The Cato Institute

The Truth About Glass-Steagall

The repeal of the Glass-Steagall Act has not been the source of U.S. financial woes, and if reinstated, would do little to prevent crises in the future.

The Glass-Steagall Act was enacted in 1933 in response to banking crises in the 1920s and early 1930s. It imposed the separation of commercial and investment banking. 

In 1999, Glass-Steagall was partially repealed by the Gramm-Leach-Bliley Act. When the United States suffered a severe financial crisis less than a decade later, some leapt to the conclusion that this repeal was at least partly to blame. Indeed, both the Republicans and the Democrats included the reinstatement of Glass-Steagall in their 2016 election platforms

In The Repeal of the Glass-Steagall Act: Myth and Reality, a new study, international financial regulatory expert Oonagh McDonald argues against the idea that repealing Glass-Steagall caused the financial crisis, and that bringing it back would prevent future crises.

According to McDonald, despite calls to reinstate Glass-Steagall by both Republicans and Democrats, it is no silver bullet for our contemporary financial woes.

Instead, McDonald argues, Glass-Steagall left the U.S. with a fragile and expensive set of unit banks, without actually fixing the problems banks had experienced prior to 1933. After many years and changes to the structure of the banking and financial system, small sections of Glass-Steagall were repealed by the Gramm-Leach-Bliley Act (GLBA), without entirely dismantling it.

When the US experienced the financial crisis of 2008, both Republicans and Democrats leapt to the conclusion that the repeal of Glass-Steagall had caused the financial crisis. However, McDonald argues that these banking regulations could not have prevented the 2008 crisis and that the blame for bank failures lies elsewhere.

In the aftermath of the financial crisis, anger towards Wall Street and demands for further regulation of the banking system have once again become salient. The problem with current proposed reforms to the financial sector is the failure to address the real cause of past financial crises, instead simply attempting to placate justified public anger surrounding the issue with band-aid solutions – and still leaving the banking system susceptible to another crisis.

“By focusing the public’s anger on ‘greed,’ ‘overpaid bankers,’ and so-called ‘ca­sino banking,’ politicians have been able to di­vert attention from the ultimate cause of the financial crisis, namely their belief that afford­able housing can be provided by encouraging— or even obliging—banks to advance mortgages to homebuyers with low to very low incomes and requiring government-sponsored enter­prises to purchase an ever-increasing propor­tion of such loans from lenders,” McDonald concludes. “If politicians continue to believe that affordable housing can only be provided in that way and act ac­cordingly, no one need look any further for the causes of the next financial crisis.”

In short, the blame for the financial crises lies in the irresponsible policies pushed by politicians, not the actions of big banks.

Read the study….

What Does Trump’s Win Mean for the Supreme Court?

Although the vacancy left on the Supreme Court by Justice Antonin Scalia’s passing—and judicial nominations more broadly—didn’t play as big a role in the campaign as leaked videos and emails, this issue is now at the forefront of the new administration’s transition plan. 

So, what does a Trump presidency mean for the Court?

At first glance….

• The Merrick Garland nomination is dead, and Senate Republicans’ strategy of not even considering Garland worked.
• Anthony Kennedy will almost certainly continue to be the “swing justice” on most controversial issues.
• An open question is what happens when Trump realizes that the sorts of judges he’s been advised to appoint would rule against him on various matters.
• If you live by executive action, you die by executive action—which means that many high-profile cases looming on the Supreme Court docket will simply go away.

Read more…

Does Ban the Box Disincentivize Minority Employment?

People of color have been disproportionately impacted by mass incarceration, an issue compounded by the fact that ex-offender status often makes it very difficult to find a job. Ban the Box is a policy that is supposed to help alleviate the problem. But, do Ban the Box policies actually exacerbate racial disparities in employment?

Individuals who have been convicted of a crime often have difficulty finding employment. Part of the reason may be that employers discriminate against those with criminal records, even when other observable characteristics are identical. In addition, since black and Hispanic men are more likely to have criminal records, making a clean record a condition for employment could exacerbate racial disparities in employment.

