Thursday, June 22, 2017

What Can the Kansas Tax Cut Experiment Teach Us About Tax Reform?

President Trump has been looking to make tax cuts a major part of his tax reform plan. For Trump's critics, the tax cuts that Trump is proposing look like a huge gift to the top 1 percent. There has been considerable debate as to whether his tax cuts would work. Fortunately for those who are public policy wonks, there is a case study that can provide some insight: the state of Kansas.

As of July 1, 2012, the state of Kansas enacted HB2117, which was the State's largest income tax cuts in history. HB2117 had multiple provisions, including reducing the top income tax rate from 6.45 percent to 6.25 percent, reduce the lower income tax rate from 3.5 percent to 3 percent, and eliminate the income tax for hundreds of small business owners throughout the State. What makes this newsworthy is that a little over two weeks ago, the Kansas House and Senate overrode Governor Sam Brownback's veto and undid his five-year experiment. Why did Republicans side against Brownback? They believed that the tax cuts were causing budgetary shortfalls, which is why the Kansas income tax is to now increase. This has ramifications not just for the state of Kansas, but also for the U.S. federal government because it is being used as a case study on how tax cuts make for lousy public policy. What I would like to examine here is the success of the Kansas case study and how informative it can be for future tax cuts.

But first, a bit of economic theory on tax cuts. For those who propose tax cuts, the idea is twofold. On the supply-side, it will provide those with capital to incentivize further economic growth (e.g., Akcigit et al., 2015; Moretti and Wilson, 2017). On the demand side, lower taxes provides higher take-home income, which means more money for consumption, investment, or savings. I discussed trickle-down economics last year, and a) it is not an idea or philosophy advocated within the economics discipline, and b) those who advocate for free markets advocate for cutting taxes for everyone, not just the rich. The economic theory of tax cuts comes with another facet known as the Laffer Curve. The theory behind the Laffer Curve is that there is a taxation rate that optimizes tax revenue. The issue with the theory is that we don't know what that amount is, which can potentially shift based on tax type and other factors. This can also mean that if the tax rate is too high, then a lower tax rate could theoretically increase tax revenue. Also, the growth maximizing point is lower than the revenue maximizing point. Now that we have the theory out of the way, did Kansas' tax cuts do the trick?

Let's take a look at some economic metrics. Kansas unemployment dropped from 5.6 percent to 3.7 percent since the legislation began. This is good for Kansas in the sense that their unemployment is below the national average. On the other hand, the labor force participation rate decreased from 69.1 percent to 66.7 percent, which puts a damper on the low employment rate. Also, Kansas' GDP growth is smaller than that of surrounding states (see below), which doesn't bode well. The Kansas Policy Institute (KPI) released a report in January refuting why we should use geographical proximity as the basis for comparing other states. When comparing Kansas to states that are similar to Kansas economically, the KPI found that Brownback's tax cuts have had a positive effect on job growth.


A couple of counterpoints on the taxation bit. One is that tax revenue did not decline while the tax cut experiment was taking place (see Fed Reserve below). Furthermore, the State of Kansas increased the sales tax from 6.15 percent to 6.5 percent in 2015. Looking at private sector job growth in Kansas, jobs were growing until shortly after the sales tax increase took place, which was three years after the income tax decrease took place. Even with these income tax cuts, there is still an overall increase in tax revenue because of the sales tax increase. More to the point, Kansas state tax is small in comparison to federal tax burden, which means the effects of the income tax cut are probably going to be more modest than a major cut in the federal income tax.



There has been complaints about how the tax cuts did not cut budget deficits. With the exception of 2013, government spending has increased. As the chart from Tax Foundation below shows, per capita government spending stayed stagnant over the years. It shouldn't be a surprise that there was an increase in deficits. If the income tax cuts are not offset by spending cuts or tax increases, of course there will be an increase in the deficit. It's basic mathematics. Deficits also have an effect on savings, which in turn, have an effect on the worth of capital (Gale and Samwick, 2014). This happens because as long as the government has debt, it will need a way to pay of the debt. If it cannot tax, the government would have to borrow, which means driving up the interest rate and driving the economy into the ground. This is why it is important that a tax cut doesn't exacerbate government deficits.



On top of the budget deficits, the Kansas experiment included an exemption for pass-through entities (i.e., businesses taxed with individual income tax instead of corporate tax), which even the pro-tax cut organization Tax Foundation thought went too far because it would encourage tax evasion and reduce tax revenue.

Between increased government spending, tax exemptions, and other tax increases, the Kansas experiment is not a rebuke or refutation of supply-side economics or fiscally conservative policy. Kansas reminds us of a few things:

  1. An economy responds to much more than just tax cuts, especially meager ones.
  2. Tax cuts aren't inherently bad, but they can do damage if poorly constructed.
  3. The effects of reduced taxes can take a while, which is why looking five years after the fact is preliminary at best. Arthur Laffer, the creator of the Laffer Curve, thinks it would have taken ten years for the benefits to fully exist. As an example, one could argue that the Reagan tax cuts from the 1980s took until the 1990s to take effect, which subsequently affected the 1990s tech boom. With the Kansas experiment cut off short, we will never know either way. 
  4. Most importantly, tax reform cannot simply be reduced to mere tax cuts.
In 2012, a a panel of expert economists at the University of Chicago were asked whether a cut in income tax would lead to GDP growth. Interestingly, a plurality found that cutting income taxes would translate into greater GDP growth, which is good news considering that is the primary purpose of tax cuts. On the other hand, there were a number of economists on this panel who were uncertain.

Why are there economists who are uncertain about the effect of tax cuts on the GDP? Because tax cuts are not inherently a solution. Don't get me wrong: high taxes are decidedly burdensome. Two prominent economists (one of whom worked in the Obama Administration as a top economic advisor) found that a 1 percent increase in taxes translate into a 3 percent decrease in GDP over three years (Romer and Romer, 2010, p. 764). Another study illustrates how GDP growth relatively accelerates as a result of the tax cut (Taylor and Taylor, 2014). This 2012 study from the Tax Foundation also illustrates empirical studies that show how higher taxes adversely affect growth (although to be fair, the Left-leaning Center for Budget and Policy Priorities finds that state income tax cuts do not spur economic growth).

At the same time, tax reform is more than the tax rate. Tax reform is about such things as who and what is being taxed (e.g., broadening the tax code, shifting from a progressive income tax to a progressive consumption tax, having the tax cuts be for lower-income individuals instead of [or in addition to] the 1 percent [Zidar, 2015]), simplifying the tax code, which taxes are being lowered or raised, how the tax cut is being financed, and whether deductions are eliminated.  The centrist Brookings Institution found that tax cuts could work, but work best if they are accompanied by spending cuts [or minimal increases in the budget deficit] (Gale and Samwick, 2016). Brookings also points out that for the United States, tax cuts did not work out because the federal government would accompany tax cuts with increased spending (Gale and Samwick, 2014).

The lesson from Kansas is not that tax cuts are bad. The lesson is the following. Tax cuts work when they are properly offset with spending cuts and/or other tax increases, which does not happen nearly as often as it should. Tax cuts can work if there are not gaping loopholes and exemptions. Lower taxation rates can and do help when done right. While taxes have the potential to be distortionary and cause economic pain, they are not the only economic force in play. There are regulations, government spending, demographics, structural labor market shifts, monetary policy, other states' policies that have spillover effects, and technological development, amongst others. Ultimately, there are right ways and wrong ways to implement a tax cut, and even then, other economic forces could mitigate the economic growth that ought to come with tax cuts. Tax cuts are not a cure-all for tax reform, but at the same time, tax cuts leave taxpayers with more money and the potential to enhance economic growth when done right.

