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  • Author: Alan Reynolds
  • Publication Date: 01-2021
  • Content Type: Journal Article
  • Journal: The Cato Journal
  • Institution: The Cato Institute
  • Abstract: Estimates of the elasticity of taxable income (ETI) investigate how high‐​income taxpayers faced with changes in marginal tax rates respond in ways that reduce expected revenue from higher tax rates, or raise more than expected from lower tax rates. Diamond and Saez (2011) pioneered the use of a statistical formula, which Saez developed, to convert an ETI estimate into a revenue‐​maximizing (“socially optimal”) top tax rate. For the United States, they found that the optimal top rate was about 73 percent when combining the marginal tax rates on income, payrolls, and sales at the federal, state, and local levels. A related paper by Piketty, Saez, and Stantcheva (2014) concluded that, at the highest income levels, the ETI was so small that comparable top tax rates as high as 83 percent could maximize short‐​term revenues, supposedly without suppressing long‐​term economic growth. Such studies could be viewed as part of a larger effort to minimize any efficiency costs of distortive taxation while maximizing assumed revenue gains and redistributive benefits.
  • Topic: Economics, History, Tax Systems, High-Income People
  • Political Geography: North America, Global Focus, United States of America
  • Author: Isabella M. Pesavento
  • Publication Date: 01-2021
  • Content Type: Journal Article
  • Journal: The Cato Journal
  • Institution: The Cato Institute
  • Abstract: Adoption, particularly adoption out of foster care, has not been well studied within the field of economics. Researchers may avoid this topic because the adoption market greatly deviates from a typical market, and the system and data collection are highly fragmented, with relatively little federal coordination. Rubin et al. (2007) and Thornberry et al. (1999) show that instability in foster care placements produces negative welfare outcomes, and Hansen (2006), Barth et al. (2006), and Zill (2011) demonstrate that adoption out of foster care is socially and financially beneficial. Yet, children waiting to be adopted out of foster care are in excess supply, which has been exacerbated in recent years. I hypothesize that this is, in part, due to misaligned incentives of government officials and the contracted foster care agencies. I show that earnings are prioritized over ensuring permanent child placement, which hinders the potential for adoption, and government oversight fails to correct such iniquities because of career interests.
  • Topic: Economics, Government, Markets, Children, Incentives, Foster Care, Adoption
  • Political Geography: North America, United States of America
  • Author: Anna Bocharnikova
  • Publication Date: 01-2021
  • Content Type: Journal Article
  • Journal: The Cato Journal
  • Institution: The Cato Institute
  • Abstract: This article investigates the dynamics of individual economic well‐​being in Estonia and Finland over three periods: (1) 1923–1938, when both countries were similarly situated; (2) 1960–1988, during which Estonia was under Soviet control; and (3) 1992–2018, after Estonian independence. Economic well‐​being is calculated using the purchasing power of wages in terms of the affordability of a minimal food basket. The results show that, in 1938, the purchasing power of wages in Estonia was 4 percent lower than in Finland; in 1988, it was 42 percent lower; and, by 2018, the gap had fallen to 17 percent. Consequently, as measured by the purchasing power of wages, well‐​being in Estonia and Finland was similar before the Soviet occupation, widely diverged during Soviet rule, and converged after Estonian independence, with the transition from plan to market.
  • Topic: Economics, Markets, Politics, History, Culture
  • Political Geography: Europe, Finland, Estonia
  • Author: Scott Lincicome
  • Publication Date: 01-2021
  • Content Type: Journal Article
  • Journal: The Cato Journal
  • Institution: The Cato Institute
  • Abstract: Labor market and cultural disruptions in the United States are real and important, as is China’s current and unfortunate turn toward illiberalism and empire. But pretending today that there was a better trade policy choice in 2000—when Congress granted China “permanent normal trade relations” (PNTR) status and paved the way for broader engagement—is misguided. It assumes too much, ignores too much, and demands too much. Worse, it could lead to truly bad governance: increasing U.S. protectionism; forgiving the real and important failures of our policymakers, CEOs, and unions over the last two decades; and preventing a political consensus for real policy solutions. Indeed, that is happening now.