If even a few ex-offenders are more job-ready than some non-offenders, then employers’ statistical discrimination against those with criminal records hurts the most job-ready ex-offenders. This has motivated the Ban the Box movement, which calls for employers to delay asking about an applicant’s criminal record until later in the hiring process.

Ban the Box policies seek to limit employers’ access to criminal histories. This access itself is relatively new. Before the internet and inexpensive computer storage became available in the 1990s, it was not easy to check job applicants’ criminal histories. 

Advocates of Ban the Box believe that if employers can’t tell who has a criminal record, job-ready ex-offenders will have a better chance at getting an interview. During that interview, they will be able to signal their otherwise unobservable job-readiness to the employer. They believe this could increase employment rates for ex-offenders and thereby decrease racial disparities in employment outcomes.

If Ban the Box enables some re-entering offenders to get their foot in the door and communicate their job-readiness to employers, we might see a positive effect on employment for this group. But if young, low-skilled black and Hispanic men are now less likely overall to be called in for interviews, then the net effect on employment could be negative.

Unfortunately, well-intentioned policies, like Ban the Box, that remove information about negative characteristics can often do more harm than good. 

New research shows that when information on criminal records is available, firms are actually more likely to hire low-skilled black men. Meanwhile, Ban the Box and similar policies that limit information on criminal records negatively impact poor men of color.

Surveys show that employers are most concerned about hiring those who were recently incarcerated. Since young, low-skilled black and Hispanic men are most likely to fall into this category, many employers respond to Ban the Box policies by avoiding interviews with these groups.

On average, young, low-skilled black men are 5.1% less likely to be employed after Ban the Box than before. Ban the Box also reduces employment by 2.9% for young, low-skilled Hispanic men. Both effects are unexplained by pre-existing trends in employment, and—for black men—persist long after the policy change. The effects are larger for those with no high school diploma or GED, for whom a recent incarceration is more likely.

However, employers are less likely to use race as a proxy for criminality in areas where the minority population of interest is larger—perhaps because discriminating against that entire set of job applicants is simply infeasible. For example, Ban the Box reduces black male employment significantly everywhere but in the South (where a larger share of the population is black). Similarly, Ban the Box reduces Hispanic male employment everywhere but in the West (where a larger share of the population is Hispanic). 

Ban the Box’s negative effects on black and Hispanic men are larger when national unemployment is higher. In other words, employers are more able to exclude broad categories of job applicants in order to avoid potential ex-offenders when applicants far outnumber available positions.

Advocates for Ban the Box seem to think that in the absence of information, employers will assume the best about all job applicants. This is sadly not the case.

Read the study…

The Problem with Obama’s Light Footprint

In a new analysis, Brad Stapleton critiques Obama’s light footprint approach to military intervention, arguing it adjusts tactics instead of strategy….

 In The Problem with the Light Footprint: Shifting Tactics in Lieu of Strategy, Stapleton argues that President Obama’s effort to avoid becoming embroiled in another conventional ground war by adopting a “light footprint” approach to military intervention is fundamentally flawed.

The lessons of Afghanistan and Iraq have made Americans extremely wary of embarking upon new foreign military adventures. Unfortunately, Obama has continued to pursue the George W. Bush administration’s goals of defeating terrorism and promoting democratization abroad through military force.

Yet those strategic objectives are unlikely to be secured militarily—with either a heavy or light footprint. Although airstrikes and Special Forces raids may be useful for toppling dictators and decapitating terrorist hierarchies, they contribute little toward the realization of larger political objectives such as the eradication of radical Islamic terrorism or the democratization of the greater Middle East.

