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Pakistan and U.S.: A Troubled Marriage of Convenience by Malou Innocent, Aimen Khan

Fri, 25 May 2012 00:00:00 -0400

Yesterday, in response to Pakistan’s conviction of Shakil Afridi — a Pakistani citizen, a physician who helped America track down Osama bin Laden — the Senate Appropriations Committee cut U.S. aid to Islamabad by $33 million. The legislation, which comes less than a week after a deal to reopen supply routes through Pakistan into Afghanistan crumbled, is a striking reminder that Washington’s relations with Islamabad still remain in shambles.

Pakistan is key to stability in Afghanistan and a major contributor to its security challenges.

Islamabad’s growing anti-Western posture, coupled with its reluctance to tackle its militants more vigorously, suggests that mutual interests would be best served not by the United States paying more in transit fees and remaining hostage to Pakistan, but by phasing out the substantial aid it currently sends there.

From 2002 to 2010, about $13.3 billion in U.S. military aid flowed to Pakistan, while other economic assistance amounted to more than $6.5 billion. This largesse has lacked adequate appraisal of whether aid has enhanced bilateral trust, reached those who need it most or persuaded Pakistan to help avert a Taliban-controlled Afghanistan.

During the Cold War and after 9/11, U.S. assistance mostly served to further entrench Pakistan’s military and civilian leaders, who routinely diverted aid toward themselves rather than the economic and social development of their people. The majority of Pakistanis therefore connect U.S. aid to their country’s deteriorating situation.

Nonetheless, aid flows even as controversies fray relations nearly beyond repair, prompting observers to dub the partnership “transactional.” A long-term view of the partnership must go beyond the current news cycle.

In March, a joint session of Pakistan’s parliament unanimously approved resolutions calling for an end to U.S. drone strikes, “hot pursuit” military raids and the use of Pakistani airspace for the transport of arms and ammunition into Afghanistan. The proposals, sharply at odds with U.S. policies, reflect a divergence of interests between the two countries that existed long before last year’s Navy SEAL raid against Osama bin Laden.

There is little evidence that U.S. aid has ever served its interests in Pakistan — and, unfortunately, ample evidence that much of it has been funneled to U.S. enemies. A year before 9/11, Pakistani president Pervez Musharraf declared at a news conference, “Afghanistan’s majority ethnic Pashtuns have to be on our side... This is our national interest... The Taliban cannot be alienated by Pakistan.”

Yet in 2006, as Pakistani officials were busy cutting peace deals with militants, President George W. Bush said of Musharraf: “When the president looks me in the eye and says, ‘The tribal deal is intended to reject the Talibanization of the people,’ and that there won’t be a Taliban and won’t be al Qaeda, I believe him.”

President Obama came into office hoping to improve relations, even backing a bipartisan plan for nonmilitary aid. But among Pakistanis, the conditions attached to that aid are widely viewed as infringements on their sovereignty. Combined with the quadrupling of drone strikes under the current administration, relations hit an all-time low.

Whether under Bush or Obama, the Washington-Islamabad partnership has been a marriage of convenience confounded by irreconcilable differences. The feuding couple has few constructive high-level meetings and mutual commitment to the union is meager.

Islamabad has been distancing itself from Washington and forging stronger ties with Russia, China, Iran, Saudi Arabia and other Muslim states. Anti-Western orientation is even codified in several parts of Pakistan’s 1973 constitution. In a verbatim nod to Marxist ideology, one notable passage reads: “The state shall ensure the elimination of all forms of exploitation and the gradual fulfillment of the fundamental principle, from each according to his ability to each according to his work.”

The United States must carefully calibrate a policy with Pakistan that continues diplomatic relations absent large sums of aid. While cutting aid to Pakistan might be temporarily destabilizing, Pakistan’s support for militant Islamists is arguably more harmful to regional stability. Moreover, while emergency-type humanitarian aid can be beneficial to the Pakistani people, economic development aid intended to promote growth has been detrimental, allowing Islamabad to avoid confronting its rampant corruption and budgetary problems with the necessary urgency.

The Pakistani government and people stand united in their belief that Pakistan does not need the United States. Phasing out U.S. aid to Pakistan benefits both parties and better reflects strategic realities.

Malou Innocent is a foreign-policy analyst at the Cato Institute. Aimen Khan is a defense policy researcher from Islamabad, Pakistan.

Hearkening Back to the USSR by Swaminathan S. Anklesaria Aiyar

Thu, 24 May 2012 00:00:00 -0400

Back in the 1970s, the U.S. government passionately pleaded for untrammeled emigration as a fundamental human right. In 1975, the U.S. imposed trade sanctions on the Soviet Union for levying an exit tax on citizens wishing to emigrate (mostly Jews). In a complete reversal of that moral passion, Senator Charles Schumer has now introduced legislation to levy a tax of 30% on assumed capital gains of people like Eduardo Saverin, co-founder of Facebook, for giving up American citizenship and emigrating to Singapore. The exit tax proposed on Saverin and others like him is thousands of times higher than anything the Soviet Union dreamed of.

