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  • Author: Robert Levy
  • Publication Date: 10-2016
  • Content Type: Commentary and Analysis
  • Institution: The Cato Institute
  • Abstract: It’s doubtful that new gun controls—imposed mostly on persons who are not part of the problem—will be ef- fective. Accordingly, they should expire automatically after a reasonable test period. If they work, they can be reenacted. The Second Amendment doesn’t bar sensi- bleregulations,butitdemandsrigorfromourlawmak- ers and the courts in legislating and reviewing gun control measures.
  • Topic: Arms Control and Proliferation
  • Political Geography: America
  • Author: Fredrik Erixon, Bjorn Weigel
  • Publication Date: 10-2016
  • Content Type: Special Report
  • Institution: The Cato Institute
  • Abstract: The great value of innovation is not merely in invention but rather diffusion and adaptation. And real innovation requires an economy that runs on the culture of experimentation and is open to innovators and entrepreneurs contesting markets—challenging incumbents to such a degree that it redefines the market (like Apple’s iPhone did with the handset market in 2007). In the past decades, however, these forces of diffusion and adaptation simply have not been powerful enough; in fact, legislators have acted to shield incumbent businesses from them. Now the existential challenge that capitalism faces is the growing resistance to innovation.
  • Topic: Economics, Political Economy, Digital Economy
  • Political Geography: America, Global Markets
  • Author: Mark A. Calabria
  • Publication Date: 01-2015
  • Content Type: Working Paper
  • Institution: The Cato Institute
  • Abstract: There was perhaps no issue of greater importance to the financial regulatory reforms of 2010 than the resolution, without taxpayer assistance, of large financial institutions. The rescue of firms such as AIG shocked the public conscience and provided the political force behind the passage of the Dodd-Frank Act. Such is reflected in the fact that Titles I and II of Dodd-Frank relate to the identification and resolution of large financial entities. How the tools established in Titles I and II are implemented are paramount to the success of Dodd-Frank. This paper attempts to gauge the likely success of these tools via the lens of similar tools created for the resolution of the housing government sponsored enterprises (GSEs), Fannie Mae and Freddie Mac.
  • Topic: Economics, International Trade and Finance, Financial Crisis, Reform
  • Author: Patrick J. Michaels, David E. Wojick
  • Publication Date: 04-2015
  • Content Type: Working Paper
  • Institution: The Cato Institute
  • Abstract: The purpose of this report is to provide a framework for doing research on the problem of bias in science, especially bias induced by Federal funding of research. In recent years the issue of bias in science has come under increasing scrutiny, including within the scientific community. Much of this scrutiny is focused on the potential for bias induced by the commercial funding of research. However, relatively little attention has been given to the potential role of Federal funding in fostering bias. The research question is clear: does biased funding skew research in a preferred direction, one that supports an agency mission, policy or paradigm? Federal agencies spend many billion dollars a year on scientific research. Most of this is directly tied to the funding agency mission and existing policies. The issue is whether these financial ties lead to bias in favor of the existing policies, as well as to promoting new policies. Is the government buying science or support?
  • Topic: Government
  • Author: George Selgin
  • Publication Date: 03-2015
  • Content Type: Working Paper
  • Institution: The Cato Institute
  • Abstract: Not long ago a colleague of mine, who works regularly with legislators, attended a conference at which the lunch speaker, a famous economist, began by telling everyone why governments regulate financial institutions. The reasons the economist gave consisted of various (supposed) financial-market failures. Said the colleague to me later: “I just wanted to stand up and shout, 'That's got nothing to do with it!'” I relate this because some readers may otherwise fail to appreciate the importance of a work whose chief revelation is that financial legislation — and consequently the general structure of financial systems — are shaped by politics. My colleague didn't need to be told, but others, including many economists, evidently do. In Fragile by Design: The Political Origins of Banking Crises Scarce Credit, Charles Calomiris and Stephen Haber tell them. Banking arrangements, they argue, are “not a passive response to some efficiency criterion but rather the product of political deals that determine which laws are passed” (pp. 13 and 38). What's more, the laws such deals give rise to are, more often than not, detrimental to bank safety and soundness. In few words, banking instability has its roots, not in any fragility inherent to commercial banking, but in deals struck between governments and various interest groups. Fragile by Design is at once an alternative interpretation of the history of banking and a contribution to the debate on the causes of the recent crisis. Though other reviewers have tended to focus their attention on the latter contribution, many of Fragile by Design's most important insights, as well as many of its more serious flaws, are independent of its take on the subprime crisis. It is to those insights and flaws that I wish to draw attention
  • Topic: Government
  • Author: Norbert J. Michel
  • Publication Date: 03-2015
  • Content Type: Working Paper
  • Institution: The Cato Institute
  • Abstract: We now have a 100-year history by which to judge the Federal Reserve's performance. On balance, the Fed has not increased economic stability relative to the pre-Fed era. The Great Depression, the great stagflation, and the 2008 financial crisis have all occurred on the Fed's watch. Even excluding the Great Depression, business cycles have not become appreciably milder, nor have recessions become less frequent or measurably shorter. The Fed has strayed so far from the classic prescription for a lender of last resort—to provide short-term funds to solvent institutions at penalty rates—it strains all reason to suggest that it has successfully fulfilled that function. Its regulatory failures are numerous. It failed even to see the 2008 financial crisis coming. Perhaps the best that can be said about the Fed is that the variability in inflation has declined since 1984.
