March 2024

Scott Lincicome

Among the research I commended in the 2024 Economic Report of the President (ERP) last week was a solid section on free trade’s “pro‐​poor bias,” i.e., that eliminating US government barriers to cross‐​border commerce disproportionately benefited Americans with lower incomes. This week, the Federal Reserve Bank of Minneapolis highlights a brand new paper showing much the same thing (emphasis mine):

In a Minneapolis Fed staff report, Monetary Advisor Michael Waugh models how lower trade costs play out for richer and poorer households (Staff Report 653, “Heterogeneous Agent Trade”). Waugh finds starkly different effects, with poor households (defined by their level of consumer spending) gaining much more as freer trade lowers prices.

The reason is not that poorer households buy a larger proportion of imported goods. Rather, it is their higher marginal utility of consumption: Falling prices provide more value to households with tighter budgets, as evidenced by their sensitivity to prices. Low‐​income households react more strongly as trade drives down the prices of imports and competing domestic goods. These households increase their consumption more as their buying power increases, and they are quicker to substitute new products in pursuit of savings.

Waugh finds that all US households benefit from a 10 percent reduction in US trade costs. But the poorest fifth of households experience a welfare gain more than 4.5 times larger than the richest.

Given the ample academic research cited in the ERP, these new findings, while welcome, are unsurprising. However, they do raise the following question related to the 2024 US presidential campaign: If an across‐​the‐​board 10 percent reduction in US trade costs generates outsized gains for America’s poor, what does an across‐​the‐​board 10 percent increase in those same costs—say, via the universal tariff proposed by Donald Trump—do?

For more on the benefits of free trade and the costs of protectionism, be sure to check out Cato’s ongoing Defending Globalization project or this 2022 Cato paper from me and Alfredo Carrillo Obregon.

Walter Olson

Under the Supreme Court’s commercial speech jurisprudence, businesspeople do not check their First Amendment rights at the gate when they enter the marketplace. In a significant application of this principle, a panel of the Ninth Circuit ruled in November that California may be barred from requiring businesses to “disclose” through labeling scientifically dubious and misleading allegations about their products. 

The case arose under California’s unique and burdensome Proposition 65, which I’ve written about many times. Prop 65 requires merchants to post warnings, on labels or public spaces at their business, against product exposures that could cause cancer or birth defects, a list that at various times has included such things as candles, fireplace logs, coffee, French fries, Christmas lights, hammers, billiard cue chalk, matches, grilled chicken, life‐​saving drugs, brass doorknobs, car exhaust in parking garages, and on and on. “Practically speaking,” the law firm Sidley has noted, “Prop 65 creates an ‘over‐​warning’ problem: The law requires warnings for so many products and situations that the warnings themselves become meaningless.” The law is jealously guarded, though, because most of the money from the resulting settlements goes to the lawyers, who form a potent Sacramento lobby against reform.

The dispute at hand arose because California law requires that a warning appear if a substance has appeared as probably cancer‐​causing on the list of the International Agency for the Research on Cancer (IARC), and that list includes the herbicide glyphosate, the subject of a huge volume of litigation in recent years. Significantly, both the federal EPA and California’s own environment agency have studied the issue and reached a different conclusion: glyphosate appears to be safe for humans. Agricultural groups sued to enjoin the state from enforcing the rule, resulting in the recent ruling in National Association of Wheat Growers v. Bonta.

The Supreme Court has laid out two levels of scrutiny for compelled commercial speech. The lower of the two levels, the so‐​called Zauderer standard, provides that when a required label or other speech is “purely factual and uncontroversial” in its content, it need only be “reasonably related” to a substantial government interest and not “unjustified or unduly burdensome.” That’s a concession to the large volume of relatively uncontroversial labeling on matters like weights and measures, ingredient lists, nutritional content, and so forth. Regulators usually win under that standard. In cases where the content of the compelled speech is controversial or not purely factual, however, intermediate level scrutiny applies (the so‐​called Central Hudson standard) in which case the rules must “directly advance” a “substantial” governmental interest, with the means chosen not being “more extensive than necessary.”

Two of the panel’s three judges found that glyphosate disclosure would inevitably flunk intermediate scrutiny; the district court had said that statements about glyphosate could not be deemed “factual” if they are false, nor would such publication advance a substantial governmental interest. On appeal, the dissenting judge on the panel would have sent the case back to see whether there might not be ways to couch a label carefully so as to fulfill the legal requirement without asserting anything non‐​factual.

National Association of Wheat Growers v. Bonta is unlikely to spell a revolution in regulation, so long as agencies pay attention to what is factual and what is not in the speech they require. The endless list of putative hazards under Prop 65, however, does include more than a few products and substances for which a court might find a required warning of cancer or birth defects to be absurdly misleading or non‐​factual. That’s yet another reason a rational California legislature would revisit, and roll back, this bad law.

Colleen Hroncich

Eric Eisenbrey was a middle school science teacher for 10 years, but he often felt like he couldn’t really help his students given the constraints of the system. So he decided to make a change. “I knew that education was my passion, so I wanted to make sure I found a way to keep working in education,” he says. Through his research, he found Microschool Builders, where he got the support to create Eyes and Brains STEM Center, a microschool in rural Elkins, West Virginia.