Even current U.S. law imposes an exit tax, via imagined capital gains, on anybody who has been a U.S. citizen or a permanent resident for more than seven years. Capital gains are calculated under the presumption that all assets of the emigrant have been sold at the time of emigration. These gains are currently taxed at 15 percent. Schumer wants the rate raised to 30 percent. Further, he wants to ban such persons from ever re-entering the U.S.

Whatever happened to the human rights that the U.S. swore by in the 1970s? The Soviet Union imposed a so-called "diploma tax" on the ground that it should be able to recover the cost of higher education for the emigrants — its rate of exit tax ($ 5,000 to $ 25,000) rose with the level of education. Enraged by this, Senators "Scoop" Jackson and Charles Vanik pushed through legislation denying Most Favored Nation trade treatment to countries that restricted emigration through measures like an exit tax. Twenty-one American Nobel laureates issued a public statement condemning the exit tax as a "massive violation of human rights."

People have a fundamental right to migrate to improve their prospects. The UN Declaration of Human Rights says in Article 13, "Everyone has the right to leave any country, including his own." Article 12 of the International Covenant on Civil and Political Rights incorporates this right into treaty law. It says "Everyone shall be free to leave any country, including his own. The above-mentioned rights shall not be subject to any restrictions except those provided by law necessary to protect national security, public order, public health or morals or the rights and freedoms of others." The permitted restrictions do not mention exit taxes.

The Jackson-Vanik amendment applied to any country that:

(1) denies its citizens the right or opportunity to emigrate;
(2) imposes more than a nominal tax on emigration or on the visas or other documents required for emigration, for any purpose or cause whatsoever; or
(3) imposes more than a nominal tax, levy, fine, fee, or other charge on any citizen as a consequence of the desire of such citizen to emigrate to the country of his choice.

Ironically, this constitutes excellent moral grounds for other countries to impose trade sanctions on the U.S. Its exit taxes are far more than "nominal."

People left the Soviet Union and East Germany for both political and economic reasons. Communist regimes denied political and commercial freedoms. However, they provided full employment and universal welfare (of a low standard) to the aged, widowed and handicapped. By holding down wages and opportunities for their young and talented workers, they extracted a surplus that financed welfare. No wonder those wanting to climb over the Berlin Wall were overwhelmingly youngsters, not pensioners. The youngsters sought better economic prospects and less implicit or explicit taxation. And at the time, Americans cheered.

The same U.S. now wants a fiscal Berlin Wall to discourage citizens seeking better economic prospects in Singapore or other places. The logic behind the U.S. exit tax is analogous, though not identical, to the logic of the Soviet Union. Communist states viewed human capital embodied in their citizens as state property, to be kept at home or clawed back through taxes on exit. The U.S. seems to regards the financial capital of its citizens as a sort of state property, to be kept at home or clawed back through taxes on exit.

The ultimate collapse of the Berlin Wall and Soviet Union had a great moral lesson. A nation needs to make itself attractive to its own citizens, not stop their exit. The lesson applies to the U.S. too. It too must make itself attractive to its citizens, rather than penalize them for wanting to leave for more attractive destinations like Singapore.

Swaminathan Anklesaria Aiyar is a Research Fellow at the Cato Institute's Centre for Global Liberty and Prosperity.

FBI Free to Ambush our Bill of Rights by Nat Hentoff

Wed, 23 May 2012 00:00:00 -0400

When I was a kid, beginning to learn what it is to be an American, I found a hero in George Mason, a leading Virginia delegate to the 1787 Constitutional Convention. Mason refused to sign on to the Constitution that was passed by the convention. Why?

“There is no Declaration of Rights,” he explained.

There was no section in the Constitution protecting citizens’ individual rights against an imperious government in this new America — similar to the charges Thomas Jefferson made against King George III’s government in our Declaration of Independence in 1776.

George Mason’s contagious objections became a major reason that the first 10 amendments, the Bill of Rights, were finally listed and ratified by enough states to be added to the Constitution in 1791.

And we still proudly have them! Or do we? As George W. Bush, Dick Cheney and Barack Obama have eroded our guarantees of a self-governing republic, how many Americans are aware they are losing some of the liberties guaranteed in the Bill of Rights? How many Americans even know who George Mason was?

Thomas Jefferson said Mason was “of the first order of greatness” (“George Mason’s ‘Objections’ and the Bill of Rights,” Robert A. Rutland, “This Constitution: A Bicentennial Chronicle,” American Political Science Association and American Historical Association, 1985).

I know enough about my hero to have no doubt what George Mason’s reaction would be to one of the most persistent and unpunished present violators of the Bill of Rights — the FBI!

