agreement were to be reached, what would prevent the president from declaring it to be insufficient later on, reimposing sanctions, and making new threats of war absent additional Iranian concessions? What would stop a future administration from following his precedent? Iran has little incentive to reach any deal with the administration.
  • Destroying a compromise promoted by more moderate factions in Tehran, dramatically discrediting those most interested in negotiating with Washington. The relative balance of power has now shifted toward those in Iran who preach distrust and confrontation. What intelligent Iranian politician today would endorse Donald Trump as a serious negotiating partner? Even President Hassan Rouhani is now playing the hawk, announcing that Iran will gradually leave the JCPOA if the Europeans fail to deliver continued economic benefits, as promised.
  • Imposing sanctions, which hit hardest the westward-looking middle and commercial classes. While they may be dissatisfied with the Islamic government, their focus increasingly is on economic survival. And the main cause of their distress is Washington, not Tehran.
  • Insisting that Iran abandon its primary means of defense by eliminating its missile program. The country’s conventional military forces have shrunk dramatically in capability even as the U.S. has bolstered the arsenals of Tehran’s enemies, most notably the Kingdom of Saudi Arabia and the United Arab Emirates, with modern arms. Because those nations remain essentially amalgams of city states in the desert, the one thing Iran can do is hit them with missiles.
  • Expecting Iran to abandon an independent foreign policy. At Baghdad’s request, Tehran helped its Shia neighbor defeat the virulent Sunni Islamic State insurgency (which had been loosed by America’s invasion). Similarly, answering Damascus’s call, Iranian forces assisted in defeating multiple insurgents, many aided by Washington. With good reason, the Islamic Republic views the U.S. as its enemy—plotting the 1953 coup, supporting the repressive Shah, backing Iraq’s invasion of Iran, constantly threatening war. Yet the Trump administration expects Tehran to accept being treated as a veritable puppet state within Washington’s sphere of interest.
  • Expecting Shia Iran to also accept the de facto suzerainty of Sunni Saudi Arabia. The aggressive Saudi crown prince has pushed the U.S. to actively join the Sunni-Shia struggle. Thus has America become an ally in Saudi Arabia’s brutal war of aggression against Yemen. Riyadh also wants the U.S. to wage war against Iran. Accepting the administration’s demands would deliver the Mideast to Saudi Arabia’s not so gentle mercies without a shot being fired.
  • Attempting to foment revolution and regime change by starving Iran’s population. Doing so is not only inhumane but counterproductive. Sanctions have stoked internal dissatisfaction while allowing the regime to blame America. Moreover, violent crises and implosions rarely yield liberal, pro-Western regimes. Notably, the administration has had no better results elsewhere—Cuba, Venezuela, Russia, North Korea. If Washington does succeed in wrecking Iran’s existing government, the winners in any resulting power struggle probably won’t be our friends.

Of course, Iran would be better off freed from radical Islamic rule. But for all its sanctimonious rhetoric, the Trump administration doesn’t seem to care about Iranians’ human rights. Moreover, its general approach to Iran is almost entirely wrong, driven by both Saudi Arabia and Israel. Policy should instead reflect America’s interest in minimizing regional tensions, reducing our number of adversaries, and shifting security responsibilities onto friends and allies.

That requires engagement. So far, President Trump has used but one tactic: sanctions. The Obama administration was correct in thinking that the JCPOA could help transform Iran. The process was never going to be easy or simple, especially since Islamist factions understood the West’s appeal to many Iranians, including younger urbanites. Before President Trump inadvertently helped Islamic hardliners by junking the nuclear accord, Tehran’s internal political struggle was sharpening. Creating additional foreign economic opportunities would have increased pressure on the regime to expand outside cooperation. And that pressure would have steadily grown. While there was never a guarantee that a democratic Iran would have emerged, the chances would have been much better than they are today.

The U.S. also needs to acknowledge and respect Iran’s security interests. Yes, the regime is malign. However, governments do not voluntarily dismantle themselves and they do not willingly weaken their defenses. Every American military threat increases the case in Tehran for building more missiles and restarting the nuclear weapons program. Insisting that Iran accept American and Saudi domination makes it imperative that the Islamic Republic maintain and deploy unconventional forces and foreign proxies. Washington would do much better to encourage its well-armed partners to seek détente rather than permanent sectarian conflict.

Imagine a foreign power imposing harsh economic sanctions on and threatening war against the U.S., attempting to starve Americans into revolt, insisting that Washington accept Mexican domination of the continent, and demanding that America yield its principal defensive weapons. No doubt a few Americans would advocate surrender. But the vast majority would shout not only “no!” but “hell no!” In this respect, foreigners are a lot more like us than we might like to think.

The U.S. and Iran should talk. But contrary to the president’s hope, giving Tehran an economic ultimatum will not bring it to the negotiating table. Trump has destroyed the possibility of normal diplomacy between his administration and the Iranian government. Unless he dramatically changes direction, the Middle East will become a much more dangerous place.

Doug Bandow is a senior fellow at the Cato Institute. A former special assistant to President Ronald Reagan, he is author of Foreign Follies: America’s New Global Empire.

Taiwan's Growing Political Turbulence Creates a Problem for Washington

Wed, 05/15/2019 - 13:21

Ted Galen Carpenter

U.S. policy goals over the decades since President Richard Nixon initiated a rapprochement with the People’s Republic of China (PRC) have been quite consistent. Officials in various administrations, conservative and liberal, Republican and Democrat, have sought to preserve the status quo between Taiwan and the PRC. That means perpetuating Taiwan’s de facto independence, but encouraging steps to reduce tensions between the island and the mainland. As far as U.S. officials are concerned, decisions about Taiwan’s ultimate political status should be put on hold indefinitely. In essence, Washington’s “Goldilocks” scenario favors a cautious relationship between Taipei and Beijing that eschews both confrontation and progress toward reunification. Unfortunately, growing political volatility in Taiwan, impacting both the governing Democratic Progressive Party (DPP) and the opposition Kuomintang Party (KMT), poses a major threat to that goal.

It’s not the first time that there are troubling developments in Taiwan from the standpoint of U.S. interests. During the initial years of the twenty-first century, Taiwanese President Chen Shui-bian alarmed U.S. officials because he seemed to take too seriously the DPP’s official position in favor of full-fledged, official independence for the island. Chen repeatedly blindsided Washington with pro-independence initiatives that provoked Beijing. U.S. leaders were more relaxed with Chen’s successor, KMT leader Ma Ying-jeou, who pursued an array of closer economic and cultural ties with the mainland. As the number of cross-strait agreements grew, however, some hawkish elements in the U.S. foreign policy community began to fret that ties between Beijing and Taipei might be growing a little too close.