Earlier this year, Eric shared his story at a Cato Institute event, Showcasing Education Entrepreneurs. It’s a great example of how school choice programs can help bring educational options to rural and low‐​income areas.

When he first started looking into starting a microschool, “There was this concern of being in a lower socioeconomic area in West Virginia—that opening a micro school wouldn’t be affordable to families,” he explains. “It requires a good amount of funding to be able to have a school and be able to offer the materials and the supplies and the experience to students. But it just so happened that at the point that I was just working on launching my school, the state passed our ESA program, which is called Hope Scholarship. And with that passing in the state, it really gave me the opportunity to say, ‘OK, this is something I can do. This is a viable way of parents being able to sign their students up for the school and being able to have enough funding.’”

The monopoly system fought against the program, challenging it in court, which complicated things and caused a “rough start” in the first year. But Eric was able to launch with seven students last fall. “The kids are so excited to have this space where they’re able to really explore their passions,” he says. “My big focus is on showing students that the science, the engineering, the technology, the math, it all comes into play in any interest they have, anything they do. It’s all about that critical thinking.”

Eyes and Brains STEM Center uses mixed‐​age classrooms and a student‐​centered focus, and he takes a very individualized approach to evaluating where his students are in their learning journeys. “Even without standardized tests, I know what math skills my students are struggling with. I know what reading skills my students are struggling with. I know where there are gaps in their knowledge of history or science. And it’s different for each kid,” he says.

Eric realizes there’s going to be some pushback as new learning options like microschools spread because they aren’t standardized.

We want these hard, fast numbers. We want these labels. And we want to be able to say ‘This student’s an “A” student, this student’s a “B” student.’ But I want to be able to say this is this student, this is this individual. Because that’s what parents see. They see their kid. And parents are starting to realize that they want their students to be in a situation where their student is seen as their student. As this individual, not as the “A” student or “B” student or the kid that’s always getting in trouble just because they need out of their seat. And in the smaller school setting, in the microschools, we’re able to really see our students. We’re able to then personalize that growth.

From Eric’s perspective, one problem of the standardized approach in the school system is that the modifications students receive can hinder their development. He’s currently working with a child who is dyslexic. In a public school, the child would probably test all right because he’d have someone reading the passage and questions to him along with other modifications. But that wouldn’t be helping him actually become a better reader. “He loves getting new information, and not being able to read a text when it’s put in front of him is a barrier. It limits him from doing different things that other kids around him can do,” Eric explains. “In the microschool, I’m working with him as that individual student, looking at what it is specifically he needs and trying to meet those specific needs. He might not look like he’s doing as well compared to his peers. But I can see when the growth is happening.”

At the Cato event, an attendee asked if the panelists had any tips on how to get more mainstream acceptance of these alternative learning models. To Eric, parent education is key. Many parents still aren’t aware the Hope Scholarship exists. He runs after‐​school programs at his microschool, and often parents who come for those programs are surprised to learn there’s a full‐​time school option there for their children. Parents are used to education looking a certain way, so there’s often a need for “de‐​schooling” to help them understand it doesn’t have to be that way.

“Having been a public education teacher, I found that I had to de‐​school myself when I stepped out of the classroom,” he recalls. “I had to realize that it doesn’t have to be all the subjects broken up and we have to hit on these certain things in a certain amount of time. And really the parents that I have now, the big thing for them is that they’re seeing just how happy their students can be in a different environment where they have more freedom, where they have more choice, and where the education is tailored to them.”

Jeffrey Miron and Jacob Winter

An important strand of economic analysis suggests that nudges — non‐​coercive policies like providing relevant information or adjusting defaults — can significantly change economic behavior. This contrasts with traditional regulation and taxation, which are coercive in the sense of changing the prices or costs faced by economic agents.

According to proponents, nudges should be relatively acceptable to libertarians, precisely because they are non‐ or at least less coercive.

A key question, however, is whether nudges achieve their goals, and at what cost. On that score, the evidence is mixed. 

As one example, recent research (Cato Research Brief no. 374) conducted an experiment that encouraged customers to audit their water use (with the goal of reducing greenhouse gas emissions). The study concluded that audits reduce water use, but the reductions in emissions were small, so the program was not cost effective. Other research (Cato Research Brief no. 373) suggests that text messages to encourage a switch from coal to electric heating caused less rather than more use of electricity. New York City has mandated since 2008 that fast food restaurants display calorie information on menus; research has found no evidence that this policy has influenced calorie consumption or the frequency of visiting fast food restaurants.

To be sure, nudges sometimes work. Research has shown that take‐​up of retirement plans increases when employees are enrolled by default, even when opting out is trivial.

Overall, however, using nudges is harder than it looks. Meaningfully changing behavior (via taxation, regulation, mandates, or prohibitions) will likely generate unintended consequences. The research above “nudges” back against the claim that nudges can achieve substantial benefits at minimal cost by avoiding coercion.

This article appeared on Substack on March 28, 2024.