In the fall of 2008, just before the Bush administration left, then-Attorney General Michael Mukasey changed and expanded the Attorney General’s Guidelines for Domestic FBI Operations. The guidelines were made official on Dec. 1, 2008. They remain in force under Obama.

If James Madison and Thomas Jefferson could see this shredding of the Bill of Rights, they might be leading another American Revolution.

When the FBI guidelines were released, I did my part, writing several columns on this disembowelment of our American identity. But Michael Ratner of the Center for Constitutional Rights and Margaret Ratner Kunstler more clearly exposed the guidelines’ contempt for our privacy in “Hell No: Your Right to Dissent in 21st-Century America” (New Press, 2011).

One chapter in particular lists the FBI guidelines, explaining how they throttle the Bill of Rights:

“The Mukasey guidelines, under a section titled ‘General Authorities,’ dispense with the Privacy Act restrictions on keeping records about United States citizens and permanent residents, flatly stating that all activities authorized by the guidelines are exempt from the Privacy Act.”

Here, as demonstrated by Ratner and Kunstler, is the America in which you are now living:

“As surveillance and the gathering of information can be carried out without any criminal predicate and on the completely innocent, these guidelines have effectively granted the FBI the authority to use and retain records on millions of law-abiding Americans.”

Where is that allowed in our Constitution?

When I was a kid, I read Arthur Koestler’s “Darkness at Noon,” a book about Josef Stalin’s Russia that turned me into a fiercely unyielding anti-Communist for the rest of my life. During the so-called Great Depression, I remember arguing with Communists in my Boston neighborhood about Stalin keeping an eye on law-abiding Russians.

When I became a reporter years later, specializing in dangers to our civil liberties, I was startled by the extent to which J. Edgar Hoover’s FBI had secretly infiltrated so many entirely lawful organizations with informants and instigators of illegal actions, insatiably searching for Communists, fellow travelers and other suspicious “persons of interest.”

Hoover is gone, but here I am now with this account by Ratner and Kunstler, learning that “the FBI is ‘authorized and encouraged’ to identify and recruit informants, even if the activities to be investigated are totally lawful... Informants often end up participating in active ways and even suggesting tactics, some of which may be illegal — depending on what the informant’s FBI handler suggests.”

Watch carefully some unfamiliar organizations you may consider joining. In protecting the rule of law, are they being goaded from the inside to go beyond it?

Next week’s column will be visited by Michael German of the American Civil Liberties Union’s Legislative Office, where he is policy counsel on national security, immigration and privacy.

Previously, German was an FBI special agent from 1988 to 2004 in domestic terrorism and other investigations who, as the ACLU notes, “also served in undercover operations, successfully helping to prevent several terrorist attacks.

“He resigned in 2004 to make Congress and the public aware of the continuing deficiencies in FBI counterterrorism operations after the implementation of the 9/11 Commission’s reforms” (“Intelligence Expert and Former FBI Agent Joins ACLU as National Security Counsel,” aclu.org, Oct. 5, 2006).

Bill of Rights champion George Mason would recognize German as a true Bill of Rights comrade.

“I joined the FBI because I wanted to defend this country,” German says, “but the oath I took was to defend the Constitution. Working for (the Bush) administration, I felt as though I was participating in a dark chapter in American history.”

Ultimately, German joined the ACLU because he knew he must uphold “what this country stands for: We can, and must, be both safe and free” (aclu.org, Oct. 5, 2006).

Michael German merits the Presidential Medal of Freedom — if we ever get a president who insists that the FBI operates within the Constitution.

But instead, today’s Attorney’s General Guidelines for Domestic FBI Operations turn untold numbers of law-abiding Americans into persons under surveillance.

Is that what the rest of us stand for?

Nat Hentoff is a senior fellow at the Cato Institute.

WTO Correctly Calls the U.S. to Task for Lying about Dolphins by K. William Watson

Wed, 23 May 2012 00:00:00 -0400

In a dispute between the U.S. and Mexico over federal regulations defining “dolphin safe” tuna, the World Trade Organization recently held that the U.S. rules are an unjustifiable discrimination against Mexican tuna fishers. They are also in violation of WTO obligations.

This outcome is a welcome indictment of American policies that prevent eco-conscious consumers from having effective access to information, and using their power in the free market to support environmental causes. Moreover, it casts light on a growing trend that opaquely mixes health, safety, and environmental regulations with trade protectionism.

Current U.S. law prohibits tuna producers from making any statements on their product labels about how their fishing practices affect dolphins unless they meet the minimum requirements for the official “dolphin safe” label. Advocates of the law say it is about truth in advertising and accuse the WTO of putting the world’s dolphins at risk for the sake of trade flows. This argument fails to appreciate the sophisticated competence of American consumers and, more importantly, ignores the fact that these federal rules are misleading.