A majority of Taiwanese voters appeared to harbor similar concerns, not only electing DPP candidate Tsai Ing-wen as president in 2016 but also giving the DPP control of the national legislature for the first time. Tsai has proceeded more cautiously than Chen did regarding independence, but Beijing’s disappointment and anger at Taiwan’s retreat from Ma’s conciliatory policies has led the PRC to adopt even more belligerent measures than during Chen’s years in office.

Washington has seemed reasonably content with Tsai. Indeed, the Trump administration and Taiwan’s admirers in Congress have adopted measures to increase U.S. backing for Taipei in response to Beijing’s bullying behavior. Support at home for Tsai’s presidency, though, has ebbed, and the DPP suffered major setbacks in November 2018 local elections. Tsai was pressured to quit her post as party chair, and she now faces a strong internal challenge for re-election as Taiwan’s president from her onetime prime minister, William Lai, who is competing with Tsai for the DPP’s nomination in an upcoming primary.

Washington has reason to see Lai as another Chen Shui-bian - a potential loose cannon when it comes to relations with the mainland. Lai has sharply criticized Tsai for ineffectual leadership and is taking a markedly more pro-independence stance. He warns against any consideration of Beijing’s offer of a “special status” for Taiwan - acceptance of official reunification, but with Taiwan enjoying political autonomy akin to that of Hong Kong. Lai expresses emphatic opposition to such an agreement, noting that Beijing has gradually eroded Hong Kong’s autonomy, and that acceptance of a similar special status would ultimately result in Taiwan becoming another Tibet - a victim of communist subjugation. Some of Lai’s supporters are even more adamant about the need for full independence, and voice extreme impatience with Tsai about her unwillingness to take a stronger stand on the issue.

Political trends are equally unsettled in the KMT. In a crowded, multi-candidate race with New Taipei Mayor Eric Chu having emerged as the initial frontrunner, two individuals especially worry Washington and those Taiwanese who are determined to preserve the island’s de facto independence. One is Kaohsiung mayor Han Kuo-yu, a populist maverick, who shocked the nation with his upset 2018 win for that post. Han has drawn comparisons to Donald Trump, especially because of outlandish policy promises and unflattering comments about women and minorities. Potentially even more worrisome, though, are his extremely accommodating views about relations with Beijing. Indeed, there are indications that the PRC launched a subtle propaganda campaign to nudge Taiwanese voter opinion in his favor. Although Han announced on March 31 that he would not run for the KMT nomination, he now appears to be wavering about that decision.

The entry of Terry Gou into the race creates similar concerns about China policy. Gou, the business tycoon who founded Foxconn, Apple’s leading manufacturer of iPhones, also has led to Trump comparisons, in part because, like Trump, he has never held public officebefore making a run for the presidency. Like Trump and Han, Gou also has drawn fire for insensitive, if not blatantly sexist, views. That’s no small matter when Taiwan’s incumbent president is female.

KMT partisans worry that with Gou’s candidacy, the party faces the growing danger of a bruising, divisive, and close-fought primary battle among multiple candidates. The KMT’s new fissures could waste the apparent advantage caused by the Tsai-Lai feud in the DPP. Indeed, the bitter divisions in both parties could open the path for a strong independent or third-party bid, especially by Taipei mayor Ko Wen-je.

Gou’s views on China may worry Washington at least as much as those of Han and Lai. Gou stresses the goal of dampening tensions with the mainland and rejects the notion that Taiwan can preserve its de facto independence by military means or outside support. When he asked rhetorically: “Why should Chinese people fight Chinese people?” it set off a political firestorm for two reasons. First, a majority of people on Taiwan identify as Taiwanese, not Chinese. Second, his cavalier comment appeared to reflect a very casual attitude about the hardline tactics that Beijing has already deployed and appears determined to intensify. Tsai immediately scorned Gou, suggesting that he tell China to refrain from warlike behavior and the pursuit of an arms race.

Washington has ample reason to be uneasy about the political trends in both the DPP and the KMT. If Lai unseats Tsai in the primary and goes on the win the general election, U.S. policymakers will have to deal with a Taiwanese leader perhaps even more determined than Chen was to push the envelope on Taiwan’s independence. The result almost certainly would be a spike in already worrisome cross-strait tensions, increasing the danger of an armed clash between the PRC and Taiwan’s protector, the United States.

The prospect of Han or Gou as president is less dangerous, but Washington still has reason to dislike the potential impact on U.S. policy in East Asia. Both men seem to blur the distinction between a cautious, moderately accommodating policy toward Beijing and one of outright appeasement. That approach could bring Washington’s hopes for a continued Goldilocks scenario regarding Taiwan’s status to an abrupt end.

American leaders should conduct a comprehensive reassessment of U.S. policy toward Taiwan. Smart great powers don’t allow themselves to be put in a situation where they can get whipsawed by volatile domestic political developments in a client state. Yet that is where Washington now finds itself regarding Taiwan, and the consequences could be extremely unpleasant.

Ted Galen Carpenter, a senior fellow in defense and foreign-policy studies at the Cato Institute and a contributing editor at the National Interest, is the author of ten books, the contributing editor of ten books, and the author of more than seven hundred articles on international affairs.

The Folly of Protectionist Tariffs

Wed, 05/15/2019 - 08:07

Michael D. Tanner

Conventional wisdom holds that it is the “elites” who are opposed to President Trump’s protectionist policies, including his recent ramp-up of tariffs on Chinese goods, and it is true, insofar as support for free trade increases with education and income. But the reality is that poor and working-class Americans will be hurt the most by Trump’s trade war.

Trump’s trade war will hurt poor and working-class Americans the most.

Trump’s insistence to the contrary notwithstanding, most of the cost of tariffs is paid by American consumers (through higher prices), not by the countries being sanctioned. For instance, it is estimated that the president’s latest round of tariffs on China will cost the American family an average of at least $767.

But that cost does not fall equally on poor and rich alike. To state the obvious, $767 means a lot more to a poor family struggling to pay its bills than it does to a wealthy one. Moreover, tariffs are more likely to fall on goods and services that the poor depend on, daily necessities of which they often lack a reserve supply.

Consider that among the companies that have announced they will be most impacted by the China tariffs are Walmart, Target, and Costco, none of which are known as the store of choice for global elites.

Studies show that the lower your income is, the harder you’ll be hit by tariffs. Tariffs imposed by Trump last year have already cost poor families 0.33 percent of after-tax income, as opposed to 0.28 percent for wealthy families, and hurt single parents even more than they hurt families. Trump’s latest tariffs will likely be even more regressive. And while each new tariff’s impact is relatively small, they cumulatively take a big hit out of poor people’s income.