Monday, June 19, 2017

A French Case Study on How Rigid Employment Protection Laws and Unionism Stifle Labor Market Growth

Emmanuel Macron was elected President of France last month, and already I knew that his work was cut out for him. Between economic stagnation, immigration, unemployment, defense, and a host of issues, Macron will not be bored during his tenure. Another issue that Macron is already facing is trade unions. During the French election, Macron made labor market reform a key proponent of his pro-business election platform. Macron was not sworn into office all that long ago, and the trade unions are ready to face Macron because of his pursuit of labor regulation reform. Macron is already being urged by trade unions to slow down labor market reforms. Macron sees labor market reform as an opportunity to bring more flexibility to a byzantine set of labor laws (le Code du Travail), while there are those on the Left who view its as protecting Big Business while giving workers the shaft. When analyzing the dynamics of labor market regulations in France, we should ask ourselves what sort of effects the regulations have and whether it is worthwhile keeping such rigidity.

Le Code du Travail, which is France's 2,000-plus page corpus of labor laws, has been around since the late nineteenth century. With that many pages of rules and regulations, it is not practical to cover everything today. However, there are some key points about the French labor market that can be covered that can nevertheless paint the picture of the state of France's labor market. For one, the Index of Economic Freedom (see here) points out how France's labor regulations lower its economic freedom. The Fraser Institute has similar results with its economic freedom index. Although France's scores on Fraser's index are higher than they used to be, France's score on regulations (and labor regulations in particular) lower its overall score on Fraser's index.

There are a number of labor laws that constrict labor market growth: mandated vacation time, the 35-hour work week, a high minimum wage, the list goes on. A major example that illustrates the ineptitude of the French labor market is what happens when a firm hires fifty employees. Once an employer exceeds 49 employees, businesses are hit with many regulations, including having to create a work council (comité d'enterprise), establish a Health and Safety committee, reporting more detailed statistics to the Labor Ministry, appoint a union representative, and new regulations making it more difficult to lay off or fire workers. A 2016 paper from The London School of Economics (Garicano et al., 2016) shows how French companies get around all the rules applying to companies with 50 or more employees: hire up to 49 employees. This is significant since the same LSE paper (see below) found that larger factories in France have had higher productivity rates than the smaller ones (Garciano et al., p. 33). Another way of framing this quandary is that France is not being as productive because of the labor rigidity.


What ends up being paradoxical is that labor productivity in France is nearly as high as it is in the United States (see below), not to mention that France has one of the highest GDPs in the world and has a good standard of living. If you notice the metric the OECD uses for labor productivity, it is GDP per hour worked. That means the metric filters out anyone who is not working. Sure, for those who are working, they're doing great. But what about the rest who are not?


As this Cato Institute article points out, just because France does have a relatively high standard of living doesn't mean that France's economy is doing well. One of the drawbacks of the French labor regulations is that France has a higher-than-average unemployment (see below). As the OECD Index of Employer Protection, it is more difficult to fire someone in France than it is in the United States. If France were able to hire more people, it might be that the labor productivity per employee drops a bit. But at least more French people would be working, and that overall economic output increases. The Left-leaning International Labor Organization is hardly capitalist, but nevertheless concedes that short-term jobs are a feature of stringent employment projections (Le Barbanchon and Malherbert, 2013, p. 20). Furthermore, a paper by three French economists shows that any country with high employment protections would benefit from lowering those protections by increasing [low-skilled] employment (Cette et al., 2016).



What would it look like if France relaxed its labor laws and employee protections? A panel of some of the foremost expert economists in Europe were asked last month about whether liberalizing France's labor markets by reducing employment protections and decentralizing union power would improve the French economy. Two thirds answered that it would improve France's economy. About the same percent also agreed that reducing employment protections would translated into reduced unemployment. Most of those who did not agree were unsure. Why? They thought that the short-term might be problematic because overmanned firms might go to the wayside. That being said, when you remove the economists who were unsure, the ratio between those who thought it would help versus those who didn't was even more pronounced. Most economists agree that France's labor laws are too stringent, and that France would benefit from a more liberalized labor market.

France provides a good example of what happens when labor regulations run amok. Even so, one can argue that France is just one country, one case study. After all, comparative politics reminds us that each country has its own unique set of circumstance, and that multiple phenomena simultaneously interact to create different results. On the other hand, the basics of comparative politics gives us the ability of analyzing cross-country data and phenomenon while reminding us that each country has its own unique dynamics. Even if France's dynamics are not identical to those of the United States or other countries, we can still draw some conclusions.

When regulations make more it difficult for businesses to hire, fire, and retain employees, it is more difficult for economic progress to take place. It is more difficult for people to have a livelihood. Minimum wage causes greater unemployment. As we experience in the United States, extending overtime laws makes hiring more expensive. An IMF paper shows how German employment improved when Germany significantly reduced labor regulations in the 2000s (Detragiache et al., 2015). We can go through country by country, but both economic theory and empirical evidence point to the same thing: more liberalization of the labor market is better. The unions in France will surely push back, but when all is said and done, France will benefit from less labor market rigidity.

Thursday, June 15, 2017

Parsha Shelach: The Spiritual Fringe Benefits of Wearing Tzitzit Are in the Details

"Clothes mean nothing until someone lives in them." Marc Jacobs might be a gay, non-observant Jewish fashion designer, but he has a point, and not just about clothing in general. When we wear clothing, we make a statement of ourselves. Clothing becomes an external manifestation of our personality. It also has the potential to express not just who we are, but what we stand for. It is a phenomenon that we see in this week's Torah portion:

"Speak to the children of Israel and you shall tell them to make for themselves fringes on the corners of their garments, throughout their generations, and they shall make a thread of sky blue on the fringe of each corner. These shall be fringes for you, and when you look at them, you will remember all of G-d's commands to perform them. And you shall not wander after your hearts and after your eyes which you are going astray. You shall remember all my commandments and be holy to your G-d. I am the L-rd your G-d who took you out of the land of Egypt to be your G-d. I am the L-rd, your G-d." -Numbers 15:38-41

This lengthy passage, which also happens to be the third paragraph of the Shema, describes the mitzvah of wearing fringes, or tzitzit (ציצית), on one's garment. If clothes mean nothing until someone lives in them, then what does wearing tzitzit mean when a Jew wears them?

The biblical verse itself already gives an answer: to remember the commandments. I'm not here to diminish that response because a) it is straight from the Torah, and b) it is correct. However, rabbinic commentary provides further insight. Menachot 43b went as far as saying that performing the mitzvah of tzitzit is as if one performed all the mitzvahs. Why? Because seeing leads to remembering, and remembering is supposed to ultimately lead to doing. 