Tuna caught in a part of the Pacific Ocean near Mexico must meet strict requirements before it can be labeled “dolphin safe.” Mexican tuna fishers work primarily in the Eastern Tropical Pacific where dolphins and tuna often school together. They catch tuna by “setting on dolphins,” that is, by locating a school of dolphins and encircling it with nets to catch the tuna swimming underneath. This practice can result in dolphin mortality as the tuna are captured, although dolphin death has declined significantly since the institution of the International Dolphin Conservation Program, which places independent observers on all Mexican tuna fishing vessels in the region. The U.S labeling law prohibits any tuna caught using this method in this part of the ocean from being labeled dolphin safe even if an observer certifies that no dolphins were killed.

What makes the law discriminatory and misleading is that tuna caught elsewhere, like the Western Central Pacific where U.S. fishing fleets operate, may be labeled dolphin safe without any certification that dolphins were not harmed. In the WTO case, the U.S. was given an opportunity to justify this different treatment by showing that the policy even-handedly addresses different levels of risk for dolphins in different regions. But the WTO found that fishing techniques used in other parts of the ocean can also harm dolphins, and that excluding Mexican tuna from access to the label under especially strict terms was discriminatory.

The discriminatory nature of the law does a great disservice to American consumers of tuna. The fact that over 98% of canned tuna sold in the United States is labeled “dolphin safe” suggests that American consumers really care about dolphins. In a market where a dolphin safe label is a competitive necessity, access to that label effectively determines access to the American consumer market for tuna. It’s that consumer-driven market reality that prompted Mexico to make a trade case out of the issue.

This particular case is an excellent example of how consumers are better informed about the things that matter to them when government does not interfere with the free flow of information. Polls have indicated that most consumers believe the “dolphin safe” label certifies that no dolphins were harmed when the tuna were caught. This is untrue. The federal requirements for dolphin-safe labeling do not exclude tuna that were caught while killing dolphins as long as it was not done using one particular method in one particular part of the ocean. Consumers are indeed being misled, but it is the control of information by government, not the availability of competing standards, that is to blame.

Without this law, consumers would be free to demand tuna caught without setting on dolphins, or they might prefer to buy only tuna whose capture was certified as dolphin safe by an independent observer. Under the current regime, tuna producers are completely prohibited from providing that information on product labels. A policy designed to protect dolphins by harnessing the power of consumers depends on having informed consumers with access to all relevant information. Consumers who want to protect dolphins from tuna fishers are not served by a law that actually protects U.S. tuna fishers from Mexican competition.

The adverse WTO ruling offers the U.S an excellent opportunity to demonstrate simultaneously its commitment to the free trade principles of the international trading system, and its belief in the values of a free and open society. Market competition can shape fishing practices to make them more ethical and fair only if information is permitted to flow freely to those with the power to use it. The best solution—the one that is clearly within the bounds of trade rules and best protects dolphins—is to drop the labeling requirement altogether and trust dolphin-loving consumers to make rational choices.

K. William Watson is a trade policy analyst at the Cato Institute.

Baby Budget Hawks of the GOP by Michael D. Tanner

Wed, 23 May 2012 00:00:00 -0400

The conventional wisdom, pushed for very different reasons by both Republicans and Democrats, is that Republicans in Congress, controlled by radical tea-partiers, have been slashing government spending. Thus it becomes a little hard to understand how, in the few short months since last year’s debt-ceiling deal, the federal debt has increased by more than $1.5 trillion, roughly $13,000 per household. If Republicans are such great budget cutters, how come we continue to spend more, run more deficits, and accumulate more debt?

The latest evidence suggests that it is because, contrary to conventional wisdom, Republicans still aren’t such radical budget hawks after all.

For example, the latest Club for Growth scorecard suggests that, on the whole, Republicans in this congress have actually been less fiscally responsible than those in past congresses. For 2011, the average Republican received a weighted score of 69.5 out of 100. That’s far short of the 86.3 average score in 2010, and it hardly suggests a tea-party-led wave of austerity.

Forty Republicans received scores of 90 or higher, and nine — Representatives Amash (Mich.), Chaffetz (Utah), Flake (Ariz.), Franks (Ariz.), Graves (Ga.), Huelskamp (Kan.), Jordan (Ohio), Labrador (Idaho), and Lamborn (Colo.) — received perfect scores of 100 percent. However, 25 Republicans had scores below 50. In fact six Republicans – Ros-Lehtinen (Fla.), Diaz-Balart (Fla.), McKinley (W.Va.), Smith (N.J.), Young (Alaska), and LoBiando (N.J.) — had scores worse than those of some Democrats, such as Dan Boren (Okla.). Interestingly, for all the attention paid to freshmen representatives who are supposedly in hock to the Tea Party, only three freshmen — Amash, Huelskamp, and Labrador — received perfect scores, while three other freshmen — Representatives Dold (Ill.), Meehan (Pa.), and McKinley — were among the worst-performing Republicans. Compare this with 2010, when 28 Republicans received a perfect score from the Club for Growth and only two had scores below 50.

