I Would Rather Be Polite Than Politically Correct

When growing up, I was taught to mind my P's and Q's. Proper etiquette does not simply show compliance with social norms, but it also shows respect for other human beings. Good manners are supposed to show how civilized an individual is. If we are to live in a civil society, we shouldn't make it our mission to offend people. In an effort to make society to more civil, there are certain individuals, most prominently on the Left (although the Right has their own version of political correctness), that want to push for political correctness. Oxford defines political correctness as "the avoidance of forms of expression or action that are perceived to exclude, marginalize, or insult groups of people who are socially disadvantaged or discriminated against." You might read that definition and think that "political correctness" sounds awfully synonymous with "being polite." If you thought or think that political correctness and politeness are one in the same, you would not be alone. I have some well-intentioned friends who think as such. However, I'm going to argue the contrary. Today, I'm not simply going show how political correctness differs from politeness, but also why I would rather choose being polite over being politically correct.

Given our political climate, I could get cynical about the usage of the term. The Right likes to use the term as an attempt to dismiss ideas coming from the Left. The term has another use. When people say they like to be politically incorrect, they can pose as protectors of free speech. However, if Milo Yiannaopoulos and President Trump remind us of anything, it can be that "politically incorrect" can be used as an excuse to be rude and boorish. To flip it around, I could continue with the cynicism and say the Left uses the term not to be concerned with politeness, but because they want to protect their ideas, speech, and actions as the only acceptable kind. The Left uses it as a means to "regulate public discourse by defining opposing views as bigoted and illegitimate." While I can find a certain amount of truth in each of these characterizations, I would like to dig deeper. Here are some descriptions of political correctness I was able to find that can shed some light on the distinction:

• "Political correctness is the conscious, designed manipulation of language intended to change the way people speak, write, think, feel, and act, in furtherance of an agenda." -Jeff Diest, President of the Mises Institute
• Political correctness is advocated for because "problematic social attitudes inadvertently contribute to the upholding of systemic power structures that strengthen systemic bigotry and subconsciously influence us to commit acts of violence." Contrast that someone who wants to be polite because they would rather not be a jerk. 
• "Political correctness is America's newest form of intolerance, and is especially pernicious because it comes disguised as tolerance. It presents itself as fairness, yet attempts to restrict and control people's language with strict codes and rigid rules. I'm not sure that's the best way to fight discrimination. I'm not sure if silencing people or forcing them to alter their speech is the best method for problems that go much deeper than speech." -The late comedian George Carlin
• President Barack Obama believes that one definition is that "political correctness is the same as having good manners." But he believes in another definition, which is that political correctness is a "hypersensitivity that ends up resulting in people not being able to express their opinions at all, without somebody suggesting they're a victim." His subsequent advice to those going to college was to not go around looking for insults, and to engage those who you disagree with on their ideas. 

If you think that politeness and political correctness are synonymous, here are a few examples of political correctness to remind us of how it has run amok. UCLA students staged a protest over a student capitalizing the word "indigenous" in a research paper, which was perceived as a "linguistic micro-aggression." Fox News using the term "homosexual," a term that has been non-offensive over the years, is now offensive. Even the feminist play "Vagina Monologues" is now considered offensive because it narrowly defines what it means to be a woman. Eating foods from other cultures is deemed "cultural appropriation." Top comedians are refusing to perform at colleges, while conservative speakers are barred from speaking on college campuses because they are considered too offensive. Here is one from this past weekend: Jewish lesbians were banned from marching with Jewish rainbow flags in Chicago's Dyke March because certain hypersensitive anti-Zionists were "triggered." This is but a sample of how the politically correct attempt to control language and thought, so again, what are the issues with political correctness that make it go beyond politeness?

Issues With Political Correctness

1. Consistency. If political correctness were about politeness, the rules would apply to everybody, not just certain disadvantaged individuals. Political correctness comes off as this urge to please everyone. The problem is that, as Aristotle put it, "a friend to everyone is a friend to no one." You can't please everyone, so you end up [inadvertently and inevitably] selecting people to offend. Those who are politically correct are concerned about offending certain minority groups, but tend not to extend that politeness towards white males, conservatives, Christians, or any combination thereof. More to the point, they are so concerned about offending certain minority groups that they can and are bound to offend others (mainly those who don't agree) in the process.
2. Magnitude. The idea of magnitude goes hand in hand with the issue of inconsistency. Those who are politically correct not only apply their PC behavior and speech to certain individuals, but do it in such a way that it is like walking on egg shells (And if you don't think it's like walking on egg shells, here's an example: Harvard Business Review found that political correctness undermines relationships in the workplace). If you are going to go to extreme lengths to not offend certain individuals, that means you don't care about offending individuals who don't fit the PC criteria, which means everyone else's freedom of speech or opinions don't matter. 
3. History. Politeness predates modern-day political correctness, which didn't gain traction until Alan Bloom wrote his book on the topic in 1987. Standards of human decency, on the other hand, have existed well before political correctness existed. The idea of thinking before you speak comes from the Bible (Ecclesiastes 5:2). The Golden Rule of "Do not do unto others as you would have done unto you" is something that can be found in every major world religion.
4. Implausible to Fully Implement. What do I mean by this? The list of triggers is subjective and can be never-ending. As we have seen political correctness evolve (or in this case, devolve) over the past thirty years, the list of material that has been deemed offensive by the "PC Police" has been ever-growing. Plus, let's remember something else important: it is not possible to fully censor everything. Life is not one, big safe space. Quite the opposite! All you enforce with political correctness is that it is acceptable to complain about the most micro of aggressions. It is no wonder that 59 percent of Americans find that too many people are easily offended.
5. Severe Incapability in Prioritizing Problems. Political correctness misses the forest for the relatively small and insignificant trees. Political correctness is what writer Ryan Holiday refers to as "outrage porn." Rather than focus on real issues, people find things that are mildly offensive, broadcast it to a wide audience, and generate outrage while distracting us from real societal problems. What makes me outraged by this "outrage porn" is that it minimizes actual victims. You have a whole host of societal issues, and the PC crowd is focusing its energy on words?! Because of this outrage porn, political correctness doesn't do a good job at teaching people how to be mindful of what they say since political correctness comes off as pedantic and petty for so many Americans.  

If we are to live in a multicultural, pluralistic society, we need to protect speech that is deemed offensive to us, and that includes "politically incorrect" speech. It teaches us how to get along with others who are different than us, and it allows for a free intellectual marketplace in which ideas can best flourish. I still call on people to use self-censorship and work towards a civil society, one where we act decently towards one another because decency makes for progress.

This is where I make the differentiation: Politeness is about decency towards everyone. I wish political correctness were a modern-day application of decency, but alas, it is not. Political correctness is thought and speech control under the guise of tolerance, politeness, and universal brotherhood. We need to factor in free speech and decency because both are important. Political correctness means that we guarantee neither free speech nor decency, which is why I would rather be polite than politically correct any day of the week.

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 have 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.

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 translate 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.

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.

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.

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 a 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 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.

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.

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.