This leads into the Talmudic passage in the next folio in Menachot 44a. A Jewish man was going to consort with a well-known, non-Jewish harlot for a hefty price. Before they engaged in sexual congress, the tzitzit slapped him in the face. The tzitzit were such a strong reminder that the man did not go through with it. More to the point, the harlot was so impressed that she herself ended up converting to Judaism. Even if the slap in the face was a metaphorical one, it still illustrates the power of how seeing invokes memory and subsequent action. The idea of memory would also explain why this passage is in the Shema and why the passage has a reminder to remember the Exodus at the end. As R. Baruch Epstein points out, it is not enough to remember: we also have to act. If the tzitzit do not prompt us to act, then they have not had the full effect.

The saying goes that the devil is in the details. Personally, I prefer to say that G-d is in the details, but it's the same general idea: details provide deeper insight. The particulars of the mitzvah of tzitzit also bring up a few follow-up questions that lead to that deeper insight:
  • Why are there 39 windings? To make the tzitzit, you have to wind the thread in order to create the tzitzit. In Ashkenazic tradition, the number of windings is 39 (see below). Why the breakdown of 7-8-11-13? Seven stands for the seven days of Creation. Eight stands for the number of transcendence that goes beyond nature. Eleven is for the Hebrew letters ו-ה under Jewish numerology (gematria), which also are the last two letters of G-d's name in the Tetragrammaton. Thirteen represents for the gematria of אחד, or the Hebrew word for "one," which represents G-d's Oneness (R. Aryeh Kaplan).
  • Why are the threads loose? The loose threads are like the unwoven portion of the tallit (prayer shawl). They represent the incompleteness in G-d's metaphorical garment, an incompleteness that unwoven part that man is supposed to complete (R. Meir Simcha of Dvinsk). I actually have an alternative response. When looking at an individual mitzvah (which is represented by a loose tzitzit thread), it seems isolated or inexplicable. In reality, the mitzvot are tied together to the greater purpose of serving G-d, much like the loose threads are tied together as one entity. 
  • Why are there 8 threads? During Passover, we sing a song called "Who Knows One?" (Echad Mi Yodea). When we sing the song and reach the part of "Who knows eight", what is the response? "Eight days for circumcision." Circumcision represents the covenant between the Jewish people and G-d. Much like circumcision is supposed to be a link with the Transcendental, so are the tzitzit (Maharal).   
  • Why are the threads placed at the edge of the garment? As R. Dr. Asher Meir puts it, the outward-flowing fringes represents the openness we should have to the world, and how we should reach out to it. The tzitzit thusly represent how we are the interact with the world: openly, instead of closed off from it. Much like the tzitzit can only extend so far, the mitzvahs also put limitations on what Jews can do. This represents the paradox between being free and feeling a sense of obligation towards G-d and Judaism: we are to maximize our experiences while adhering to the mitzvahs. 
  • Why is the garment with the tzitzit a square? The Sages taught that a four-sided figure is an archetype of something manmade. The square reminds us of our responsibility in the world (Jerusalem Talmud, Nedarim 3:2).
  • Why is supposed to be worn during the day only? The nighttime is supposed to be a time of inactivity and turning more inwards, which is why it is commanded during the daytime only (Shulchan Aruch, O.C. 18). I would surmise that it is during the daytime only because for the mitzvah of tzitzit to work, you have to see them, much like the biblical verse states. In premodern times, one could not see much at night, which included being unable to see tzitzit. In modern times, we can see them, which under that argument, would extend the mitzvah to the evening. 
  • Why is there a blue thread? The Torah says that one of the threads has to be sea blue. The Talmud (Chullin 89a) provides an explanation. The blue thread is blue like the sea, which is similar to the blue of the sky, which is similar to the color of the Throne of Glory. There is further symbolism here. The sea represents immersing oneself in Torah. The sky represents doing mitzvot for the sake of Heaven. From there, one can reach the Throne of Glory, which represents the high end of our potential. 
  • Why is the mitzvah not obligatory? If the purpose is to remind us of all the mitzvot, surely it should be obligatory. Yet under Jewish law, it is not. Why? Because the mitzvot form the life of a Jew. They are all-encompassing. Since it can be quite the undertaking, it is only when Jews obligate themselves to take on the mitzvah of wearing tzitzit that Jews truly express a love for G-d. 
Marc Jacobs was right: clothing means nothing until someone lives in them. These insights mean nothing until we live in them. The tzitzit do not mean anything until we put them on and say the blessing. They don't have much significance until we look at them, are reminded what it means to be a Jew, and act based on that realization. We can only "live in the tzitzit" when we realize its spiritual significance and how that affects our daily decisions. Only when the tzitzit positively affects our thoughts, words, and deeds have we truly fulfilled the mitzvahs.

Monday, June 12, 2017

Puerto Rican Statehood Is Not a Cure-All for Puerto Rican Debt Crisis

Puerto Rico has experienced its fair share of woes with its government-debt crisis. On more than one occasion has Puerto Rico's structural debt issues been compared with that of Greece. There have been suggestions as to how to alleviate Puerto Rico of its debt issues, but one is of particular interest: statehood (also see here). Yesterday, the Puerto Rican people are to voted on a non-binding referendum as to whether Puerto Rico should become the 51st state of the Union (see here). Puerto Rico voted on the issue four times prior: in 1967, 1993, 1998, and 2012. While the 2012 referendum was the first time the majority voted for statehood, the political process was unclear because of 500,000 blank ballots. Due to the ambiguity of the results, we have the upcoming referendum, which provides three options: "Statehood," "Independence/Free Association", or the status quo. If Puerto Rico achieves statehood, it would receive federal funds, Social Security, Medicare, and most relevant, a right for its government agencies to declare bankruptcy. Regardless of the outcome of the ballot, statehood would still require United States Congressional approval.

I'm skeptical that anything will change Puerto Rico's status. One reason is that after four failed referenda, nothing has changed. Even though the referendum yesterday had an overwhelming 97 percent of voters voting in favor of statehood, there was a dismally low participation rate of 23 percent. The second reason has to do with political feasibility. If Puerto Rico became a state, that means that Puerto Rico would have two Senators in the Senate. The Puerto Rican Senators would probably be Democratic since Puerto Rico is overwhelmingly Democratic, which means the count in the Senate would be 52-50. Since the Republicans would have an even slimmer majority in the Senate, they would not dare risk giving the Democrats the Senate.

Even if statehood were politically feasible, I still am concerned about Puerto Rican statehood, which is tied to its debt issues. As of date, Puerto Rico owes about $120 billion, and none of this covers the $40 billion in unfunded liabilities. This might sound small in comparison to the United States' $20 trillion debt. However, Puerto Rico's state debt-to-GDP is 70 percent. To compare, the average debt-to-GDP ratio for states in the USA is only 17 percent. Puerto Rico's deficit spending and bloated pension system have contributed to the high debt, but as I explained last year, Puerto Rican debt is complex and largely due to government policy.

Aside from Puerto Rico's enormous debt, there would also be adverse effects of Puerto Rico becoming the fifty-first state. In 2014, the Government Accountability Office (GAO) released a report on what would happen if Puerto Rico joined the United States. The report found that it could result in reduced Puerto Rican tax revenue (p. 31). The report also estimated that Puerto Rico would receive $5.2 billion in federal funds while paying $2-4 billion. A government that is trying to pay off a large amount of debt does not need to cut off a primary source of revenue simply because it wants to become a state. While there are costs to admitting Puerto Rico to statehood in the United States, there are also costs of letting Puerto Rico continue on its current path and being incapable of having access to certain financial tools (e.g., bankruptcy, default). I was unable to find studies or numbers to compare the status quo with the effects of statehood.