Of course one could be argue that scorecards that focus on specific votes are not a particularly good measure of a lawmaker’s overall record. Perhaps the votes were tougher this year, or the Club for Growth stopped scoring on a curve. Let’s take a look, then, at a slightly different measure of fiscal responsibility, the National Taxpayer Union’s latest measure of proposed spending increases and cuts by members of Congress. By this measure, there has also been an improvement by Republicans in this congress, but not an overwhelming one.

On an annualized basis, Republicans in the House proposed spending increases of $5.3 billion and cuts of $135 billion. Thus, if every one of their proposals had passed, total federal spending would have been reduced by $130.2 billion, which is 3.6 percent of this year’s projected spending. That would still have left us with a budget deficit this year of $1.17 trillion.

That’s an improvement over last year, when Republicans proposed a net spending reduction of only $45 billion. So it’s a baby step in the right direction — but far from what we need to keep us from falling off the debt-and-deficit cliff.

Moreover, the actual Republican record is not quite as good as even this baby step looks, because nearly all Republicans backed the repeal of Obamacare, which accounts for $40.3 billion of the annualized savings. Supporting repeal was easy, and it had no actual chance of passing. If we take that away, then Republicans called for only $95.3 billion in other cuts, which is roughly 2.6 percent of federal spending. Overall, Republicans still seem unwilling to make the tough choices when it comes to spending cuts.

Those Republicans proposing the biggest net reductions in spending are Representatives Jason Chaffetz (Utah), Trent Franks (Ariz.), and Jeff Duncan (S.C.). Among the freshmen class in the House, Representatives Duncan, Huelskamp, Labrador, and Guinta proposed the largest net reductions, with the first three also receiving near-perfect Club for Growth scores.

On the other side, ten House Republicans actually proposed net spending increases, among them Representatives Chris Smith (N.J.), Chris Gibson (N.Y.) and Patrick Meehan (Pa.). Notably, Representatives Gibson and Meehan were also among those with the worst voting records, according to the Club for Growth.

Let’s look at one more measure of Republican seriousness when it comes to debt and deficit reduction: the most recent budget votes. Nearly all House Republicans, of course, voted in favor of the Ryan budget. While certainly not perfect — it would take more than 20 years to achieve balance — the Ryan budget nonetheless laid down an important marker on entitlement reform and spending restraint. Among the ten House Republicans who voted against the Ryan budget were both those who thought it spent too much money (Representatives Amash and Huelskamp) and those who thought it didn’t spend enough (Representatives Gibson and McKinley, of course).

In the Senate, Republicans were less likely to support the Ryan budget, in part because Senate rules allowed them more alternatives. Still, the results from a fiscal-responsibility perspective were mixed. Only 16 Republicans supported the most fiscally conservative alternative, proposed by Senator Rand Paul of Kentucky. They picked up one more vote for a proposed budget by Senator Mike Lee of Utah. A third proposal by Pennsylvania’s Senator Pat Toomey garnered 32 votes, and the original Ryan budget received 41. Four Republican senators voted against all four alternatives: Brown (Mass.), Collins (Maine), Heller (Nev.), and Snowe (Maine).

Recent weeks have also seen Republicans in the House vote to reauthorize the Export-Import Bank, an example of corporate welfare if there ever was one, and abandon the sequester for cuts in military spending. Senate Republicans also agreed on a highway bill that hikes the deficit in the long run.

None of this suggests that Republicans were not generally more fiscally conservative than Democrats. The average Democrat score on the Club for Growth Scorecard was only 10.95 out of 100. All but three Democrats in the House scored below every Republican, and six Democrats received a score of 0. The average Democrat proposed net spending increases of $496 billion — almost half a trillion dollars in new net spending. Not a single Democrat voted for the Ryan budget, or for any of the lower-spending alternatives.

But better is not good enough.

Unless Washington gets spending under control, we are headed toward a debt crisis of Greek proportions, and time is running out. It’s time for Republicans to live up to the hype and get truly serious about cutting spending.

Michael Tanner is a senior fellow at the Cato Institute and author of Leviathan on the Right: How Big-Government Conservatism Brought Down the Republican Revolution.

Free Markets Require Increased Legal Immigration by Alex Nowrasteh

Tue, 22 May 2012 00:00:00 -0400

When Mitt Romney’s campaign says it is “still deciding what his position on immigration is,” it goes without saying the political debates inside his campaign are intense. What should not be contentious, however, is the commitment for increasing legal immigration by anyone supporting free-market principles.

The current immigration system is the antithesis of a free-market economy and resembles nothing so much as a Soviet-style economic central planning bureau.

The government fixes quotas and subquotas on the number of immigrants by skill, country of origin, employer and even where they can live. Arbitrary rules, inspections and other requirements make the system virtually unworkable for all but the most committed of employers, with the result that American companies are prevented from finding the talent they want.

Soviet bureaucrats thought they knew everything about the labor market, including the number of workers, their skill level and even where they should live. Their efforts failed, and so has our immigration system.