If that wasn’t bad enough, there is little doubt that an extended trade war with China will damage the broader American economy. Some economists estimate that Trump’s tariffs on Chinese goods and China’s retaliatory tariffs on American goods will cost the U.S. economy $62 billion in lost output. One research group, Oxford Economists, fears that if the trade war expands and tariffs on both sides are extended to the full range of traded goods, it could reduce U.S. GDP by more than 2 percent, and even push the U.S. economy into a recession. The Trade Partnership, an industry group, warns that anywhere from 900,000 to 2 million jobs could be at risk if the trade war drags on, roughly eight jobs lost for every job saved. Very few of those lost jobs are held by “elites.”

If we should have learned anything from history, it is that the free market does more to help people escape poverty and move up the economic ladder than the government ever could. On the other hand, government intervention in the market seldom helps the poor and struggling. And once one moves beyond the populist rhetoric, protectionism is no different: The very people whom the president says he is fighting for will end up on the losing end.

Michael Tanner is a senior fellow at the Cato Institute and the author of The Inclusive Economy: How to Bring Wealth to America’s Poor.

How Donald Trump May Push America into a War with Iran

Wed, 05/15/2019 - 07:47

John Glaser

Is the Trump administration readying war plans against Iran? Somebody certainly wants us to think so. The question is who, and for what purpose?

A bombshell New York Times article details an updated military plan that was presented by Acting Defense Secretary Patrick Shanahan last week. The plan calls for up to 120,000 U.S. troops to be deployed to the Persian Gulf region “should Iran attack American forces or accelerate work on nuclear weapons.” This is cause for alarm. But the plan apparently does not call for a full ground invasion of Iran, which would require a much higher number of troops. And President Trump, who recently asked Iran’s leaders to call him on the phone, seems unlikely to authorize such a war, which would dismay a significant portion of his base as the 2020 campaign picks up.

The Trump administration’s frenzied provocations could lead America to the brink of a conflict with Iran-one that almost no one actually wants.

So, why are we reading about this in the newspaper? One possibility is that the war hawks in Trump’s White House want to publicly signal to Iran and the international community that the administration is prepared to use force in response to Iranian misbehavior. Another possibility is that the anonymous national-security officials who leaked this have grown uneasy about National Security Advisor John Bolton’s determination to attack Iran and change its regime. They might see his recent bureaucratic maneuvers, including a highly unusual visit to CIA headquarters and a recent incident in which he deliberately exaggerated raw intelligence in order to depict a long-scheduled carrier deployment to the Gulf as a deterrent threat to Iran, as dangerously provocative posturing that could unintentionally start a war. A third possibility is that both of these are happening simultaneously.

The ongoing internal drama over Iran policy demonstrates how ill-equipped Trump is for the job of president. Three years into his first term, Trump is on his third national security advisor, his second Secretary of State, and the position of Defense Secretary has been vacant for four months following Mattis’s resignation in December. The president appears unable to unite his own cabinet around a clear strategy.

He has filled his national security team with war hawks and, with Iran tensions rising, the policy results reflect this quite well. The White House recently took the unprecedented measure of designating the Iranian Revolutionary Guard Corps as a terrorist organization, which officials have warned could put U.S. forces in the region at risk. The United States has also embarked on a concerted campaign of economic warfare against Iran, increasing sanctions and bullying the international community into zeroing out imports of Iranian oil. The resultant economic slump has caused tangible pain and suffering among the Iranian people (an intended consequence of the policy) and has bolstered the hardliners in Iran.

There is a lot of sound and fury, but it signifies quite a bit. If you were trying to design a policy that had a high probability of inciting some tit-for-tat escalation leading to war, the Trump administration’s approach to Iran is what you would end up with. The question is, why? Iran has complied with the strict limitations on its nuclear program under the Joint Comprehensive Plan of Action, a deal Trump may want to improve upon but, thanks to his withdrawal from it, can’t. The other parties to the agreement won’t play ball with the one violator of it and Iran certainly won’t capitulate in the face of “maximum pressure.”

So why risk a war with Iran that would be orders of magnitude costlier than the war in Iraq, and would fail just as miserably? The answer is that Trump’s war hawks, and most of the political establishment in Washington, perceive the threat from Iran to be serious when in fact it hardly exists at all.

Americans must begin to appreciate how peculiar it is for a country like ours to be so maniacally obsessed with, and terrified by, a country like Iran. The United States is a global military juggernaut whose core national-security concerns are rendered rather trivial due to its outsize capabilities and its uniquely protective geography, reinforced even further by a reliable nuclear deterrent. Iran is a third-rate military power in a tough neighborhood half a world away. It poses no direct threat to us. Iran’s main regional rivals possess conventional and nuclear capabilities that can deter Iran quite sufficiently. Washington’s phobia of the supposed threat of an Iranian attempt to close the Strait of Hormuz, through which about 30 percent of the world’s crude oil flows, is mostly overheated babble. A sincere attempt would be damaging to Iran’s own economic self-interest, not to mention its security, as retaliation would surely be swift. Additionally, Iran’s much ballyhooed support for non-state actors, mostly Hezbollah, Hamas, and the Houthis in Yemen, does not present a real threat to America. Those groups have local concerns. Hezbollah and Hamas are almost exclusively focused on Israel, and the Houthis in Yemen are a nationalist movement. These are not transnational terrorist groups spending time trying to hatch 9/11 style plots against America.

How is it that the United States of America can get whipped up into such a hysteria over such a weak, distant, and hemmed in Iran? Much of Washington seems unable to properly assess risk. Threat perceptions on Iran are fueled by an outdated enemy image where Iran plays the role of the villain, but presents no objective direct threat to this country.

The president’s political calculations, along with a national-security bureaucracy that mostly appears resistant to another disastrous U.S. war in the Middle East, make a deliberate attack against Iran unlikely. But the Trump administration’s frenzied provocations could lead us to the brink of a conflict that almost no one actually wants. The fact that the threat justifying this posture is largely in the imaginations of a few ideologues in Washington only sharpens the sense of irony-and tragedy.

John Glaser is director of foreign policy studies at the Cato Institute..

Protecting Faith in a World Filled with Religious Persecution and Repression

Tue, 05/14/2019 - 08:04

Doug Bandow

The Easter bombings in Sri Lanka offered a reminder both dramatic and tragic that religious minorities suffer brutally around the world. What made that instance unusual is that members of a minority faith, Muslims, targeted members of another minority faith, Christians. The more usual persecutors in Sri Lanka are Buddhist nationalists, who routinely target both Christians and Muslims.