Even without those studies, I still worry. My main issue and concern with giving Puerto Rico statehood to alleviate financial woes is that it is like putting a bandaid over a cold. Puerto Rican debt is structural and largely due to government policy. This government policy has encouraged Puerto Rico to take on a large amount of government spending that has landed them in this problem. Furthermore, if Puerto Rico joins the United States, that also means Puerto Rico would share the United States' monetary union, which means higher interest rates and contending with a forecasted stronger dollar.

If the more fundamental issues are not addressed, then more of the burden will shift over the the United States federal government while Puerto Rico continues to carelessly spend government funds. I think there should ultimately be some sort of federal oversight and debt relief, but it cannot be unconditional. It has to come with reform to get Puerto Rico out of its predicament. Otherwise, as Argentina and Greece have shown us with its IMF bailouts, it will be more of the same.

Thursday, June 8, 2017

Trump's Paris Agreement Withdrawal Doesn't Screw Us Over on Climate Change

Last week, President Trump withdrew from the Paris Agreement. You can read the original text here, but essentially, the Paris Agreement is an international agreement that has the goal of making sure that by the end of the century, the global temperatures do not rise 2˚C above pre-industrial revolution temperatures. The two-degree mark is important because many climate scientists believe it is the threshold our planet can handle without climate change destroying the world. Think of it as analogous to a speed limit, but for climate change. As long as we don't go over, we can avoid drastic shifts in weather or food and water crises.

The United States' intended goal when initially signing the Paris Agreement back in 2015 was to reduce emissions by 28 percent of the 2005 levels by the year 2025. To arrive at the goal, the Obama administration pledged to enact various regulations on oil and gas activities, vehicles, residential buildings, and other facets of our life. We'll touch upon that concept in a moment, but let's just say that what Obama pledged was much more aggressive than what his counterparts pledged.

Based on what I have heard about the Agreement, Trump's withdrawal from the Agreement sounded so catastrophic. German Chancellor Angela Merkel thought Trump's decision was extremely regrettable, and French President Emmanuel Macron called it "a mistake both for the U.S. and our planet." John Oliver's bit (see below) made it seem as if Trump single-handedly precipitated the beginning of the end of the world. Did Trump's indifference on climate change really doom us all? Will Trump's decision cause harm or does it ultimately not matter?



I don't want to get into how the politics of the Green United Fund, how the United States made an overly aggressive pledge while the EU made modest ones in comparison, or how the United States was never technically or legally bound to the Paris Agreement since ratification did not go through the legislative branch. I don't even want to get into the politics of climate change right now. I want to get into whether the costs are worth the benefits, and whether the Paris Agreement would stop the horrors of climate change. The burden of proof (see below) as to whether the Paris Agreement is good policy is on proponents proposing it, not the skeptic.



Speaking of skepticism, there have been points where I have expressed "climate change denial,"which later evolved into skepticism. I have reached the point where I have acknowledged that man has contributed to climate change. At the same time, the skepticism comes in when people around me express such confidence in tenuous climate models that try to project effects a century out.

Even with my skepticism, I still think something needs to be done. Why? The best argument I have come across is that of risk management. In the private sector, what do you do when you have non-diversifiable, low-probability, high-risk scenario is hedge against that risk. Climate change is no different here. At the same time, identifying manmade climate change as a problem does not automatically necessitate a specific solution. You can hold the opinion that manmade global warming is a problem that needs to be solved now and still think the Paris Agreement is a bad idea, which is what I am going to argue now.

The Right-leaning Heritage Foundation released a study on the impacts of the Paris Agreement back in 2016. The study found that by 2035, there would be 400,000 American jobs lost, $2.5 trillion lost in GDP, a total income loss of $20,000 for a family of four, and household energy expenditures to increase by 13 to 20 percent. And that is just the cost to the American economy! If that is the cost it imposes on the United States, imagine the costs it would impose on developing countries, the ones that already deal with energy poverty. And for that cost, the Heritage study estimated that the Paris Agreement would reduce global warming by less than two-tenths of a degree Celsius. A March 2017 report from NERA Economic Consulting comes with similar results.

And if the Heritage Foundation is not an adequate source for you to illustrate how ineffective the Paris Agreement would be, how about the Massachusetts Institute of Technology (MIT)? The MIT Joint Project on the Science and Policy of Global Change projected that even if every country succeeded on its pledges made back in 2015, the Paris Agreement would avoid a measly 0.2˚C of warming (also see Lomborg, 2015), which is only a fraction of what would be needed to avoid global warming catastrophe. In the November 2016 issue of Global Environment Change (Vandyck et al., 2016), a group of European climate change scientists researched the effect the Paris Agreement had, and concluded that the even with the Agreement, the global temperature would most probably be 3˚C, which is above what is desirable.


And if those studies were not enough, look at the estimations from the United Nations itself. Since this Agreement is through the UN, they are the ones who are going to be the most optimistic and Pollyannish about the Agreement. Even if all the countries are able to make their pledges for the Agreement (which is tenuous to begin with), the United Nations estimates that it would most probably range between 3 and 4˚C. And these are the figures from those advocating for the Agreement assuming that all the countries will meet their pledged goals.



A final point to consider is whether the 2˚C target can is feasible. To make that goal, the world would need to reduce oil reserves by a third, gas reserves by half, and coal reserves by 80 percent (McGlade and Eckins, 2015). With an increase of global demand for energy consumption, good luck with that!

Trump's decision is not the end of the world as we know it, and I'm actually glad to see Trump pull out of this bad deal. Just because we "need to do something now" doesn't mean we should do anything. That's the mentality that allowed Obamacare to reek havoc on the United States health care system. If there is to be a policy alternative, it needs to be better than the status quo, and those arguing the case for the Paris Agreement simply have not met the burden of proof to implement it in good conscience. I would be much more inclined towards a revenue-neutral carbon tax than the Paris Agreement, although technological subsidies would be even better. We saw how carbon emissions dropped as a result of fracking, and further innovation and positive market shifts will solve the issue more suitably than the Paris Agreement. Heavy-handed, command-and-control regulation like we see in the Paris Agreement wasn't going to solve climate change. When all is said and done, the solution needs to focus on technological innovation. If we can focus more on the technological piece instead of regulations with high economic costs and nearly non-existent environmental benefits, then we could actually make headway on climate change.

Monday, June 5, 2017

How the Department of Labor's Fiduciary Rule Will Impact Retirees and Financial Institutions

Saving for retirement can be a challenge. Depending on what you invest in, it can yield a high or low rate of return. It also doesn't help if the financial advisor helping you manage your retirement account is not acting in your best interest. As John Oliver illustrates in his episode on retirement saving last year, you could get screwed over in paying hidden and not-so-hidden fees while financial advisors could be profiting off of it. In 2015, the Council of Economic Advisors attempted to put a price tag on the bad advice from financial advisory $17 billion a year. Granted, this CEA figure has been criticized (see here and here), but it does provide a form of problem-framing. In attempts to help those saving for retirement, the Department of Labor (DOL) passed the "fiduciary rule" (see full text here). The fiduciary rule was supposed to take into effect back in April. However, Trump ordered a delay for 180 days in February, which means that the fiduciary rule is to come into effect this week.