American workers, not just American employees, are hurt in the process. Foreign workers typically have different skills and experiences than Americans, which means there is little competition between them. Employing more foreign doctors and farmworkers increases the demand for American nurses and pesticide producers, creating jobs and expanding the economy. And these come with the benefits of increased choice and lowered prices for goods and services for the average American consumer.

Our immigration regulations are not just arbitrary, complex and expensive, but are based on an entirely false premise that there is a fixed pool of jobs over which people must compete. Jobs are constantly being created and destroyed in a healthy economy. And immigrants create many of them.

Immigrants are typically more entrepreneurial than native-born Americans. At the high end of the skills spectrum, more than half of all Silicon Valley startups in recent years have been founded by immigrants, many of whom were in the U.S. for more than a decade before becoming entrepreneurs. Lower-skilled immigrants, primarily from Latin America, are contributing to an immigrant business-creation rate more than twice that of native-born Americans. This penchant for business creation seems to pass down the generations.

The Great Recession has forced many immigrants into being entrepreneurs because of the tough economy. Even during good economic times, however, immigrants are at least 25 percent more likely to start a business than native-born Americans. Business creation from any source increases economic growth and employment opportunities for all.

In a free market, firms and workers should be free to negotiate and work together - regardless of nationality. The labor market is the largest market in the U.S., and increasing legal immigration will allow people to move to our relatively capitalist economy, where they are most productive, increasing economic growth in the process.

Legalizing peaceful unauthorized immigrants will give them an incentive to more quickly learn English, increase their incomes and become Americans. The same pattern was observed in the aftermath of the 1986 Immigration Reform and Control Act, when around 3 million unauthorized immigrants were legalized. Deportation or living in the shadows permanently is not a just punishment for breaking our Soviet-style immigration regulations.

Immigrants are less likely to abuse the welfare state than similarly skilled Americans, even when they are eligible. To the extent that abuse of the welfare state is a concern for anyone espousing free-market principles, they should follow the advice of the Cato Institute’s late chairman emeritus and economist, William Niskanen, who said, “Build a wall around the welfare state, not around the country.” Welfare ineligibility is a far better and cheaper solution than closing the border further. The welfare state and the perverse incentives it creates are the problem, not immigrants.

Mr. Romney has told us that free markets produce more wealth and prosperity for the greatest number of people than other systems. A true free market in labor, accessible to immigrants without the burdens of dealing with our near Soviet-style immigration regulations, will reap enormous gains for Americans and immigrants, and propel us out of the Great Recession.

Alex Nowrasteh is the immigration policy analyst at the Cato Institute's Center for Global Liberty and Prosperity.

Politicians and Team Owners Snooker Sports Fans and Taxpayers by Nick Mosvick, Ilya Shapiro

Tue, 22 May 2012 00:00:00 -0400

Minnesota governor Mark Dayton just signed the midnight deal that state lawmakers struck with the owners of the Minnesota Vikings to build the team a new stadium. Players and management shook hands. Fans breathed a sigh of relief that their beloved football team would remain in the Gopher State. But some important parties were missing from the celebration: the taxpayers who are stuck with the check.

Both of us are sports fans — one a born-and-bred Vikings supporter, the other a Washington Capitals season-ticket holder who wrote his master's thesis on the Olympics — but we recognize that most fans are hurt by such deals. That's because they lead to increased taxes and higher prices, squeezing the average fan for the benefit of owners and sponsors. And that's not even counting the overwhelming majority of taxpayers, regardless of fandom, who never set foot in these gladiatorial arenas.

Let's look at this particular deal. The stadium costs $975 million on paper, with over half coming from public funds, $348 million from the state and $150 million from Minneapolis — not through parking taxes or other stadium-related user fees, but with a new city sales tax. In return, the public gets an annual $13 million fee and the right to rent out the stadium on non-game-days.

Vikings ownership, NFL commissioner Roger Goodell, and local politicians make a typical pitch for the deal: the stadium will attract investment to the area; local establishments will see a rise in game day sales of $145 million; jobs will be created, including 1,600 in construction worth $300 million ($187,500 per job?!); tax revenues will increase $26 million; property values will rise; and, of course, the perennially underachieving team's fortunes will improve.

Such arguments are always trotted out for these sweetheart deals, but the evidence regarding the economic effects of publicly financed stadiums consistently tells a different story. For example, Dennis Coates and Brad Humphreys performed an exhaustive study of sports franchises in 37 cities between 1969 and 1996 and found no measurable impact on per-capita income. The only statistically significant effects were negative ones because revenue gains were overshadowed by opportunity costs that politicians inevitably ignore.