  • Author: Mark A. Calabria, Michael Krimminger
  • Publication Date: 02-2015
  • Content Type: Working Paper
  • Institution: The Cato Institute
  • Abstract: Not long ago a colleague of mine, who works regularly with legislators, attended a conference at which the lunch speaker, a famous economist, began by telling everyone why governments regulate financial institutions. The reasons the economist gave consisted of various (supposed) financial - market failures. Said the colleague to me later: “I just wanted to stand up and shout, 'That's got nothing to do with it!'”
  • Topic: Economics
  • Author: Robert P. Murphy, Patrick J. Michaels, Paul "Chip" Knappenberger
  • Publication Date: 10-2015
  • Content Type: Working Paper
  • Institution: The Cato Institute
  • Abstract: A vigorous campaign aimed at American policymakers and the general public has tried to create the perception that a federal carbon tax (or similar type of “carbon price”) is a crucial element in the urgently needed response to climate change. Within conservative and libertarian circles, a small but vocal group of academics, analysts, and political officials are claiming that a revenue-neutral carbon tax swap could even deliver a “double dividend” — meaning that the conventional economy would be spurred in addition to any climate benefits. The present study details several serious problems with these claims. The actual economics of climate change — as summarized in the peer-reviewed literature as well as the U.N. and Obama Administration reports — reveal that the case for a U.S. carbon tax is weaker than the public has been told.
  • Topic: Climate Change, Economics, Energy Policy, Politics
  • Political Geography: Global Focus
  • Author: Julio Garin, Robert Lester, Eric Sims
  • Publication Date: 08-2015
  • Content Type: Working Paper
  • Institution: The Cato Institute
  • Abstract: This paper evaluates the welfare properties of nominal GDP targeting in the context of a New Keynesian model with both price and wage rigidity. In particular, we compare nominal GDP targeting to inflation and output gap targeting as well as to a conventional Taylor rule. These comparisons are made on the basis of welfare losses relative to a hypothetical equilibrium with flexible prices and wages. Output gap targeting is the most desirable of the rules under consideration, but nominal GDP targeting performs almost as well. Nominal GDP targeting is associated with smaller welfare losses than a Taylor rule and significantly outperforms inflation targeting. Relative to inflation targeting and a Taylor rule, nominal GDP targeting performs best conditional on supply shocks and when wages are sticky relative to prices. Nominal GDP targeting may outperform output gap targeting if the gap is observed with noise, and has more desirable properties related to equilibrium determinacy than does gap targeting.