Some of you might be asking yourself what a fiduciary even is. A fiduciary is someone who holds a legal or ethical relationship of trust, which in this context is someone entrusted to take care of money or assets for another individual. What the DOL's new fiduciary rule does is that it elevates certain financial professional working with retirement plans or providing retirement advice (e.g., investment advisory, insurance brokers) to the level of a fiduciary. What this means is that any of these financial professionals would be held up to the legal and ethical standards of a fiduciary. Financial professionals covered under this law would have to reveal potential conflicts of interest, and that all fees charged need to be clearly stated. We already have fiduciary standards under the Employment Retirement Income Security Act of 1974 (ERISA).

However, the standards are now higher with the new fiduciary rule because it means that the advice meets the client's needs and objectives. The fiduciary law has not made some financial services providers happy, which is why BlackRock and Vanguard were pushing Trump for an even longer delay. What I have to wonder is whether the DOL's fiduciary rule is more of a case of stopping financial advisors from screwing over their clients, a case of excessive regulation that will do nothing to help clients of financial services, or something in between.

At first glance, the law seems very intuitive and common-sense. The fiduciary rule was created with the intent of ensuring that investors receive quality financial advice so they can have enough to save for retirement. Why would anyone be against advisors acting in their investors' best interest? Shouldn't they be acting in a professional and ethical manner? Isn't that just good business practice? There is a difference between expecting that financial professional act professionally and adding on a litany of regulations for them to follow, and as we know, regulations come with costs.

The Right-leaning American Action Forum (AAF) released its April 2017 study on the fiduciary rule. As the graphic below shows, it is not flattering. The AAF estimates that it will cost those with an IRA an extra $813 per account per year, as well as paying $1,500 in duplicative fees. Consulting firm A.T. Kearney found in its detailed findings that through 2020, the financial services industry is expected to lose $20 billion as a result of the fiduciary rule.




The DOL puts the costs at a lower rate than the AAF does, and the Left-leaning Economic Policy Institute concurs in detail with the DOL's analysis. In its regulatory analysis of the fiduciary rule, the DOL estimates that the fiduciary rule could cost anywhere between $10 billion and $31.5 billion over the next decade (DOL, p. 10). The DOL also estimates that investors would stand to make $33 billion to $36 billion in gains over the next decade (ibid.), although interestingly enough, the centrist Brookings Institution puts it at $108 billion.

The fiduciary rule has the potential to limit investment advice for those with lower retirement accounts. The Cass Business School found that when the British government passed a comparable version of the DOL's fiduciary rule, it resulted in advisors largely abandoning those with savings below $220,000. As a result of Britain's equivalent of the fiduciary rule, the U.K. Financial Conduct Authority found that the number of firms asking for a £100,000 minimum more than doubled [from 13 percent to 32 percent] (FCA, p. 19). To bring the accessibility issue back to the United States, consulting firm Oliver Wyman estimates that 7 million IRA accounts would fail to qualify for an advisory account under the new fiduciary rule because the balance will be too low.

Even for those who view the DOL fiduciary rule as a positive step, such as those over at the Brookings Institution (Bailey and Holmes, 2015), there is still concern that the rise in compliance costs could mean abandoning clients with small-scale savings. There are technically alternative ways of paying for financial advice that do not create obvious conflict of interest. However, brokers will not be able to find a way to provide cost-effective advice to less wealthy investors. How so? Brokers who use the commission structure will find it too expensive under the new DOL rule (not to mention that a commission structure would be rendered inherently conflicted under the new law), and a flat fee is inefficient for smaller investors, which account for up to 76 percent of IRA investors. A study from McKinsey shows that advisors earn 0.54 percent on commission-based accounts while earning 1.18 percent on fee-based accounts. What the McKinsey finding means is that the average account would be hit with an extra $800 cost year, which would be unaffordable for many.  

Another cost that is up for debate is that of litigation costs. If the fiduciary inadvertently provides bad advice or the client selects safer portfolio options (thereby yielding a smaller rate of return), it could open up lawsuits. The DOL estimates that it would increase premiums by 10 percent, or $300 a year. However, an independent analysis from Oxford Economics begs to differ. The issue with putting a number on the litigation costs is that the unknown nature of the effects the fiduciary status will have. Oxford Economics not only believes that the DOL is wildly underestimating, but that the fiduciary rule would complicate compliance and litigation risks (Oxford, p. 11, 19-20). In 2016, there were 4,000 arbitration cases alleging wrongdoing by a broker. With elevating brokers to the legal status of fiduciary, it is not unfeasible to think that litigation costs would skyrocket.

Even in spite of the fees, I think another important question we should ask ourselves is whether enough Americans are able to save for retirement with the status quo. This is not to justify the morality of the financial professionals that do take advantage of others, but to ask whether the American people are left with nothing to save as a result of swindlers. I took a look at 401(k) retirement accounts earlier this year, which can provide some insight. To summarize, we're not in a retirement crisis. We've had more people save for retirement as a result of the 401(k). 75 to 85 percent of those who save with a 401(k) have enough for retirement. What is more is that since 1989, retirement savings have been exceeding inflation. The 401(k) is not perfect, and financial professionals could perhaps give better advice to help their clients. However, the situation is not so dire where financial advisors are robbing their clients blind while leaving them with nothing to live off: far from it.

Financial services companies have already reacted to the fiduciary rule. MetLife and AIG have already left the brokerage market all together. Merrill Lynch replaced its commission-based retirement accounts with a fee-based model, which could end up costing more. State Farm and Morgan Stanley have already drawn back on its brokerage business in anticipation of the fiduciary rule. And to think that these are the big firms. Much like Dodd-Frank disproportionately affects smaller banks because it was more difficult to gather the resources to fully comply with all the regulations (see GAO report), I would expect smaller financial advisors to have a similar issues, especially a similar trend in smaller firms leaving and the subsequent market consolidation that we observed in the banking sector with the enactment of Dodd-Frank (see Fed data here).

In many ways, the fiduciary rule is "Obamacare for your IRA," especially that bit of "if you like your plan, you can keep it." If the 401(k) provides for more-than-adequate retirement savings, then a fiduciary rule that forces many advisors towards fee-based could make it more difficult to invest in retirement, thereby exacerbating income inequality. Costing both the financial advisors and investors is not protecting people, but pricing many out of saving for retirement. If more tax-advantaged vehicles are abandoned, especially those for lower-income individuals, it would probably mean greater reliance on Social Security, which would be deleterious given how strained Social Security already is. A simple disclosure rule explaining the compensation structure to their advisees could very well do the trick. What will not do the trick is the fiduciary rule. Once it goes into effect, it will not be at all surprising if or when we see saving for retirement become all the more elusive and unreachable for the average American because some bureaucratic entity that doesn't have much experience in financial regulation unleashed feel-good policy with bad results.

Thursday, June 1, 2017

Should Insider Trading Be Legalized?

Until recently, I did not know who Doug DeCinces was. Apparently, he is a former B-list Major League Baseball third baseman. As of a few weeks ago, he was found guilty on 14 charges of insider trading. Instead of going down in the history books as a mediocre baseball player, he will be known as a crook and fraudster. This got me thinking a little more. DeCinces is hardly the first person convicted of insider trading. Martha Stewart and Enron are the two most famous cases of insider trading out there. When we see insider trading on the news or in movies, we think about white-collar crime, but it is portrayed as high up on the list of white-collar crimes because the information used in insider trading can hurt others in the process while those privy to the information make lots of money. But what exactly is insider trading?