In March 2011, Obama authorized U.S. participation in a NATO bombing campaign against Muammar el-Qaddafi’s Libya, a prime example of the light footprint approach. The humanitarian mission soon morphed into regime change, and when Islamic extremists filled the power vacuum left in the wake of the Qaddafi regime, the administration in September 2014 announced a new “systematic campaign of airstrikes’ as to destroy ISIS. Overall, the results of Obama’s interventions in Libya have not served U.S. interests.

Another example of the light footprint approach has been the administration’s reliance on drone strikes. While drone strikes, especially in the northwest region of Pakistan, have decimated the hierarchy of al Qaeda and its affiliates, there are drawbacks as well. As numerous critics have suggested, the U.S. drone program could actually undermine the campaign to eradicate terrorism by engendering anti-American resentment.

The United States needs a new strategy, not just new tactics. Rather than attempting to defeat terrorism abroad, the U.S. should focus on improving intelligence and law enforcement capabilities to mitigate the threat of terrorist attacks at home. And rather than attempting to catalyze democratization with military force, the U.S. should pressure authoritarian regimes to introduce gradual liberal reforms—so that when those countries do eventually democratize, those transitions are more likely to endure.

In short, the United States should adopt a less militaristic strategy. Recognizing the inherent limits of what military action can achieve should lead to a gradualist strategic approach that mitigates the terrorist threat instead of eradicating it, and encourages democracy instead of imposing it through military force.

Read the paper…

Is It Time for the United States to Quit NATO?

NATO will celebrate its sixty-seventh anniversary in April. Instead of being an occasion for the usual expression of mind-numbing clichés about the alliance’s enduring importance both to U.S. security and world peace, it should become an opportunity for a long overdue assessment of whether the NATO commitment truly serves America’s best interests in the twenty-first century. There is mounting evidence that it does not.

Learn more….

The Teachers’ Union vs. D.C. Children

There is no disputing that the Washington, D.C., school system is one of the worst in the nation. Although D.C. schools spend nearly $30,000 per student each year, more than a third of students fail to graduate. In a test to determine whether high-school students were college ready, only 10 percent of D.C. students met proficiency standards in math, and just a quarter met the reading standards. The story is even worse for black students; only 4 percent met the math standards.

In response, President Bush established the Opportunity Scholarship Program in 2004. The program provides scholarships (vouchers) that low-income D.C. families can use to send their children to private schools in the District, including religiously affiliated schools. The scholarships are targeted to those students most in need. The average household income for families participating in the program is under $21,000. More than 83 percent of those families are African-American, and another 14 percent are Hispanic/Latino.

But despite a record of success, the omnibus budget deal failed to reauthorize the program beyond this year. President Obama, having defunded the program once, is expected to oppose reauthorization once again. D.C. Delegate Eleanor Holmes Norton is unalterably opposed to the program. Why do so many Democrats seem to favor the teachers’ union over poor minority students?

In order to preserve the program for the 2016–17 school year, Congress will have to either push through a stand-alone funding bill in the face of ferocious opposition from Democratic lawmakers and the teachers’ unions, or hope to include the funding in some future budget deal. It’s really a simple choice: poor, minority children, or wealthy, powerful unions. Where do we stand?

Learn more….

Taking Credit for Education: How to Fund Education Savings Accounts through Tax Credits

Every child deserves the chance at a great education and the American dream. Unfortunately, decades of student achievement data reveal that the increasingly costly U.S. district school system does not provide an excellent education for all students. 

In a new study, Cato scholar Jason Bedrick, with coauthors Jonathan Butcher and Clint Bolick, explains how funding Education Savings Accounts (ESAs) through tax credits is a constitutionally sound method of providing every child with the chance at an excellent education.

In their new policy analysis, Taking Credit for Education, Jason Bedrick, Butcher, and Bolick contend that Education Savings Accounts (ESAs)—when properly designed and regulated through tax credits—can empower families with more educational options.