  • Topic: Economics, Human Welfare, Markets, GDP
  • Political Geography: Global Focus
  • Author: Joshua R. Hendrickson, David Beckworth
  • Publication Date: 06-2015
  • Content Type: Working Paper
  • Institution: The Cato Institute
  • Abstract: Over the last few years, the Federal Reserve has conducted a series of large scale asset purchases. Given the Federal Reserve’s dual mandate, the objective of this policy has been to generate an increase in real economic activity while maintaining a low, stable rate of inflation. The effectiveness of large scale asset purchases and the ability of the central bank to achieve a particular target has been subject to debate. The monetary transmission mechanism is of primary importance for understanding the effects of both the recent large scale asset purchases and of monetary policy more generally. The purpose of this paper is to propose a monetary transmission mechanism and to present empirical support for this mechanism. In particular, this paper suggests that monetary policy is transmitted through changes in the growth rate of transaction assets through both a direct and indirect effect. First, an increase in the growth rate of the monetary base, whether through lump sum transfers or open market operations, generates a real balance effect that increases real economic activity. Second, the indirect effect is through bank lending. Since bank loans are often a function of nominal income, expansionary monetary policy increases bank lending. Since economics agents are forward-looking and the the effects of monetary policy are persistent, monetary policy is transmitted through the expected future time path of the growth of transaction assets and nominal income. This characteristic is especially important in light of the policy recommendations of Sumner (2011, 2012) and Woodford (2012), in which the central bank attaches an explicit target for the level of nominal income to large-scale asset purchases.1
  • Topic: Economics, Markets, Monetary Policy, Federal Reserve
  • Political Geography: Global Focus
  • Author: Therese M. Vaughan, Mark A. Calabria
  • Publication Date: 05-2015
  • Content Type: Working Paper
  • Institution: The Cato Institute
  • Abstract: International activity related to the regulation and supervision of financial services has exploded since the global financial crisis. The crisis exposed weaknesses in the structure for regulating internationally active banks, and motivated a number of work streams aimed at strengthening standards (most notably, significant revisions to the Basel capital standard for internationally active banks, now known as Basel III). The insurance sector was also stressed by the meltdown in financial markets that occurred in 2007-2008, albeit far less than the banking sector, and, with the exception of AIG, it is generally recognized that insurers played little role in the financial crisis, and that traditional insurance activities do not pose a systemic risk to the financial system.1,2 Nonetheless, the insurance sector has also been targeted for a new stream of regulatory initiatives at the international level. The most important organizations with respect to these activities are the International Association of Insurance Supervisors (IAIS) and the Financial Stability Board (FSB), both based in Basel, Switzerland. The purpose of this paper is to review these developments and to highlight potential concerns for U.S. insurance markets.
  • Topic: Economics, International Trade and Finance, Markets, Financial Crisis
  • Political Geography: Global Focus
  • Author: Neelanjan Sircar
  • Publication Date: 09-2015
  • Content Type: Working Paper
  • Institution: The Cato Institute
  • Abstract: This paper develops a theory on how voters form and change political preferences in democratic developing world contexts. In the developing world, where state institutions are often weak, voters tend to be more focused on the competence and capacity of parties and candidates to deliver benefits. Such information may be difficult to ascertain, so voters must glean information from how candidates conduct themselves during the electoral campaign. Voters use kinship networks to develop more accurate preferences by collectively reasoning through newly available information on candidates. In order to demonstrate these claims, this study analyzes data collected on political preferences and kinship networks in two villages just before and after the campaign period during the 2011 Assembly election in the Indian state of West Bengal. The paper finds very strong kinship network effects on changes in issue preferences and vote choice over the course of the campaign and explains the results through qualitative work and a series of network autoregressive statistical models. In sum, this paper demonstrates how voters develop independent preferences and implement political change, even in low information contexts with weak human capital.
  • Topic: Democratization, Politics, Self Determination, Elections
  • Political Geography: India
  • Author: Mark Schneider, Neelanjan Sircar
  • Publication Date: 08-2015
  • Content Type: Working Paper
  • Institution: The Cato Institute
  • Abstract: The literature on decentralized public programs suggests that errors in the targeting of anti-poverty programs are rooted in the capture of these programs by local elites or local politicians. Consistent with the literature on moral economy in political science and experimental economics, we argue that voters in contexts of rural poverty prefer local leaders who target subsistence benefits to the poor. In a high information village context, where voters and leaders know each other, we argue that local elections lead to the selection of local leaders with pro-poor preferences over the distribution of these benefits. We show this with a novel theory of local politicians’ social preferences. We test our theory with unique data from a behavioral measure, conducted in the context of a lottery with a modest cash prize in rural India, that captures a scenario in which local leaders have full discretion and anonymity over allocation among members of their rural communities. We analyze our data using a novel estimation strategy that takes the characteristics of the pool of potential beneficiaries into account in decisions over allocation under a budget constraint. We find that local leaders have strong preferences for targeting the poor, and particularly those they believe supported them politically in the past. This article suggests that free and fair elections at the local level can powerfully encourage pro-poor targeting even in contexts of weak institutions and pervasive poverty. It also makes a fundamental contribution to research on distributive politics by challenging research in this area to demonstrate the effect of electoral strategies and other distortions on allocation relative to local leaders’ baseline distributive preferences.