Insider trading entails the trading of a public company's stock by individuals who possess nonpublic  and material information about the company. What comes of as egregious about having this information is not that its nonpublic nature (since trades are reported to the Security Exchanges Commission), but rather that it's material. In this case, "material" is defined as causing a substantial change in price if that information were made public. What the inside trader does is "act on private information that more accurately reflects the future value of some financial asset than the current price does." Should the law punish someone who is privy to certain information before others are?

Much like any argument, there are at least two sides to it. For insider trading, the main argument against insider trading is that it gives undue advantage to the person possessing the nonpublic and material information. It can be seen as exploitable. Between a low opinion of Big Business, the Great Recession, and income inequality being a hot-button topic in today's political climate, do we really need to give the "1 percent" a greater advantage than they already have? Legalizing insider trading could create greater animosity towards Wall Street and the "1 percent," as well as erode confidence in financial markets.

One counterargument is that a quarter of public company deals involve some sort of insider trading (Augustin et al., 2014). Insider trading is already commonplace, even with SEC regulations. From someone who has worked in market research, there is going to be some form of information asymmetry, regardless of SEC laws. Being able to provide a "level playing field" is impossible. Even if all the information were available, some individuals and entities will be more diligent in their research than others. One party will always have superior information to another.

Insider trading regulations stifle the flow of information. This is significant since one of the functions of price is to transmit information. In the case of stocks, the prices embody what traders expect in the future. Take the Enron scandal as an example. If the market were freer in that scenario, people would have been selling Enron stock at a quicker rate. The dissemination of the price drop would have signaled something was up (i.e., they were cooking their books). Distorting prices means that prices are misplaced, and stocks are thus miscalled. The Federal Reserve Bank of Atlanta conceded back in 1997 that such distortion exists.

Even if that information were more readily available, the stock market deals with fickleness, and often times brings fortune based on sheer luck. To make it more complicated, only two out of twelve types of scenarios are even prosecutable (see below), and as the Wharton School of Business points out, even identifying those cases are difficult. Those who function in the stock market know that the stock market is a high-risk endeavor, but also participate in it because there are also high rewards. All of this would explain why there really is not a victim of insider trading (see arguments here and here).


Another interesting argument for legalizing insider trading is that if it were that bad, corporations would prohibit insider trading from happening. Why? Because disclosure of "inside information" can affect the bottom line of executives. Companies can use contracts in common law to prevent it. If companies have not found it damaging, why should the government get involved?

The case for insider trading is not clear cut and dry because there are some arguments that could help the case against insider trading, such as harming specialists who charge a "bid-ask" spread, not deterring various types of investors to participate in order to hold together the modern securities market, and the conceivability of capital fleeing the market (that latter one seems tenuous given how much insider trading exists even with insider trading regulations). For those crying foul on insider trading, what I would like to see is better empirical evidence that a lack of insider trading laws causes harm. For instance, a study from Duke University (Bhattacharya and Daouk, 2002) showed that insider trade laws reduces the equity of a law by 5 percent, while a study from the Brookings Institution finds that insider trading increases market volatility (Du and Shang-Jin, 2002).  There are arguments for insider trading (e.g., Smith and Block, 2015) and against insider trading (e.g., Bainbridge, 2001). At the end of the day, I would like to see more empirical evidence on the adverse effects of insider trading before I even begin to consider siding with the SEC. Otherwise, I am going to speculate that legalizing insider trading is better than putting onerous regulations on it.

Monday, May 29, 2017

Why the Custom of Eating Dairy Food on Shavuot?

Shavuot is approaching quickly. In a matter of hours, Jews celebrate the moment when the Israelites received the Torah at Mount Sinai. What is interesting about this holiday is that there is not a ritual that particularly defines the holiday. With Rosh HaShanah, you have the blowing of the shofar. Yom Kippur comes with a fast. Sukkot comes with both the Four Species and the sukkah. Passover has the seder and matzah. But Shavuot, nothing......well, sort of nothing. Shavuot was one of the three festivals for which one made a pilgrimage to the Temple. We have no Temple anymore, so it would be more accurate to say that there is no biblical-era ritual that exists for Shavuot. The explanation I have heard is that there is no particular ritual because the holiday is supposed to be about Torah. The Torah is the main focus of Shavuot. Even so, there are some relatively minor rituals and traditions that have evolved, such as studying Torah all night, as well as the tradition I would like to focus on today: eating dairy food.

This tradition is mentioned in the fourteenth century in Rabbi Yitzchak Tyranu's text, Sefer HaMinhagim (although some think it was mentioned in the thirteenth century). This legalistic work does not explain the meaning or significance behind the text. Here are a few reasons for the practice that have evolved over the years:

  1. Multiple sources, including R. Aharon HaCohen and R. Meir of Rothenberg, opine that we celebrate the Torah on Shavuot, and as such, there are verses in the Song of Solomon that allude to Torah: "Like honey and milk, [the Torah] lies under your tongue (Song of Solomon, 4:11)." There are some that use this verse as a basis to eat honey on Shavuot, as well as dairy products. 
  2. The Chofetz Chaim suggests that the practice comes from Mount Sinai itself. At Mount Sinai, the Jews were given the laws of separating meat and dairy. With these new laws, they did not have kosher dishes. Since dairy food does not require the same extent of preparation, that is what was eaten during the first Shavuot, and we thus take on that tradition. The problem with this explanation is that the explanation came well after the practice came, which creates an anachronism. 
  3. R. Yechiel Michel Epstein noted that Numbers 28:26 talks about a meat offering for Shavuot (מנחה חדשה להי בשבעתיכם). This phrase works out as an abbreviation for "from milk" (מחלב), and therefore we eat milk.
  4. According to gematria (Jewish numerology), the Hebrew word for milk (חלב) adds up to 40. The 40 corresponds to the 40 days Moses spent on Mount Sinai. To commemorate that event, we eat dairy products (R. Yitzchak Lipietz; R. Menachem Mendel of Ropshitz). 
  5. Milk was historically kept in simple vessels, such as clay or glass. If milk were kept in something fancy like silver or gold, it would spoil. If we go back to the metaphor that Torah is like milk, then Torah is meant for those who are humble, not for the haughty (R. Elyakum Dvorkas). 
  6. At the end of Pirkei Avot, there is a list of 48 ways to acquire Torah. One of the ways on the list is through not [excessively] indulging oneself. Meat is considered an indulgence in traditional Judaism, and as such, we teach ourselves the lesson that Torah is not acquired through physical and material indulgence (R. Avraham Hershovitz). 
  7. The Zohar states that each of the 365 negative mitzvahs corresponds to a day on the solar calendar. Which mitzvah corresponds to Shavuot, asks the Zohar? The mitzvah to not mix a kid with its mother's milk. In Exodus 34:26, the verse starts off by bringing the first fruits to the Temple. The verse finishes with the prohibition on mixing meat with dairy. On Shavuot, we eat two meals (one meat and one dairy) and are mindful not to mix the two together. Since two loaves are eaten for the two meals, the two loaves correspond to the offerings given on Shavuot (Rema, OC, 494:3).
  8. According to the Talmud (Bechorot 6a), honey is made from the bee, and milk is a byproduct of cow. These products could be construed as non-kosher because they come from a live animal, which is a violation of one of the seven Noahide laws (FYI: neither honey nor milk are considered non-kosher). While the source of these products would be considered spiritually unclean, the end-product is considered spiritually pure. Upon receiving the Torah, milk became kosher to the Jews. This is analogized to the fact that the Torah has the ability to take something impure and render it pure (R. Shlomo Kuger). I'm not a fan of this homily for a few reasons, most notably being that the Torah does not render everything pure, and that there are still items considered non-kosher, but I digress.
  9. Another reason is that it is a reminder that Moses was saved from being slaughtered by the Egyptians when he was a baby. What does Moses' infancy have to do with Shavuot? According to the Talmud (Sotah 12b), Moses' mother placed Moses in the basket of reeds and sent him along the Nile. None of the Egyptian women were able to nurse Moses. The Pharaoh's daughter found one woman, Moses' biological mother, to nurse Moses. The eating of dairy food is supposed to commemorate the miracle that took place in Moses' live on the sixth of Sivan, which is the same date on the Jewish calendar as Shavuot (Yalkut Yitzchak).
  10. Another name for Mount Sinai is Mount Gav'nunim (הר גבנונים; see Psalms 68:17). The name גבנונים is etymologically similar to the Hebrew word for cheese (גבינה). More to the point, the gematria for the word גבינה adds up to 70, which alludes to the "70 faces of Torah" (Rebbe of Ostropole).
  11. The Jerusalem Talmud (Chagigah 2:3) provides another reason. According to the Talmudic passage, King David passed away on Shavuot. When a king passes away, the entire community is in a mourning state, and back in those days, it meant not eating the sacrificial meat offering, which meant eating dairy only. This argument is tenuous because one does not mourn on yom tov, not to mention that this is not a widely accepted reason for the practice. 