In order to make ESAs available to children from diverse backgrounds, the authors lay out a series of policy recommendations for legislators that would allow flexible spending while minimizing spending fraud and mitigating constitutional concerns that may arise. These Education Savings Accounts will enhance accountability and free taxpayers from being forced into paying for ideas they oppose by providing funds through voluntary tax-credit contributions.

States such as Arizona, Florida, and New Hampshire have experiences with both privately and publicly managed ESAs and tax-credit scholarships that support the use of ESAs funded through tax credits. Policymakers can combine models from these three states to create tax-credit funded educational savings accounts. ESAs funded by charitable donations that are eligible for tax-credits would blend tax-credit scholarships and flexible spending accounts, increasing liberty for both families and scholarship organizations. For example, scholarship organizations can serve as educational advisers to parents and oversee ESAs, while parents have more spending flexibility with the restricted-use debit cards that accompany these accounts.

Although completely eliminating fraud is impossible for any program, private or public, policymakers can take reasonable measures to minimize fraud without unnecessarily burdening ESA families or education providers. Currently, some programs use a reimbursement method to avoid the misuse of funds, but this can be troublesome for families who don’t have money to use upfront. Tax-credit funded ESAs would mitigate this problem by letting parents access ESA funds through a debit card that could be restricted by vendor or by product or service.

While the constitutionality of school choice has been affirmed by the U.S. Supreme Court, Blaine amendments exist in about 36 state constitutions that generally restrict the use of public funds for religious or sectarian schools. However, scholarship tax credit laws have a perfect record in courts since Blaine amendments usually apply to appropriations of public funds, and tax-credit eligible donations are private funds. Policymakers can also design legislation for these savings accounts in ways that can increase the likelihood of withstanding constitutional scrutiny. For example, lawmakers can fund ESAs through tax credits rather than legislative appropriations, thus making it neither an appropriation, nor a form of aid limited only to religious or private schools.

“Education savings accounts empower families to customize their children’s education,“ the authors conclude. "They are an improvement on traditional school-choice programs because they enhance the freedom of parents to purchase a wide variety of educational products and services and save for educational expenses in future years, including college.”

Read the research….

What You Wanted to Read in 2015…

Happy New Year! 2015 was a busy year at the Cato Institute. Here’s a quick guide to the most viewed articles on our website last year…..

Originally posted by anotherteenloser

10. “Relationship Between the Welfare State and Crime,” by Michael D. Tanner (37,982 Pageviews)

“Whatever Congress eventually decides to do in the way of welfare reform, I hope that you will recognize the disastrous consequences of our current welfare system. The status quo is plainly and simply unacceptable. The relationship between our failed social welfare system and juvenile violence and crime is one more urgent reason for reform.”

9. “The Human Freedom Index,” by Ian Vásquez and Tanja Porčnik (44,372 Pageviews)

“The Human Freedom Index presents the state of human freedom in the world based on a broad measure that encompasses personal, civil, and economic freedom. Human freedom is a social concept that recognizes the dignity of individuals and is defined here as negative liberty or the absence of coercive constraint. Because freedom is inherently valuable and plays a role in human progress, it is worth measuring carefully. The Human Freedom Index is a resource that can help to more objectively observe relationships between freedom and other social and economic phenomena, as well as the ways in which the various dimensions of freedom interact with one another.”

8. “When Will Climate Scientists Say They Were Wrong?” by Patrick J. Michaels (46,646 Pageviews)

“Day after day, year after year, the hole that climate scientists have buried themselves in gets deeper and deeper. The longer that they wait to admit their overheated forecasts were wrong, the more they are going to harm all of science.”

7. “Alcohol Prohibition Was a Failure,” by Mark Thornton (50,597 Pageviews)

“The lessons of Prohibition remain important today. They apply not only to the debate over the war on drugs but also to the mounting efforts to drastically reduce access to alcohol and tobacco and to such issues as censorship and bans on insider trading, abortion, and gambling.”