An older study looked at 12 stadium areas between 1958 and 1987 and found that professional sports don't drive economic growth. A shorter-term study looked at job growth in 46 cities from 1990 to 1994 and found that cities with major league teams grew more slowly. Even worse, taxpayers still service debt on now-demolished stadiums, including the $110 million that New Jersey still owes on the old Meadowlands and the $80 million that Seattle's King County owes on the Kingdome. And we shouldn't forget that local governments often employ property-rights-trampling eminent domain to facilitate these money-squandering projects.

Other evidence casts doubt on whether whatever revenue stadiums attract actually constitutes an economic plus. Stanford economist Roger Noll has noted that the majority of attending fans come from within a 20-mile radius, such that money they spend would otherwise have gone to another form of local entertainment or recreation. In that light, publicly subsidized stadiums are at best zero-sum endeavors — a shift of resources called the "substitution effect."

Moreover, any real benefits go to ownership and players. A 1999 Cato Institute report found that 55% of the gains from subsidies to pro sports teams go to players and 45% to owners. It is thus unsurprising that a more recent study suggests that teams and their stadiums are valued much less by the public than commonly perceived.

The reality of the Vikings deal is that the owners will gain the most, not taxpayers or fans. Taxpayers will bear most of the risk, while the expected increase in the franchise's value will accrue wholly to the owners — who will also be free from facility-financing costs. The owners will also have new revenue opportunities in the form of higher ticket prices, club seats, stadium-naming rights, and advertising. With all these luxury goodies, the only fans who will be able to actually attend the games are those with luxury incomes, many of whom will surely be writing the cost off their taxes as a business expense.

Keith Olbermann, in his previous incarnation as a sportscaster, once suggested that government officials who support stadium subsidies should "be sentenced to a life of hard labor in a federal penitentiary." While that seems excessive, fans should at least stop letting politicians buy their loyalty for a shiny, new stadium.

The issue is not ideological, but fiscal common sense: If stadiums pay for themselves, why would the savvy businessmen who own the teams let local governments in on the profits?

Ilya Shapiro is a senior fellow in constitutional studies at the Cato Institute and editor-in-chief of the Cato Supreme Court Review. Nick Mosvick is a former legal associate and a native Minnesotan.

Afghanistan's Corruption Breeds Failure by Malou Innocent, Danny Markus

Tue, 22 May 2012 00:00:00 -0400

Corruption in Afghanistan extends beyond petty bribery and kickbacks, so much that too many Karzai power brokers gain much from war and will lose from peace. Corruption is everywhere, from the central government to development and security contracting. Speak out against corruption too strongly, however, and you may find yourself prohibited from entering the country.

Afghan President Hamid Karzai recently banned Rep. Dana Rohrabacher, California Republican, from entering Kabul for alleging that Mr. Karzai and his supporters rule through exclusionary tactics and make money to stay in power.

That the chairman of the House Foreign Affairs oversight and investigations subcommittee was restricted from entering Afghanistan is appalling, given that American taxpayers spend nearly $2 billion a week on the 11-year-old conflict and almost 2,000 U.S. military personnel have lost their lives for its government. For the endemically corrupt regime and its band of thugs and cronies, this is business as usual.

One real life drama that played out in Kandahar, between Afghan entrepreneur Naseem Pashtoon Sharifi and the Afghan president's brother, Qayum Karzai, shows how damaging such behavior by those in positions of authority can be.

Like many in the Afghan diaspora, the 37-year-old Mr. Sharifi returned to his homeland after the fall of the Taliban regime to help rebuild his country and invest in civil society. He pioneered an outdoor billboard company, Arakozia Advertising, and was the editor of the Kandahar-based newspaper Surgar Weekly. His media empire became the fourth-largest employer in the region, as contracts from banks, wireless phone companies and even NATO-led poppy eradication projects came streaming in.

His vibrant business came to an end when Kandahar Mayor Ghulam Hamidi, a longtime friend of Mr. Karzai, arbitrarily raised the municipal taxes on Arakozia's billboards from 6 percent to 60 percent. When Mr. Sharifi resisted, dozens of his billboards were torched, torn down and destroyed. Threats of violence followed, from anonymous phone calls to intimidation by Kandahar police. Mr. Sharifi was once again forced into exile.

Eventually, Qayum Karzai, a Baltimore restaurateur who also dominates the construction and security business in Kandahar, emerged in Mr. Sharifi's place. Qayum Karzai founded his own billboard business, Innovative Kandahar Advertising, which charges four times as much, compared with Arakozia. In a devastating 2010 expose, the Toronto Star's Mitch Potter verified Mr. Sharifi's accounts. Other Kandahar-based sources also confirmed his accusations.

But Qayum Karzai is not the only Karzai involved in such strong-arm tactics against his business rivals. Hamid Karzai's younger half-brother, the late Ahmed Wali Karzai, once consolidated his power by acting as both the powerful chairman of Kandahar's provincial council and by relying on a mafia like network of militias that made millions of dollars by bribing security companies that benefited from contracts escorting NATO convoys.