The fact that I was able to cite so many reasons for this practice (and I'm pretty sure this doesn't even cover all of the reasons) implies that we really don't know the reason why the practice of eating dairy on Shavuot exists in the first place. On the other hand, it shouldn't matter. Why? Because one of the many beauties of Jewish tradition is that we can come up with multiple, spiritually meaningful explanations for the practice. Whichever speaks to you, may it bring you a sense of purpose as you eat your dairy meal this Shavuot.

Thursday, May 25, 2017

The New GOP Obamacare Replacement Plan: Same as the Old?

The Republican Party has been struggling with passing a plan to replace Obamacare. The Republicans attempted it back in March, but did not receive enough votes (even from its own party!) to pass the American Health Care Act (AHCA). Earlier this month, they released a modified version of the AHCA, and on May 4, the AHCA passed the House. The Senate indicated that they are writing their own version of a repeal-and-replace bill. Yesterday, the Congressional Budget Office (CBO) released their report on the effects the new AHCA that the House passed earlier this month. The main questions on everyone's mind are a) "Is this AHCA an improvement over the previous AHCA?", and b) "Is the new AHCA an improvement over Obamacare?"

I conducted my analysis of the initial AHCA a couple of months ago, which you can read here. Since I performed a previous analysis already, I will keep this shorter by explaining the differences between the new AHCA and the initial one, followed by a comparison of the numbers and a brief conclusion.

The new AHCA maintains a lot of the previous AHCA's provisions. However, there are some changes. The one with the biggest budgetary effect was delaying the repeal of the payroll tax increase (CBO, p. 11). States can also waive the requirement of establishing "essential health benefits," as well as the community rating. Community rating is prohibiting insurers from setting premiums on the basis of such demographics as age or gender (CBO, p. 12). There are some other more minor provisions, but that covers the major ones. What ended up being the difference?

  • Impact on Coverage. In the initial AHCA, there would have been an additional 24 million uninsured. In the new version? 23 million (CBO, p. 3). This might sound like a lot, but as the American Action Forum pointed out how the "additional 24 million uninsured" claim was misleading: about half of those "losing" insurance are those who were forced by Obamacare to purchase insurance, but no longer want insurance. 
  • Impact on the Federal Budget. Over the next decade, the new AHCA is supposed to reduce the budget deficit by $119 billion (CBO, p. 1; see below). How much was the budget deficit reduction beforehand? $337 billion over ten years. That means the new version of AHCA is $218 billion more expensive than the initial version.




  • Impact on Premiums. In the initial AHCA, premiums were supposed to be higher in 2018 and 2019 than in the ACA (aka Obamacare). However, over the next decade on average, the AHCA was supposed to cause a smaller increase in premiums than the ACA. For the new AHCA, the CBO had a more difficult time making predictions about premium increases (CBO, p. 6-7). The reason for this ambivalence is because it is unclear which states will accept the waivers that are part of the new AHCA. The CBO predicts that the new version of the AHCA will cause premiums to rise more than Obamacare in 2018 and 2019 (the same as it did for the estimate on the initial AHCA), but the CBO did state that premiums would decline on average over the next decade, regardless of whether the given state accepts the waivers. However, the CBO did add the caveat that some individuals could experience an increase in services depending on how each state defines essential health benefit (EHB), as well as which EHBs patients consume. The CBO selects that maternity care and mental health services could increase depending on how the individual state reacts. Even with this caveat, premiums will decrease on the whole, which is an improvement from when Obama lied about how Obamacare was going to lower premiums. This is important because the CBO admitted that Obamacare caused premiums to skyrocket (CBO, p. 4), not to mention the Department of Health and Human Services released a report on Tuesday finding that premiums have doubled since 2013 in 24 states. 
  • Healthcare Market Stability. Under the current law (i.e., Obamacare, ACA), the subsidies have kept non-group market participants largely insulated from price increases. This does not negate the fact that subsidies for demand [in healthcare] cause artificially high prices or that someone ultimately has to pay the bill. The CBO also admits that Obamacare has caused limited options of health care providers (CBO, p. 4), which is unsurprising because a) Obamacare literally made catastrophic coverage and other forms of less generous coverage to be illegal, and b) a majority of the health care exchanges have proven to become unprofitable because Obamacare disincentivizes younger and/or healthier individuals to participate in the Obamacare exchanges. What about under the new AHCA? Generally, the CBO predicts market stability. There is, however, a sixth of the market that the CBO surmises will become unstable due to the waivers. Community-based premiums would rise for those with pre-existing conditions. Those in non-group markets will experience higher-than-average costs (CBO, p. 5). Like with other policies, the AHCA has its tradeoffs, but most states will have stable markets.

In the previous paragraphs, we see issues with the status quo of Obamacare: premiums are too high, healthy individuals are being deterred from buying health insurance, and options are limited for patients. Something needs to be done to undo the harm caused by Obamacare's insurance regulations. On the whole, not much has changed since the modification of the AHCA. Since the modified AHCA does not undo the essence of Obamacare, it can only be considered at best a moderate improvement over Obamacare, and that depends on which metrics you're using to compare. Regardless of whether the AHCA passes or not, the lack of free-market reforms signals that state of health care in the United States does not look good.