But Sri Lanka is not considered to be one of the world’s worst examples of religious repression. In many nations government restriction combines with social hostility to make life extraordinarily difficult for those who believe differently. The U.S. Commission on International Religious Freedom has just released its latest report on religious liberty around the world.

The Commission highlighted 33 countries or other entities for their uniquely harsh treatment of people of faith. Talking about “religious liberty” has an ivory tower quality to it. But whether members of minority faiths are free typically has a huge impact on their daily lives: discrimination, harassment, and persecution, often violent, are a constant for many people.

The Easter bombings in Sri Lanka offered a reminder both dramatic and tragic that religious minorities suffer brutally around the world.

USCIRF cited 16 nations as “countries of particular concern.” That means systematic, ongoing, egregious violations” of religious freedom. Five non-state actors were rated as “entities of particular concern.” Following slightly behind were 12 countries placed on the Commission’s Tier 2 list, meaning they met one or two of the three tests for CPC status.

The 16 worst nations are Burma/Myanmar, Central African Republic, China, Eritrea, Iran, Nigeria, North Korea, Pakistan, Russia, Saudi Arabia, Sudan, Syria, Tajikistan, Turkmenistan, Uzbekistan, and Vietnam. The five terrible entities are Hay’at Tahrir al-Sham (Syria), Houthis (Yemen), Islamic State (Syria and Iraq), al-Shabab (Somali), and Taliban (Afghanistan). The slightly less bad persecutors are Afghanistan, Azerbaijan, Bahrain, Cuba, Egypt, India, Indonesia, Iraq, Kazakhstan, Laos, Malaysia, and Turkey.

There are two broad categories of persecutors. The most important are Islamic, mostly in Muslim majority states. The genesis of violence in 10 of 16 and five of five resulted from Islam. Seven of the 16 are communist or former communist (the three Central Asian states are both Muslim and communist, though in this case the latter factor likely predominates). Burma is Buddhist/authoritarian. Eritrea is generic totalitarian, if such a thing can exist. Nine of the 12 Tier 2 are Muslim. Four are communist or former communist (the two Central Asian nations are both but lean communist on persecution). India is majority Hindu.

In only two of the 33 named are Christians also persecutors. Central African Republic is majority Christian and politics is entwined with the religious violence; there has been Christian retaliation against Muslim communities. Moscow appears to persecute in support of the Russian Orthodox Church. Otherwise Christians are long out of the persecution business, thankfully.

Some of the violations are on a mass scale. China undertook mass incarceration of Muslim Uighurs in reeducation camps. A decade ago in its first report USCIRF highlighted their persecuted status, noting that they were “imprisoned for their religious belief, association or practice.” The situation has grown far worse.

In its latest assessment, explained the Commission:

Uighur Muslims are constantly surveilled, their phones confiscated and scanned, their skin pricked for blood samples to collect their DNA, their children prohibited from attending mosque. Even worse, the Chinese government has ripped entire families apart, detaining between 800,000 and two million adults in concentration camps and relegating some of their children to orphanages. Families cannot contact one another due to fear of government monitoring; thus, countless Uighur Muslims have no idea where their loved ones are or if they are even alive.

Burma/Myanmar has engaged in mass ethnic cleansing of Muslim Rohingya — nearly a million people have fled to refugee camps in Bangladesh — while Christian ethnic groups such as the Karen spent years resisting the brutal Burmese military. Tragically, Nobel Laureate Aung San Suu Kyi, though a heroic advocate of democracy, has proved to be a Burman nationalist, exercising little control-but also evidencing little concern-over the military’s ongoing depredations. Observed USCIRF: “Victims of severe human rights and religious freedom violations have little hope for justice; this includes Rohingya and other Muslims, Buddhists, Christians, and Hindus, as well as ethnic Kachin, Shan, Karen, Rakhine, and Chin.” Despite exposure of these crimes, “Burma’s military and nonstate actors continued to target with discrimination and violence” religious minorities.

North Korea imprisons up to 50,000 Christians, seen as a threat since their loyalty transcends politics and the Kim family cult. Explained the Commission: “The North Korean regime has an appalling human rights record and places unjust restrictions on its people’s inherent right to freedom of religion or belief.” Outside of a few official churches faith is effectively forbidden: “The government has been known to arrest, torture, imprison, and even execute religious believers and their family members, whether or not they are similarly religious.”

Saudi Arabia, a close U.S. ally which has promoted fundamentalist, intolerant Wahhabism around the globe, is essentially a totalitarian state when it comes to religion. Despite adopting social reforms, the government, noted USCIRF, “maintained a ban on non-Muslim public religious observance and continued to arrest, detain, and harass individuals for dissent, blasphemy, and apostasy. The Saudi government continued to violate the rights of Shi’a Muslims and non-Muslim minorities, and to advocate a doctrine of religious intolerance.”

In Pakistan “extremist groups and societal actors continued to discriminate against and attack religious minorities, including Hindus, Christians, Sikhs, Ahmadis, and Shi’a Muslims.” Blasphemy laws are used with special damage against religious minorities. While controlling territory, ISIS engaged in mass murder, religious cleansing, and sexual slavery against Christians and other minority faiths, including non-compliant Muslims. The Hay’at Tahir al-Sham, an al-Qaeda affiliate, rose in influence among insurgents, and, observed the panel, “repressed religious minorities,” including “the forcible confiscation of property from Christian families and other forms of sectarian violence.”

Eritrea has been known as the North Korea of Africa. Despite some hope for liberalization after normalization of relations with Ethiopia, noted USCIRF, “with no improvement in religious freedom and other human rights conditions in Eritrea, the opening enabled a surge in Eritrean refugees freely crossing into Ethiopia.” In Iran religious freedom continues to trend negative, “with the Iranian government heightening its systematic targeting of Muslims (particularly Sunni Muslims and Sufis), Baha’is, and Christians.”

Hundreds of Christians have been killed and thousands have been driven from their homes in Nigeria. Indeed, the Muslim Fulani have surpassed the Islamic extremist Boko Haram in violent attacks on Christians. Discrimination and violence are particularly notable at the state level, but, said the Commission, “the Nigerian federal government failed to implement effective strategies to prevent or stop such violence or to hold perpetrators accountable.”

In India Christians and Muslims are at risk of mob violence and government indifference. The problem has worsened under the Hindu nationalist government of Narendra Modi. Noted USCIRF: “in countries like India, it is increasingly difficult to separate religion and politics, a tactic that is sometimes intentional by those who seek to discriminate against and restrict the rights of certain religious communities.” Even the traditionally secular Congress party has begun to appeal to religious prejudice.