  • Topic: International Relations, Economics, Markets, Bilateral Relations, Trade, Protectionism
  • Political Geography: China, Asia, North America, United States of America
  • Author: Kam Hon Chu
  • Publication Date: 01-2021
  • Content Type: Journal Article
  • Journal: The Cato Journal
  • Institution: The Cato Institute
  • Abstract: In addition to foreign investment absorption, Hong Kong plays a pioneering role in the internationalization of the renminbi (RMB). Despite the lack of comprehensive statistics on the volume of offshore RMB transactions, Hong Kong is for sure one of the largest, if not the largest, global centers for offshore RMB businesses. According to the Triennial Central Bank Survey (BIS 2019), for instance, Hong Kong was the largest global offshore RMB foreign exchange market, with an average daily turnover of US$107.6 billion as of April 2019, considerably higher than the US$56.7 billion for London and the US$42.6 billion for Singapore.
  • Topic: Economics, Markets, Investment, Financial Development
  • Political Geography: China, Asia, Hong Kong
  • Author: John A. Allison
  • Publication Date: 06-2021
  • Content Type: Journal Article
  • Journal: The Cato Journal
  • Institution: The Cato Institute
  • Abstract: The Covid‐​19 pandemic greatly increased the scope and power of the Federal Reserve. The Fed created a number of new emergency lending facilities, which allowed it to make off‐​balance sheet loans and buy the debt of corporations and municipalities through special purpose vehicles backstopped by the Treasury under the CARES Act. Meanwhile, the Fed’s large‐​scale asset purchase program, known as quantitative easing (QE), was put on steroids after the pandemic struck in March 2020. The Fed has been purchasing longer‐​term Treasuries and mortgage‐​backed securities amounting to $120 billion per month, pushing the size of its balance sheet to an astonishing $7 trillion.
  • Topic: Economics, Monetary Policy, Federal Reserve, Pandemic, COVID-19
  • Political Geography: North America, United States of America
  • Author: Michael J. Casey
  • Publication Date: 06-2021
  • Content Type: Journal Article
  • Journal: The Cato Journal
  • Institution: The Cato Institute
  • Abstract: For all the upheaval of 2020, it’s perhaps not surprising that the 50‐​year anniversary of a major piece of financial legislation came and went with little fanfare. But the 1970 U.S. Bank Secrecy Act (BSA) deserves much scrutiny.1 In mandating that financial institutions maintain customer identity records and report illicit activity to government agencies, the BSA was a landmark statute by any measure. It paved the way to an ever‐​expanding system of international surveillance that’s a cornerstone of U.S. economic power.
  • Topic: Economics, Government, Finance, Surveillance
  • Political Geography: North America, United States of America
  • Author: Jesús Fernández‐​Villaverde
  • Publication Date: 06-2021
  • Content Type: Journal Article
  • Journal: The Cato Journal
  • Institution: The Cato Institute
  • Abstract: The monetary arrangements of societies are the result of the interplay of technology and ideas. Technology determines, for example, which coins can be minted and at what cost. For centuries, minting small‐​denomination coinage was too costly to induce Western European governments to supply enough small change (Sargent and Velde 2002). Only the arrival of steam‐​driven presses fixed this problem (Doty 1998). Simultaneously, ideas about private property and the scope of government determined whether private entrepreneurs were allowed to compete with governments in the supply of small change (Selgin 2008). Technology and ideas about money engage dialectically. Technological advances shape our ideas about money by making new monetary arrangements feasible. Ideas about desirable outcomes direct innovators to develop new technologies.
  • Topic: Economics, Science and Technology, Monetary Policy, Cryptocurrencies
  • Political Geography: Europe, Global Focus
  • Author: Martin Chorzempa
  • Publication Date: 06-2021
  • Content Type: Journal Article
  • Journal: The Cato Journal
  • Institution: The Cato Institute
  • Abstract: Digital currency and fintech have been some of the most powerful forces for freedom and personal liberty in China for the past decade, but their future influence is uncertain. Starting as a disruptive force that gave Chinese unprecedented autonomy in their financial lives, connected either to global cryptocurrency networks or local tech ecosystems built by private firms, a new chapter is beginning. In this new era, one speech urging an emphasis on innovation instead of regulation can seemingly bring the full force of the Chinese state to bear onto a firm that once disrupted state banks with impunity. Technologies like blockchain first embraced by libertarians and cryptography enthusiasts as freeing money from dependence on the state look poised to become tools for governments to increase their ability to monitor and shape financial transactions. Meanwhile, disruptive fintech tools have become symbiotic with the major state banks, which will retain their role as the core of the financial system.