Monday, May 22, 2017

Yom Yerushalayim at 50: The Religious and Political Meaning of Jerusalem

About fifty years ago on the Jewish calendar, the state of Israel experienced an amazing event, one that can arguably be described as a miracle. Once the state of Israel was created in 1948, relations were not particularly normalized. There was, and still is, tension between Israel and its Arab neighbors. In 1967, the state of Israel was entangled in what is known either as the Six-Day War or the 1967 Arab-Israeli War. It was the third day of this war that the Israeli army annexed eastern Jerusalem from its former illegal Jordanian occupation. As a result of creating a unified Jerusalem, a new holiday was created: Yom Yerushalayim (יום ירושללים), also known as Jerusalem Day. The Israeli army annexed other land in the Six Day War, so what makes Jerusalem so special?

Politically speaking, the city of Jerusalem remains contentious. There are some religiously liberal Jews, who are usually politically liberal as well, who feel uncomfortable with a Yom Yerushalayim because of the ongoing political conflict surrounding the city. There are also non-Jews who feel uncomfortable about it, as well. In the 1947 United Nations Partition Plan (Resolution 181) felt uncomfortable enough where they created Jerusalem as a separate international regime that is really not under Israeli or Arab rule. That changed when the Jordanian army illegally occupied it, but that's another story. It's so contentious that Israel is the one country that does not have a U.S. embassy located in its capital. While the Israeli government traded land for peace with the Egyptians by giving them back Mount Sinai, there was some land the Israeli government continues to legally hold. Why Israel keeps the Golan Heights is obvious: from a military strategist standpoint, it helps Israel better protect its northern border. Jerusalem provides no geopolitical or economic advantage. Quite the contrary. Given the political headache it causes, it probably would be easier for the Israeli government to give up a unified Jerusalem (although let's be honest, that wouldn't make Palestine formally recognize Israel, let alone allow for peace in the Middle East). The city of Jerusalem is worth the headache because of its non-geopolitical significance. From a historical perspective, it symbolizes a significant step in Jewish statehood and a step towards political independence for the Jewish state. That argument has its limitations since the Jewish state was already created back in 1948. Even so, the historical significance also has limitations without understanding the religious significance of Jerusalem for the Jewish people.



Jerusalem has been considered the eternal capital of the Jewish people for nearly 3,000 years. The significance of the city of Jerusalem goes back to the Bible when it is first mentioned in the Book of Joshua (Joshua 12:10). The city Jerusalem is mentioned well over 100 times in the Hebrew Bible, and when you count references to the city of Salem (שלם) or implied references, that turns into nearly 700 references to Jerusalem. Since the biblical days, Jerusalem has been attacked, captured, besieged, and destroyed on more than one occasion. The Jewish people lost sovereignty over the city when the Romans captured it in 70 C.E. Jews have lived in the city since then, but Jerusalem has had multiple sovereign rulers over it up until 1967.

Even during the years in which the Jewish people were in exile, the Jewish people never forgot about Jerusalem. In Psalms (137:5), King David says that "if I forget you, Jerusalem, may my right hand forget its skill." The vigor of the Jewish people has been and continues to be symbolized by how much we remember and yearn for Jerusalem.

It can also be a vision for the future. While the etymology of the word Jerusalem is debated, the Talmud says that the word Jerusalem can be divided into two parts: ירא (from the infinitive "to see") and שלם (peace, completeness). Jerusalem is about a vision of peace and represents how we approach a more perfected world.  This insight can help explain why we still pray for Jerusalem, even though there is a unified Jerusalem under Israeli sovereignty. The reason why a prayer for Jerusalem is still included in our daily liturgy, as well as why we should celebrate Yom Yerushalayim (and arguably recite Hallel), is because we have not received that level of perfection or peace. On the one hand, Yom Yerushalayim represents what we have accomplished. On the other hand, there is still work to be done, and until that work is done, we pray for Jerusalem. Why? Because Jerusalem is not just a city. It is an idea. We keep up the vigor and the hope that one day, the world as a whole can reach spiritual perfection and peace.

Thursday, May 18, 2017

Parsha Bechukotai: Our Homes as a Sanctuary for Holiness

Some think that to find holiness, you have to venture halfway across the world to a monastery to seek solitude or some other holy site to feel inspired. For others, going to a house of worship is what gets the spiritual juices flowing. This week's Torah portion suggests something different:

יאיש כי יקדש את ביתו קדש להי והעריכו הכהן בין טוב ובין רע.
-When a man consecrates his house to be holy unto G-d, the priest will valuate it, whether it be good or bad. - Leviticus 27:14

What we observe here is an ancient practice of valuation for someone who wants to donate their property to the sanctuary as a form of thanks. The priest (Kohen) would come by to inspect the house and conduct an assessment. If the owner of the property wants his property back, not only does the property owner have to pay the amount for which it was assessed, but they have to add an extra twenty percent to the price (Leviticus 27:15). With the sacrificial system no longer in place and a non-existent Third Temple, this verse seems to be irrelevant to anything in modern times.

The Kotzker Rebbe thought differently, and viewed the passage more homiletically. For the Kotzker Rebbe, the true sign of one's holiness is not found in the holiest of synagogues because it's easy for someone to pursue holiness in a sanctified setting. Based on this passage, the Kotzker Rebbe commented that "true holiness sanctifies the seemingly mundane activities of running a household. One who behaves in an elevate manner in one's own house is truly a holy person." There are a few takeaways from the Kotzker Rebbe's homily.

  1. True spirituality is found in our daily lives in the most seemingly mundane of places.
  2. The home is meant to be a true center of spirituality and holiness. It is the place we keep a kosher kitchen and take something as mundane as food and elevate it to holiness. The Jewish home is the place where we have guests over, have Shabbat and holiday meals, and fulfill the mitzvah of hospitality. As Pirkei Avot brings up (1:4-5), it is the place open for Torah scholars, i.e., the Jewish home is a center of Torah study and good deeds to help others in need. The home acts as a fulcrum for many mitzvahs and Jewish events. 
  3. The home tends to be a more private place than the synagogue or the work office. It is easier for anger, impatience, sloth, or other shortcomings to be concealed in the home. By being able to improve upon one's shortcomings in a place where it is easy to hide one's flaws is all the more praiseworthy.
  4. We've heard the phrase "My house, my rules." The house is meant to be one's dominion. It is easy to let the sense of ego and entitlement that comes with that territorial dominion come into play. There is a good parable from R. Salanter regarding this idea. R. Salanter was on tour, and went to someone's home for Shabbat. The host berated his wife for not covering the challah. The wife was embarrassed and ran to the kitchen. R. Salanter then asked the host, "Do you know why we cover the challah?" The host said that we cover the challah so they are spared the "embarrassment" of having the ritual attention be focused on the wine first. After that explanation, R. Salanter gave him grief because the host was more concerned with the metaphorical feelings of two loaves of bread (which are inanimate) instead of the actual feelings of his wife. If it weren't for the fact that the man went to the kitchen to beg his wife for forgiveness, R. Salanter would have left the house. The moral is that while the house can give us a sense of entitlement or ego, we should remind ourselves that our domain does not exempt us from good character
  5. The Kotzker Rebbe brings up how it is seemingly mundane activities that are the holy ones. If that is true for getting ready for Shabbat dinner or cooking kosher food, all the more it is for something as mundane as vacuuming, doing the laundry, or making the bed. 
The house is a reflection of our holiness. It is a particular test because how we behave in our homes opens us up to certain vulnerabilities that do not exist when we are at work or at shul (synagogue). The Kotzker Rebbe not only reminds us that holiness is to be pursued in all facets of our life, but also that true holiness is to be found where we least expect it: in our homes.