Security ties with America do nothing to prevent religious repression. In Afghanistan, warned the panel, “non-Muslim groups like Hindus, Christians, and Sikhs remained endangered minorities-many fled the country and many of their community leaders who remained were killed.” In Egypt “anti-Christian mob violence occurred with impunity and regularity in Upper Egypt; on several occasions, these incidents came in direct response to efforts by local Christians to legally register their churches.” In Iraq ISIS “singled out for genocide” Yazidis and Christians. Even after the group’s defeat uncertainty remains on whether they can return, while the national government “maintained and enforced restrictions on religious freedom, such as anti-blasphemy laws and official intolerance of some religious communities.”

Elsewhere the violence and repression is more modest in scope, but growing. For instance, USCIRF only recently added Russia to the persecutorial pantheon: “The government continued to target ‘nontraditional’ religious minorities with fines, detentions, and criminal charges under the pretext of combating extremism.” Moscow has focused its prosecutorial wrath on the Jehovah’s Witnesses, a small sect notorious for its commitment to proselytism. In the Crimea, seized from Ukraine, and the Donbass, held by Russian-backed separatists, Muslim Tartars and non-members of the Russian Orthodox Church, respectively, have suffered significantly.

The rest of those cited by USCIRF — as well as many others which did not make the panel’s cut-also interfere with the most fundamental human right, choosing how to respond to the transcendent. Governments unwilling to protect such beliefs are unlikely to respect freedom of conscience in any other realm. Indeed, religious liberty is the proverbial canary in the mine, the test of any government’s view of human rights.

The most fundamental role of governments should be to protect their citizens in their exercise of religious faith. Yet as the Commission documented in its latest report, in many cases it is the state which is the chief oppressor. In other instances, officials stand by, abetting if not aiding private violence, harassment, and discrimination. When governments refuse to fulfill their responsibility, others must step in to help defend all believers.

Concluded the Commission: “Across the globe, the collective voices of those fighting for freedom of religion or belief must consistently sound the alarm against state and nonstate actors who perpetrate and tolerate such abuses. These violators must be held accountable. The impunity must end.” That is right. We all share the duty to fight for freedom of conscience.

Doug Bandow is a Senior Fellow at the Cato Institute and a former Special Assistant to President Ronald Reagan. He is the author of Beyond Good Intentions: A Biblical View of Politics (Crossway) and Foreign Follies: America’s New Global Empire (Xulon).

Mayor Pete's Sister Souljah Moment

Tue, 05/14/2019 - 08:04

Walter Olson

Even before reading what Pete Buttigieg said against identity politics, I was already impressed that he went to the Human Rights Campaign to say it. HRC, “the largest national lesbian, gay, bisexual, transgender and queer civil rights organization,” is after all the House That Identity Politics Built.

On one level, his comments critical of identity politics turned out to be pretty mild. Barack Obama has said most of the same things in slightly different words. It’s not as if Andrew Sullivan, Christina Hoff Sommers, or Claire Lehmann were ghostwriting his lines.

And what Buttigieg did say was interspersed with themes and language gratifying to social justice enthusiasts. He endorsed the sweeping Equality Act, which would federalize Main Street public-accommodations disputes while whittling down religious exemptions. He mentioned Stonewall and Harvey Milk. He even acknowledged his own “privilege.” (Though he left ambiguous the extent to which this referred to his white male-ness as distinct from, say, the fortunate path traced by his education and career.)

It will be interesting to see whether Buttigieg has opened up space to move toward the center which makes it possible for others to follow.

And yet the South Bend mayor immediately began taking flak for his HRC remarks from some social justice advocates, not a few of whom had already been caustic critics of his candidacy. They could detect from his choice of words that he is not 100 percent on board with their prescribed line—maybe not even 80 percent—and worse still, he is not afraid to say so.

One of his lines drawing fire is on the “my truth, your truth” notion (“standpoint epistemology,” in the jargon). Or as it might be put more aggressively: “we [members of a marginalized identity] are the only authorities on our experience.”

His response? That’s “true as far as it goes but it doesn’t get us very far.” To you or me, that might read like a platitude. To many on the identitarian left, it comes off as dire wrongthink: after some point that is not “very far” down the road, he intends to steer us all onto some other discourse in which identity is not a trump card. This doesn’t deny our subjective truth as marginalized individuals, exactly, but it does tend to dethrone it as The Truth of all truths.

Another example: Buttigieg’s comments were critical of what he forthrightly calls “white identity politics.” Again, a truism from one perspective, and forcefully stated too. But to some on his left, this will be seen as an attempt at false equivalence. Raising the idea that white and minority identity politics can resemble each other is deeply problematic to the identitarian left because it suggests that some of the ills manifest in the former might also turn up in the latter.

And so on. Buttigieg’s contrast of “exclusion” versus “belonging,” which I liked very much, might have contented the identitarians had he denounced exclusion and stopped there. But “belonging” as an ideal is way too suspect. It’s like assimilation. It smacks of the notion that the conflicts involved are not fundamental and defining.

Again and again in his speech, minor choices of wording that outsiders might not notice served as small—but real—signals of defiance to social justice scorekeepers. I disagree with much that Mayor Pete says here and elsewhere. But I’m glad that he seems to think for himself.

It will be interesting to see whether other Democratic contenders take issue with the mayor’s identity politics remarks. Or if, alternatively, Buttigieg has opened up space to move toward the center which makes it possible for others to follow.

Walter Olson is a senior fellow at the Cato Institute.

The VA and the FDA Are Keeping Veterans from a Helpful Treatment Option, Just Because It's Marijuana

Mon, 05/13/2019 - 15:08

Trevor Burrus

The Department of Veterans Affairs is opposing a group of bills that could help veterans better access medical marijuana in states where it is legal. This is unsurprising. As a federal agency, the VA must ultimately toe the line defined by the Controlled Substances Act and the Drug Enforcement Administration: that marijuana has no legitimate medical uses and is a dangerous drug. Yet the VA’s position also raises the broader question: Will the federal government ever view marijuana, as a plant, as “medicine”?

Although it helps millions of people every day, marijuana, as far as the federal government is concerned, is not and will never be medicine. Legalization advocates like myself should put little hope in a whole plant being validated by the Food and Drug Administration as “medicine.” The FDA is no more likely to approve marijuana as a medicine than it is to approve chicken soup for colds, even though we all know chicken soup works.

Marijuana, whether smoked, drank, vaporized, or eaten, unquestionably has innumerable medicinal and therapeutic uses, as does ginger tea, yoga, hot toddies, and a good night’s sleep — all of which won’t be approved by the FDA either. Marijuana has proven uses in reducing seizures, treating glaucoma, restoring the appetites of those undergoing chemotherapy, reducing stress, treating pain, and many more. It truly is a miraculous and complex little plant.