  • Topic: Economics, Science and Technology, Finance, Digital Currency , Transactions
  • Political Geography: China, Asia
  • Author: Jill Carlson
  • Publication Date: 06-2021
  • Content Type: Journal Article
  • Journal: The Cato Journal
  • Institution: The Cato Institute
  • Abstract: Possessions, or property, have been reiterated as a human right over the course of the centuries since Locke first wrote — enshrined in everything from the U.S. Declaration of Independence to the United Nations Declaration on Human Rights (1948: 217, A III). Nevertheless, executives, judiciaries, legislative bodies, and central banks around the world have continually broken their social contract on this front: not only failing to defend the natural rights of possessions and property, but often actively harming individuals’ ability to hold value and to freely transfer and exchange assets. Access to a free, open, and functional financial system is a fundamental human right. One that is continuously violated by states and policymakers globally.
  • Topic: Economics, Finance, Money, Economic Rights
  • Political Geography: South America, Venezuela
  • Author: Jeb Hensarling, Phil Gramm, John B. Taylor
  • Publication Date: 06-2021
  • Content Type: Journal Article
  • Journal: The Cato Journal
  • Institution: The Cato Institute
  • Abstract: The Fed’s huge balance sheet allows it to engage in credit policy (the composition of the balance sheet is by definition credit policy), which inherently auto‐​resides in fiscal policy — but should auto‐​reside with Congress. This discussion, moderated by John B. Taylor, took place at the Cato Institute’s 38th Annual Monetary Conference on November 19, 2020. The transcript has been edited for publication.
  • Topic: Economics, Monetary Policy, Federal Reserve, Credit
  • Political Geography: North America, United States of America
  • Author: Simon Lester, Huan Zhu
  • Publication Date: 01-2020
  • Content Type: Journal Article
  • Journal: The Cato Journal
  • Institution: The Cato Institute
  • Abstract: Donald Trump was a trade “hawk” long before he became president. In the late 1980s, he went on the Oprah Winfrey show and complained about Japan “beating the hell out of this country” on trade (Real Clear Politics 2019). As president, he has continued with the same rhetoric, using it against a wide range of U.S. trading partners, and he has followed it up with action (often in the form of tariffs). While many countries have found themselves threatened by Trump’s aggressive trade policy, his main focus has been China. As a result, the United States and China have been engaged in an escalating tariff, trade, and national security conflict since July 2018, when the first set of U.S. tariffs on China went into effect and China retaliated with tariffs of its own. In this article, we explore the U.S.-China economic conflict, from its origins to the trade war as it stands today. We then offer our thoughts on where this conflict is heading and when it might end.
  • Topic: Economics, International Trade and Finance, Tariffs, Trade Wars, Donald Trump
  • Political Geography: China, Asia, North America, United States of America
  • Author: Ryan H. Murphy, Colin O'Reilly
  • Publication Date: 10-2020
  • Content Type: Journal Article
  • Journal: The Cato Journal
  • Institution: The Cato Institute
  • Abstract: Tyler Cowen (2020), in a controversial and widely discussed blog post, has argued that free economic institutions must be accompanied by state capacity to achieve maximal growth rates. He calls this “State Capacity Libertarianism,” which echoes positions he has posed previously (Cowen 2007, 2018). Besley and Persson (2011) can be perhaps seen as a direct predecessor. Criticisms immediately emerged, with Henderson (2020) arguing that Cowen’s specific proposals are in direct conflict with libertarianism, and with minor caveats, free economic institutions are already able to achieve the goals Cowen hopes to achieve with state capacity. Geloso and Salter (forthcoming) argue that the lack of examples of wealthy countries with weak states is due to survivorship bias, and they apply their argument to criticize Cowen (Geloso and Salter 2020). Caplan (2018), while not directly addressing State Capacity Libertarianism, argues that there is little reason to believe that the effects of state capacity are the result of strong states themselves, rather than the social and cultural factors that allowed a strong state to emerge in the first place. The purpose of this article is to put data to the question of the individual effects of state capacity and free economic institutions on economic performance, and the potential interaction between the two.