  • Topic: Democratization, Economics, Politics, Political Theory, Elections
  • Political Geography: India
  • Author: James A. Dorn
  • Publication Date: 07-2015
  • Content Type: Working Paper
  • Institution: The Cato Institute
  • Abstract: When the Federal Reserve was created in 1913, its powers were strictly limited and the United States was still on the gold standard. Today the Fed has virtually unlimited power and the dollar is a pure fiat money. A limited constitutional government calls for a rules-based, freemarket monetary system, not the topsy-turvy fiat dollar that now exists under central banking. This issue of the Cato Journal will examine the case for alternatives to central banking and the reforms needed to move toward free-market money
  • Author: Weiying Zhang
  • Publication Date: 02-2015
  • Content Type: Journal Article
  • Journal: The Cato Journal
  • Institution: The Cato Institute
  • Abstract: History and casual observations suggest that ideas and leadership are the two most important forces in all institutional changes. However, they have been absent or downplayed in conventional economic analysis of institutional changes. Conventional economics has exclusively focused on the notion of “interest” in explaining almost everything, from consumers' choices to public choices to institutional changes. IN particular, institutional changes have been modeled as a game of interests between different groups (such as the ruling and the ruled), with the assumption that there is a well-defined mapping from interests into outcomes.
  • Topic: Economics
  • Political Geography: China
  • Author: Randall G. Holcombe
  • Publication Date: 02-2015
  • Content Type: Journal Article
  • Journal: The Cato Journal
  • Institution: The Cato Institute
  • Abstract: Political capitalism is an economic and political system in which the economic and political elite cooperate for their mutual benefit. The economic elite influence the government's economic policies to use regulation, government spending, and the design of the tax system to maintain their elite status in the economy. The political elite are then supported by the economic elite which helps the political elite maintain their status; an exchange relationship that benefits both the political and economic elite.
  • Topic: Economics, War
  • Political Geography: America
  • Author: George C. Bitros
  • Publication Date: 02-2015
  • Content Type: Journal Article
  • Journal: The Cato Journal
  • Institution: The Cato Institute
  • Abstract: In the aftermath of the unprecedented 2008 financial crisis, researchers of macroeconomics, finance, and political economy are showing renewed interest in the old but very significant question: Are central banks in large reserve currency democracies—in particular, the U.S. Federal Reserve—prone to creating asset bubbles, and if so, how is it possible to prevent the misuse of the banks' discretionary powers?
  • Topic: Political Economy
  • Political Geography: United States, England
  • Author: Thomas H. Mayor
  • Publication Date: 02-2015
  • Content Type: Journal Article
  • Journal: The Cato Journal
  • Institution: The Cato Institute
  • Abstract: Karl Marx formulated his ideas in the middle of the 19th century when much of Europe, particularly England, was well along in what is often referred to as the Industrial Revolution. The central Marxist idea was that those who had wealth would reap the benefit of this revolution and become ever more wealthy while those who lived from their labor alone would be relegated to a bare subsistence. In his view, capital accumulation and increases in productivity do not benefit those who work for a living. Allegedly, those who own the means of production (wealth) and supposedly perform no work, receive all the benefits.
  • Topic: Government
  • Political Geography: Europe, England
  • Author: Ryan H. Murphy
  • Publication Date: 02-2015
  • Content Type: Journal Article
  • Journal: The Cato Journal
  • Institution: The Cato Institute
  • Abstract: Contemporary economic policy debates are dominated by concerns regarding the rise in inequality (Stiglitz 2012, Piketty 2014). Primarily, this has led to a focus in re-invigorating redistribution. For instance, Robert Shiller (2014) has recently argued for indexing top marginal tax rates to inequality and using the revenues to fund transfer payments. Secondarily, there are the longstanding objections to “neoliberalism” in general, which has encouraged globalization and the liberalization of markets. To the extent that liberal reforms have improved economic institutions, might today's inequality subsequently derail them?
  • Topic: Economics, Markets
  • Author: Richard E. Wagner
  • Publication Date: 02-2015
  • Content Type: Journal Article
  • Journal: The Cato Journal
  • Institution: The Cato Institute
  • Abstract: Since the beginnings of the efforts of economist to give their discipline scientific grounding, economists have thought their theoretical efforts had relevance for addressing significant public issues. While the classical economists generally supported what Adam Smith described as the “system of natural liberty,” those economists also weighed in on numerous issues of public discussion. The tenor and substance of those efforts is set forth wonderfully by Lion Robbins (1952) and Warren Samuels (1966). While the analytical default setting of those economists was to support the system of natural liberty, they also recognized the value of sound public policy in supporting that stem. The classical economists thought that there could be publicly beneficial activities that the system. The classical economists thought that there could be publicly beneficial activities that the system of natural liberty would be unlikely to do well in providing. They also thought that there were activities provided through commercial transactions that could wreak significant effects on bystanders to those transactions. The amount of education acquired within a society was one such candidate (West 1965), with the care of the poor being another (Himmelfarb 1983). IN such matters as these, the classical economists engaged in strenuous debate and discussion that served as a forerunner to the development of welfare economics during the 20th century.
  • Topic: Government