Marijuana, as a whole plant, contains more than 500 known compounds, many of which scientists are still trying to determine the effects. That’s somewhat unique from other prohibited drugs, such as heroin or LSD, which are single-compound drugs. Due this complexity, smoking marijuana involves inhaling a panoply of chemicals that work together to give marijuana its smell, flavor, and various psychological and physical effects.

The combination of those effects gives marijuana a yin-yang quality, with some substances seemingly inducing calm while others can cause agitation. For those who want to avoid whole-plant marijuana’s Janus-faced nature, there are currently four different single-substance, cannabinoid-based drugs approved by the FDA. The first three are based on synthetic cannabinoids, but the most recent, Epidiolex, is an oral solution of CBD that is derived from the marijuana plant and approved for certain forms of epilepsy. But for others, the complexity of marijuana creates an “entourage effect” that, while having both unpredictable and predictable effects, is preferable to, say, a pill containing isolated THC+.

Moreover, while the complexity of marijuana is one barrier to FDA approval, the variability is another. Marijuana has been cultivated for millennia, and cannabis horticulturalists have managed to produce different strains that vary widely in their components. While all the strains might be called by the scientific name of cannabis sativa or cannabis indica, they can have high CBD and low THC or the opposite. Others will be rich in other compounds that augment certain effects, such as being pacifying, over others. Finally, to make whole-plant marijuana even more difficult to pin down, the subjective experience can vary widely, even with familiar strains. What for some is a strain that alleviates depression, for others causes it.

What is the FDA to do with such a drug? Nothing, just like it does with alcohol.

Pharmaceutical companies are free to isolate cannabinoid compounds, find more targeted delivery methods, and seek FDA approval. They can refine compounds to take away the unpleasant “side effect,” for some at least, of psychoactive effects.

But the current situation is unsustainable, where a patchwork of 33 states have legalized the whole plant for recreational or medical uses while the federal government technically prohibits use for any reason. For veterans who are beholden to the federal government for their medical care, seeking to use marijuana medically in states where it is legal are in a tenuous relationship with their healthcare provider.

Whole-plant marijuana is more like a medicinal tea than an official medicine. Like tea, the side effects are benign enough, for most at least, that users should be free to experiment to find what works for them. As an intoxicant, marijuana is no more dangerous than alcohol, which of course also has many upsides because it is an intoxicant. Let the FDA decide what is “medicine,” and let citizens decide what’s medicinal for them.

And leave chicken soup alone too.

Trevor Burrus is a research fellow at the Cato Institute.

Trump’s Trade War Throws Good Money After Bad

Mon, 05/13/2019 - 13:16

Colin Grabow

Since taking office, President Trump has spoken at one time or another of reaching trade deals with China, Japan, the European Union, Canada and Mexico among others. But all that has so far been achieved is higher tariffs and a plunging stock market. The president’s vaunted trade agenda appears in tatters.

On the trade war’s Pacific front, the imposition of tariffs on $250 billion worth of Chinese imports has failed to persuade Beijing to open up its market. But it has raised the cost of production for U.S. businesses and the cost of living for American families as well as led to retaliatory tariffs on nearly all U.S. exports. More than mere tariffs will be required for China to meet American demands, with U.S. negotiators reportedly admitting their inability to “force any changes that aren’t in China’s interest.”

Perhaps the most maddening aspect of this sordid trade saga is that it didn’t have to be this way.

Well, who could have seen that coming?

And now things are set to get even worse. Faced with China’s continued refusal to meet his demands,t Trump has threatened to double down by imposing tariffs on all imports from China. It’s unclear why this will succeed where his previous efforts failed, but anyone considering a new phone, computer or television should consider making that purchase sooner rather than later.

China, however, is only the most glaring example of Trump’s trade misadventures.

A trade deal with the EU has thus far failed to show signs of materializing, which is no surprise given that the two sides seem unable to even agree on negotiating objectives. Rather than opening its market to U.S. exports, the EU has so far done the opposite, slapping tariffs on products such as bourbon, jeans and motorcycles in retaliation for Trump’s steel and aluminum tariffs. And the EU is said to be readying more such measures if Trump proceeds with plans to impose tariffs on foreign autos.

It’s a similar story with Japan, about which there’s been much talk about a trade deal but little in the way of actual movement. As with the EU, there seems to be little common ground on the scope of such a deal, and Japan may be more interested in using talks to forestall threatened auto tariffs than actually reaching an agreement.

Even the one deal that Trump has managed to conclude, the U.S.-Mexico-Canada Agreement (USMCA), is facing a daunting path to congressional approval. The Democrat-controlled House is far from eager to hand the president a victory, while Sen. Charles Grassley (R-IA) has vowed that Senate passage is an impossibility so long as metals tariffs on Canada and Mexico — which have triggered retaliatory measures that have hurt Iowa farmers- remain in place.

Trump’s tariff-centric trade policy hasn’t only made it more difficult to conclude trade agreements with other countries, it’s also made it harder to make deals with members of his own party.

Perhaps the most maddening aspect of this sordid trade saga is that it didn’t have to be this way.

One of the president’s first actions upon taking office was to withdraw from the Trans-Pacific Partnership (TPP), a trade agreement that included 11 other members of the Asia-Pacific region. Among them, Canada, Japan and Mexico. Rather than spending time and energy trying to secure deals with these countries, he could have taken the one already on the table, which was superior in most regards to the eventual deal he did get with Canada and Mexico and far more comprehensive than anything he stands to get from Japan.

Passage of the trade deal would have also placed pressure on China to curtail some of its most objectionable trading practices. By placing Beijing on the outside looking in, a U.S.-led TPP would have provided a strong incentive for China to improve its standards with an eye towards eventual membership.

Instead, we’ve been left with an absurd trade war in which victory is always just a tariff away. But so far all it has produced is plenty of tariffs and no victories.

Colin Grabow is a policy analyst at the Cato Institute’s Herbert A. Stiefel Center for Trade Policy Studies.

Turkey's Inflationary Woes

Mon, 05/13/2019 - 08:41

Steve H. Hanke

Just what is Turkey’s inflation rate? Today, Turkey’s annual inflation rate is 49 percent. How do I measure elevated inflation? The most important price in an economy is the exchange rate between the local currency – in this case, the lira – and the world’s reserve currency, the U.S. dollar. As long as there is an active free market for currency and the data are available, changes in the exchange rate can be reliably transformed into accurate measurements of countrywide inflation rates. The economic principle of purchasing power parity (PPP) allows for this transformation. The application of PPP to measure elevated inflation rates is both simple and very accurate.