  • Topic: Economics, Markets, State, Libertarianism
  • Political Geography: Global Focus
  • Author: Axel Kaiser
  • Publication Date: 10-2020
  • Content Type: Journal Article
  • Journal: The Cato Journal
  • Institution: The Cato Institute
  • Abstract: Following the failed Marxist experiment of Chilean President Salvador Allende, a free‐​market revolution led by the so‐​called Chicago Boys in the 1970s and 1980s created the conditions necessary for the country to experience an “economic miracle” that captured worldwide attention.1 As Nobel laureate economist Gary Becker (1997) put it, Chile became “an economic role model for the whole underdeveloped world.” This performance, said Becker, “became still more impressive when the government was transformed into a democracy.” Along the same lines, Nobel laureate economist Paul Krugman argued that the reforms introduced by the Chicago Boys “proved highly successful and were preserved intact when Chile finally returned to democracy in 1989” (Krugman 2008: 31). Indeed, from 1990 to 2010 a left‐​wing coalition called “Concertación” came to power. Despite having been comprised of opponents to the military dictatorship and by many former members of Salvador Allende’s government, Concertación kept in place the foundations of the free‐​market system. A pragmatic view prevailed, leading to the recognition and adoption of the economic legacy of the Pinochet years.
  • Topic: Economics, Reform, Neoliberalism, Ideology, Crisis Management, Transparency, Free Market
  • Political Geography: South America, Chile, United States of America
  • Author: Kerianne N. Lawson, Robert A. Lawson
  • Publication Date: 10-2020
  • Content Type: Journal Article
  • Journal: The Cato Journal
  • Institution: The Cato Institute
  • Abstract: This article examines 77 countries with the most significant economic liberalizations since 1970, as measured by changes in the Economic Freedom of the World (EFW) index. Measures of both the speed and comprehensiveness of the reforms are presented. Our empirical evidence suggests that faster reforming nations economically outperformed slower reformers. We do not find evidence that more comprehensive reforms, as opposed to more narrowly targeted reforms, had much of an impact on ensuing economic growth.
  • Topic: Economics, Reform, Economic Growth, Liberalization
  • Political Geography: Global Focus
  • Author: Gunther Schnabl
  • Publication Date: 10-2019
  • Content Type: Journal Article
  • Journal: The Cato Journal
  • Institution: The Cato Institute
  • Abstract: Twenty years after the introduction of the euro, the European Monetary Union (EMU) is at its crossroads. Following the outbreak of the European financial and debt crisis in 2008, the European Central Bank (ECB) took comprehensive measures to stabilize the common currency. Interest rates were cut to and below zero and several asset purchase programs have inflated the ECB balance sheet (Riet 2018). Within the European System of Central Banks, large imbalances have emerged via the TARGET2 payments system, which can be seen as quasi-unconditional credit in favor of the southern euro area countries (Sinn 2018). While the ECB terminated its asset purchase program at the end of 2018 and is expected to increase interest rates in late 2019, financial instability is reemerging. Growing uncertainty about the fiscal discipline of the Italian government has triggered a significant increase in risk premiums on Italian government bonds. In particular, in Italy and Greece, but also in Germany, bad loans and assets remain stuck in the banking systems. In the face of the upcoming downswing, European banks do not seem ready for new financial turmoil. In this fragile environment, the future path of the EMU is uncertain. To enhance the stability of the EMU, a group of German and French economists has called for a common euro area budget, for a strengthening of the European Stability Mechanism as lender of last resort for euro area countries and banks, as well as for a common European deposit insurance scheme (Bénassy-Quéré et al. 2018). In response, 154 German economists have warned against transforming the EMU into what they call a “liablity union,” which systematically undermines market principles and wealth (Mayer et al. 2018). In 2018, a French-German initative to introduce a common euro area budget faced strong opposition from a group of northern European countries as well as from Italy, symbolizing the political deadlock concerning reforms of the EMU. This article explains the different views on the institutional setting of monetary policymaking in Europe from a historical perspective. It begins with a description of the economic and monetary order in postwar Germany. It then discusses the positive implications for the European integration process and the economic consequences of the transformation of postwar German monetary order. The final section offers some economic policy recommendations.