6. “The World Misery Index: 108 Countries,” by Steve H. Hanke (76,736 Pageviews)

“The five most miserable countries in the world at the end of 2014 are, in order: Venezuela, Argentina, Syria, Ukraine, and Iran. In 2014, Argentina and Ukraine moved into the top five, displacing Sudan and Sao Tome and Principe.The five least miserable are Brunei, Switzerland, China, Taiwan, and Japan. The United States ranks 95th, which makes it the 14th least miserable nation of the 108 countries on the table.”

5. ”Immigrants Have Enriched American Culture and Enhanced Our Influence in the World,” by Daniel Griswold (87,552 Pageviews)

“It would be a national shame if, in the name of security, we closed the door to immigrants who come here to work, save and build a better life for themselves and their families. Immigrants come here to live the American Dream; terrorists come to destroy it.”

4. “Working Overtime Is More Taxing Than You Think,” by George Nastas III and Stephen Moore (92,416 Pageviews)

“Thanks to the rising burden of taxes, the bonus income actually received from working longer hours is much less than one might think. That is because every extra hour worked is taxed at the worker’s highest marginal tax rate. In some cases, overtime work may even push the worker into a higher tax bracket.”

3. “Gun Control: Myths and Realities,” by David Lampo (96,502 Pageviews)

“When one looks at the facts about gun control, it’s easy to see why the anti-gun lobby relies on emotion rather than logic to make its case.Think you know the facts about gun control? If your only source of information is the mainstream media, what you think you know may not be correct.”

2. “Syrian Refugees Don’t Pose a Serious Security Threat,” by Alex Nowrasteh (182,665 Pageviews)

“Of the 859,629 refugees admitted from 2001 onwards, only three have been convicted of planning terrorist attacks on targets outside of the United States, and none was successfully carried out.  That is one terrorism-planning conviction for every 286,543 refugees that have been admitted.  To put that in perspective, about 1 in every 22,541 Americans committed murder in 2014.  The terrorist threat from Syrian refugees in the United States is hyperbolically over-exaggerated and we have very little to fear from them because the refugee vetting system is so thorough.”

1. “How Government Killed the Medical Profession,” by Jeffrey A. Singer (203,838 Pageviews)

“Government interventions over the past four decades have yielded a cascade of perverse incentives, bureaucratic diktats, and economic pressures that together are forcing doctors to sacrifice their independent professional medical judgment, and their integrity. The consequence is clear: Many doctors from my generation are exiting the field. Others are seeing their private practices threatened with bankruptcy, or are giving up their autonomy for the life of a shift-working hospital employee. Governments and hospital administrators hold all the power, while doctors—and worse still, patients—hold none.”

The TSA Doesn’t Want You to Read This….

For PR professionals, the holiday season is like one big Friday at 5:00 p.m. That’s when you release information that you don’t want getting too much attention.

So it’s no surprise that we learned earlier this week that the Transportation Security Administration has just awarded itself the authority to make airport strip-search machines mandatory. Until now, having a machine create a digital representation of your unclothed body has had a happy alternative: a prison-style pat-down! No longer.

It takes a lot of gall for the Department of Homeland Security to make this move now, though—not only because it’s the holiday season, but because the DHS (of which TSA is a part) is currently under a court order to establish the legality of its strip-search machine policies in toto. And, all in this in spite of the fact that strip-search machines are a cost-ineffective security measure.

Read more…

Watching Star Wars Over the Holidays?

The original trilogy of Star Wars movies and the prequel trilogy of the late 90s/early 2000s was joined by Star Wars: The Force Awakens late last week.

Does Star Wars have a distinct political viewpoint that we can tease out? Would the Rebel Alliance be considered a terrorist organization? How would we know if a rebellion was justified? Is the Star Wars story libertarian?

Cato scholars geek out over Star Wars and policy….  

• PODCAST: “The Politics of Star Wars”
• “Star Wars, Science Fiction, and Foreign Policy,” by Emma Ashford
• “Our Sith Presidency And The Rise Of Darth Trump,” by Trevor Burrus