For example, using evidence from Germany’s 1920-23 hyperinflation, my long-time friend, distinguished economist, former Governor of the Bank of Israel, and Chairman of J.P. Morgan Chase International, Jacob Frenkel confirmed the accuracy of PPP during hyperinflations. In the July 1976 issue of the Scandinavian Journal of Economics, Frenkel plotted the Deutschmark/U.S. dollar exchange rate against both the German wholesale price index and the consumer price index. The correlations between Germany’s exchange rate and the two price indices were very close to unity throughout the episode of hyperinflation, indicating that changes in the inflation rate mirrored changes in the exchange rate.

I have expanded on the PPP insights presented by Frenkel. One article, which I co-authored with Charles Bushnell in the Fall 2017 issue of World Economics, “On Measuring Hyperinflation: Venezuela’s Episode,” lays out how the PPP approach can be used to accurately measure inflation in cases in which the annual inflation rate exceeds 30 percent, as it presently does in Turkey.

Beyond the theory of PPP, the intuition of why PPP represents the ‘gold standard’ for measuring elevated rates of inflation is clear. For example, during episodes of hyperinflation, virtually all goods and services are either priced in a stable foreign currency (the U.S. dollar) or a local currency. In Venezuela, for example, bolivar prices are determined by referring to the dollar prices of goods, and then converting them to local bolivar prices after observing the black market exchange rate. When the price level is increasing rapidly and erratically on a day-by-day, hour-by-hour, or even minute-by-minute basis, exchange rate quotations are the only source of information on how fast inflation is actually proceeding. That is why PPP holds and why I can use high-frequency data to calculate elevated inflation rates.

It is clear that Turkey’s number one problem is inflation. So, the first order of business for President Recep Tayyip Erdogan and the Turkish government is to stomp out Turkey’s inflation. To do that, the lira’s exchange-rate must be stabilized. The best way to do that is with a gold-backed currency board.

A currency board issues notes and coins convertible on demand into a foreign anchor currency at a fixed rate of exchange. As reserves, it holds low-risk, interest-bearing bonds denominated in the anchor currency. The reserve levels (both floors and ceilings) are set by law and are equal to 100 percent, or slightly more, of its monetary liabilities. So, the domestic currency issued via a currency board is nothing more than a clone of its anchor currency. A currency board generates profits (seigniorage) from the difference between the interest it earns on its reserve assets and the expense of maintaining its liabilities.

By design, a currency board, unlike a central bank, has no discretionary monetary powers and can’t engage in the fiduciary issue of money. It has an exchange rate policy (the exchange rate is fixed) but no monetary policy. A currency board’s operations are passive and automatic. The sole function of a currency board is to exchange the domestic currency it issues for an anchor currency at a fixed rate. Consequently, the quantity of domestic currency in circulation is determined solely by market forces, namely the demand for domestic currency.

A currency board can’t issue credit. Accordingly, a currency board imposes a hard budget constraint and discipline on the government. This is an underappreciated feature of currency boards. Unlike central banks, a currency board can’t be used as a means to finance government budgets.

Currency boards have existed in about 70 countries, and none have failed. The first one was installed in the British Indian Ocean colony of Mauritius in 1849. By the 1930s, currency boards were widespread among the British colonies in Africa, Asia, the Caribbean, and the Pacific Islands. They have also existed in a number of independent countries and city-states, such as Danzig and Singapore. One of the more interesting currency boards was installed in North Russia on November 11, 1918, during the civil war. Its architect was none other than John Maynard Keynes, who was a British Treasury official at the time.

Countries that have employed currency boards have delivered lower inflation rates, smaller fiscal deficits, lower debt levels relative to the gross domestic product, fewer banking crises, and higher real growth rates than comparable countries that have employed central banks.

To smash inflation and establish stability, a currency board for Turkey would do the trick. Indeed, that’s why I first proposed a Turkish currency board during the lira crisis of 2000-2001. The details of what I proposed then, and now, are contained in a book I co-authored with Kurt Schuler, Gelişmekte Olan Ülkeler İçin Para Kurullari El Kitabi (2001).

I know that currency boards work from, among other things, a great deal of personal experience in stopping hyperinflations—stopping them with the introduction of currency boards. One such case was in Bulgaria, when I served as President Petar Stoyanov’s adviser from 1997-2002.

After Bulgaria took the exit from Communism in 1990, Bulgarians encountered some potholes. The economy plunged, there were debt defaults, and that Balkan paradise experienced an episode of hyperinflation. This episode peaked at an astounding 242 percent per month in February 1997. Yes, that’s per month.

With the expectation that a currency board would be the best system to crush Bulgaria’s hyperinflation, I wrote a book with Kurt Schuler that was translated into Bulgarian. In late 1996, it reached the top of the best-seller list in Sofia. In January 1997, I became President Stoyanov’s adviser. My primary tasks were to draft a currency board law for Bulgaria and to explain to Bulgarian politicians and the public how such a system would halt the episode of hyperinflation.

Things moved rapidly. There’s nothing like a crisis to move the ball down the field. The currency board was installed on July 1, 1997, and inflation and interest rates plunged immediately. Much later, President Stoyanov confided that, without the stability created by the currency board system, Bulgaria would have had much more difficulty entering the North Atlantic Treaty Organization (NATO) in 2004 and the European Union in 2007.

Today, Turkey should do exactly what Bulgaria did in 1997. A currency board would make the lira sound. Indeed, if gold was the lira’s anchor, the lira would be a clone of gold, which is a stable currency that is not issued by a sovereign. With that, inflation would be smashed within 24 hours, interest rates would plunge, and stability would be established. And, while stability might not be everything, everything is nothing without stability.

Steve Hanke is a professor of applied economics at The Johns Hopkins University and senior fellow at the Cato Institute.

The Three M's: Milosevic, Mugabe, and Maduro

Mon, 05/13/2019 - 08:14

Steve H. Hanke

What do Slobodan Milosevic, Robert Mugabe, and Nicolás Maduro have in common? Other than being leaders who kept the Communist Manifesto at their bedside, all three ushered in devastating hyperinflations.

Other than being leaders who kept the Communist Manifesto at their bedside, all three ushered in devastating hyperinflations.

Hyperinflations are rare. They have only occurred when the supply of money has been governed by discretionary paper money standards. No hyperinflation has ever been recorded when money has been commodity-based or when paper money has been convertible into a commodity.