  • Topic: Economics, History, Monetary Policy, Reform, European Union, Banks, Currency
  • Political Geography: Europe, Germany
  • Author: James A. Dorn
  • Publication Date: 01-2019
  • Content Type: Journal Article
  • Journal: The Cato Journal
  • Institution: The Cato Institute
  • Abstract: 1978 has been erratic, with many interruptions along the way. The end result, however, has been eye opening: the Middle Kingdom has become the world’s largest trading nation, the second largest economy, and more than 500 million people have lifted themselves out of poverty as economic liberalization removed barriers to trade. One of the enduring lessons from China’s rise as an economic giant is that once people are given greater economic freedom, more autonomy, and stronger property rights, they will have a better chance of creating a harmonious and prosperous society (see Dorn 2019). Nevertheless, China faces major challenges to its future development. There is still no genuine rule of law that effectively limits the power of government, no independent judiciary to enforce the rights promised in the nation’s constitution, no free market for ideas that is essential for innovation and for avoiding major policy errors, no competitive political system that fosters a diversity of views, and a large state sector that stifles private initiative and breeds corruption. China’s slowing growth rate, its increasing debt burden, environmental problems, and the increasing tension in U.S.-China relations compound the challenges facing Beijing.
  • Topic: Development, Economics, History, Trade Liberalization
  • Political Geography: China, Asia
  • Author: Yiping Huang, Tingting Ge
  • Publication Date: 01-2019
  • Content Type: Journal Article
  • Journal: The Cato Journal
  • Institution: The Cato Institute
  • Abstract: When China began economic reform in 1978, it had only one financial institution, the People’s Bank of China (PBOC), which, at that time, served as both the central bank and a commercial bank and accounted for 93 percent of the country’s total financial assets. This was primarily because, in a centrally planned economy, transfer of funds was arranged by the state and there was little demand for financial intermediation. Once economic reform started, the authorities moved very quickly to establish a very large number of financial institutions and to create various financial markets. Forty years later, China is already an important player in the global financial system, including in the banking sector, direct investment, and bond and equity markets. However, government intervention in the financial system remains widespread and serious. The PBOC still guides commercial banks’ setting of deposit and lending rates through “window guidance,” although the final restriction on deposit rates was removed in 2015. Industry and other policies still play important roles influencing allocation of financial resources by banks and capital markets. The PBOC intervenes in the foreign exchange markets from time to time, through directly buying or selling foreign exchanges, setting the central parity, and determining the daily trading band. The regulators tightly manage cross-border capital flows, and the state still controls majority shares of most large financial institutions.
  • Topic: Economics, Foreign Exchange, Reform, Financial Markets, Banks
  • Political Geography: China, Asia
  • Author: Judy Shelton
  • Publication Date: 06-2018
  • Content Type: Journal Article
  • Journal: The Cato Journal
  • Institution: The Cato Institute
  • Abstract: How often do we hear references to the notion that we live in a rules-based global trading system? Addressing the World Economic Forum at Davos in January 2017, British Prime Minister Theresa May praised liberalism, free trade, and globalization as “the forces that underpin the rules-based international system that is key to our global prosperity and security” (Martin 2017). Chinese President Xi Jinping likewise extolled the virtues of a rules-based economic order at Davos, winning widespread praise for defending free trade and globalization (Fidler, Chen, and Wei 2017). But could someone please explain: What exactly are those rules? Because if we are going to invoke the sentimentality of Bretton Woods by suggesting that the world has remained true to its precepts, we are ignoring geopolitical reality. Moreover, we are denying the warped economic consequences of global trade conducted in the absence of orderly currency arrangements. We have not had a rules-based international monetary system since President Nixon ended the Bretton Woods agreement in August 1971. Today there are compelling reasons—political, economic, and strategic—for President Trump to initiate the establishment of a new international monetary system.
  • Topic: Economics, International Cooperation, Monetary Policy
  • Political Geography: Global Focus
  • Author: Ryan Murphy, Robert A. Lawson
  • Publication Date: 01-2018
  • Content Type: Journal Article
  • Journal: The Cato Journal
  • Institution: The Cato Institute
  • Abstract: This article uses newly gathered and available data and autoregressive methods to create an economic freedom index for the 1950s and 1960s for up to 95 countries. The resulting index allows not only for a longer time series but also for a larger sample of countries than has been previously available.
  • Topic: Economics, History, Economic Growth
  • Political Geography: Global Focus