The first hyperinflation occurred during the French Revolution (1789-96) when the mandat collapsed and the monthly inflation rate peaked at 143% in December of 1795. More than a century elapsed before another episode of hyperinflation occurred. Not coincidentally, this period of currency tranquility occurred during the heyday of the gold standard. With the emergence and adoption of fiat currencies, the 20th century ushered in currency instability and inflation. Indeed, since 1900 there have been 57 episodes of hyperinflation. And, five of those episodes can be claimed by Yugoslavia, Zimbabwe, and Venezuela. All are featured in the Hanke-Krus World Hyperinflation Table below, which first appeared in The Routledge Handbook of Major Events in Economic History (2013).

Milosevic and Yugoslavia:

Slobodan Milosevic was in the saddle when inflation last gutted the rump Yugoslavia. The first of his many monetary shenanigans was uncovered on January 7, 1991, when I served as an adviser in the Ante Marković reform government. It was then that we discovered on December 28, 1990, the Milosevic-controlled Serbian Parliament had secretly ordered the Serbian National Bank (a regional central bank) to issue some $1.4 billion in credits to friends of Milosevic. That illegal plunder equaled more than half of all the new money the National Bank of Yugoslavia had planned to emit in 1991. The heist sabotaged the Markovic government’s teetering plans for economic reform and hardened the resolve of leaders in Croatia and Slovenia to break away from Belgrade.

Without the Croats and Slovenes to fleece, Milosevic turned on his own people with a vengeance. Starting in January 1992, what was left of Yugoslavia endured what was at the time the second-highest hyperinflation in world history. It peaked in January 1994, when I measured the monthly inflation rate at 313,000,000%. The Yugoslav hyperinflation episode lasted 24 long months. Nonetheless, Milosevic retained his grip on what was left of Yugoslavia for another six years.

During the 24-month episode, per capita income plunged by more than 50%. Ordinary people were forced to deplete their hard-currency savings. People couldn’t afford to buy food in the free market; they kept from starving by either waiting in long lines at state stores for irregularly supplied rations of low-quality staples or by relying on relatives who lived in the countryside. For long periods, all of Belgrade’s gas stations were closed, with the exception of one that catered to foreigners and embassy personnel. People also spent an inordinate amount of time at the foreign-exchange black markets, where they exchanged huge piles of near-worthless dinars into a single German mark or U.S. dollar note. Milosevic’s monetary madness had destroyed the economy.

Mugabe and Zimbabwe:

Fast forward to March of 2007, when Robert Mugabe was in his 19thyear as president of Zimbabwe. The African country was experiencing an episode of hyperinflation that was destroying the economy, pushing more of its inhabitants into poverty, and forcing millions of Zimbabweans to emigrate. In the 1997-2007 period, living standards (as measured by real gross domestic product [GDP] per capita) fell by a stunning 38%. The episode, which peaked at an annual inflation rate of 89.7 sextillion percent—that is 89.7 followed by 20 zeros—in November of 2008, had robbed people of their savings and financial institutions of their capital through real (inflation-adjusted) interest rates that were actually negative. This form of theft occurred, in large part, due to laws and regulations governing financial institutions (pensions funds, insurance companies, building societies, and banks) that forced them to either purchase government treasury bills that yielded only a small fraction of the current inflation rate or make deposits at the Reserve Bank of Zimbabwe (RBZ) that paid no interest.

So, what was the cause of this economic meltdown? The blame lay at the doorstep of the Zimbabwean government, whose policies forced the RBZ to print money. From January 2005 to May 2007, the RBZ issued currency at a rate that exceeded that of Germany’s central bank from January 1921 to May 1923, the ramp-up phase of the great German hyperinflation.

During this period, the RBZ more than doubled its staff, from 618 to 1,360 employees. Despite this 120% increase in staff, the RBZ staff was incapable of producing accurate and timely data—even the most standard economic and financial statistics arrived months late, if at all.

With the help of Alex Kwok and my research assistants at the Johns Hopkins-Cato Institute Trouble Currencies Project, I was able to fill the gap left by the RBZ and accurately measure Zimbabwe’s first hyperinflation episode. By my measurement, the monthly inflation rate peaked at 79.6 billion percent in November of 2008, taking over the rank of second and pushing the Yugoslavia episode to the third most severe episode of hyperinflation. Despite this astronomical figure, Mugabe was able to remain in office for another 9 years. This was due, in part, to the fact that, in early 2009, Zimbabwe dumped the Zimbabwe dollar and officially dollarized.

But, Mugabe never learned the lessons of 2008. When his party, ZANU-PF, regained full control of Zimbabwe in 2013, government spending and public debt surged. To finance its ballooning deficits, the government abandoned full dollarization and started to issue its own currency in enormous amounts. The “New Zim dollar” was issued at par to the U.S. dollar but traded at a significant discount. The money supply, as a result of the New Zim dollar issuance, exploded, and so did inflation.

As night follows day, Zimbabwe experienced its second episode of hyperinflation in less than ten years, starting in September of 2017 and peaking at a monthly inflation rate of 185%. Mugabe had been in the saddle just shy of 30 years, but this was the straw that broke the camel’s back. Zimbabwe’s second episode of hyperinflation opened the door to Mugabe’s ouster in a November 2017 coup d’etat by the Zimbabwe Defense Forces.

Maduro and Venezuela:

At present, there is the only one country that is suffering from the ravages of hyperinflation: Venezuela. But, Venezuela’s ongoing episode of hyperinflation did not occur overnight. I observed some of Venezuela’s economic dysfunction first-hand during the 1995-96 period, when I acted as President Rafael Caldera’s adviser. But, it wasn’t until 1999, when Hugo Chavez was installed as president, that the socialist seeds of Venezuela’s current meltdown started to be planted. With Chavez’s ascendancy, fiscal and monetary discipline deteriorated, and inflation ratcheted up. By the time President Nicolas Maduro arrived in early 2013, annual inflation was rising into the triple digits and Venezuela was entering an economic death spiral.

Venezuela’s annual inflation rate was the highest in the world in 2018, reaching 80,0000% at year-end, and climbing to 165,382% at the end of February 2019. And, although by hyperinflation standards Venezuela’s rate of inflation has been modest, the longevity of Venezuela’s episode has been quite extended. To date, Venezuela’s episode has lasted 30 months, and counting, ranking it the fifth-longest episode of hyperinflation in history.

While hyperinflation is not a recipe for building a politician’s popular support, it is not a certain death knell, either. The three Ms—Milosevic, Mugabe, and Maduro—attest to the fact that monetary madmen can hang onto power for years after the onset of devastating hyperinflations.

Steve Hanke is a professor of applied economics at The Johns Hopkins University and senior fellow at the Cato Institute.


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