One diplomatic cable released by WikiLeaks reveals U.S. officials once described the Karzai clan's grip over Kandahar as a "semi-modern aristocracy." Congressional investigators have found mounting evidence that American taxpayer dollars had inadvertently created a network of warlords that fed the insurgency's momentum with economic assistance from the coalition. Worse, U.S. military officials say perceptions that power in Kandahar is concentrated in the hands of the Karzai family fuel support for the insurgency.

Rep. John F. Tierney, Massachusetts Democrat, once said: "In this case, the U.S. appears to be inadvertently fueling the very warlordism and corruption that we are pressing President Karzai to curtail."

So what can be done?

Step one: Establish just criteria and follow a careful vetting process to identify capable, honest and reputable Afghans from within the country and in the diaspora to serve during a one-year interim government.

Step two: Of those Afghan government officials where conclusive proof of their criminal wrongdoings will result in conviction, conduct public trials and mete out sentences commensurate with the offense.

Step three: Allow the Afghan people to decide their preferred method of governance, by either traditional means or democratic-style elections.

None of this will be easy, but as the saying goes, "no justice, no peace." If this or similar efforts for redress cannot be pursued, then Washington has even more reason to exit this conflict swiftly. Contrary to received wisdom, Afghanistan's bloodshed is not solely a result of the absence of functioning central government institutions. Rather, in the process of building those institutions, the coalition put into power a network of warlords contributing to alienation, violence and impoverishment.

Failing to appreciate the depths of Afghan corruption trivializes a primary motive that spurs many Afghans to fight, and many more to give up hope.

Malou Innocent is a foreign-policy analyst at the Cato Institute. Danny Markus has lived and worked in Afghanistan, on and off, since 2008.

How Soon They Forget by Richard W. Rahn

Mon, 21 May 2012 00:00:00 -0400

If you are a nonimmigrant American reading this, do you know why your ancestors came to America? The fact is, a large percentage of immigrants were trying to escape various forms of government persecution, including religious and tax persecution. The American Revolution was set off, in part, by a tax on tea that ranged from about 10 percent to 33 percent of its value. That and other grievances were enough to cause people to take up arms against the British.

Rather than taking up arms, most people who believe the tax burden now has become too great pick up and leave, such as all of those Californians and New Yorkers who are moving to Texas and Florida, where there is no state income tax. Many are all atwitter about Facebook co-founder Eduardo Saverin deciding to move to Singapore to partially escape what he believes is excessive taxation. Leaving the U.S. is a much more extreme action than moving from a high-tax state to a low-tax state, but a record number of Americans gave up their citizenship last year.

At what point would you consider leaving the U.S.? If you were taxed 98 percent of your income, or 75 percent as the new French president wants to do, or merely 50 percent-plus which is what many Californians will be paying if Gov. Jerry Brown gets his proposed tax increase and President Obama succeeds in getting his proposed tax increase?

Sen. CharlesE. Schumer, New York Democrat, and Sen. Robert P. Casey Jr., Pennsylvania Democrat — whose thought processes seem to be similar to those of King George III in 1776 — have denounced Mr.Saverin and introduced legislation to punish him and others who may wish to leave because of high taxes. It appears to me that this is nothing more than a modern version of the Fugitive Slave Act of 1850, which demanded slaves be returned to their “owners,” who were in effect imposing close to a 100 percent tax upon their slaves. If not for that pesky Constitution, you can bet Mr. Schumer would be proposing legislation to force all of those New York tax exiles in Florida and Texasto return to their high-tax New York plantations. The U.S., to its great shame, already imposes tax penalties on those who give up their citizenship — just like the old USSR did. Mr. Schumer, Mr. Casey, and others seem to have forgotten that theU.S. was founded on the idea of individual liberty, which includes the fundamental right of being able to flee what one views as an oppressive government.

Almost all of the Democrats and many of the Republicans in the House of Representatives also seem to have forgotten that the U.S. government is now spending about 36 percent more than it takes in each year, which is leading us toward the same fate as Greece. On May 8 and 9, a group of responsible Republicans in the House proposed 11 amendments to the Commerce-Justice-Science Appropriations bill to reduce federal spending. Only one amendment passed and that one only saved a tiny $542,000.

One proposed amendment was to reduce the appropriation for Economic Development Administration grants by $220 million. EDA long has been used as a political slush fund, enabling politicos to spend taxpayer money on many projects that make little or no economic sense. Only 147 Republicans and no Democrats had the courage to vote against this boondoggle.

The Legal Services Corporation, a federal agencyestablished by Congress to ensure equal access to justice, long has been used by left-wing lawyers to lobby for more federal spending on their favorite big-government projects. The House of Representatives held two votes on reducing LSC funding. One would have saved $328 million by eliminating the funding; it failed 122-289, with no Democrats voting for it. The other was merely to reduce funding for LSC by $128 million; it also failed, 165-246, with all but two Democrats and 69 Republicans voting against the savings.

Finally, the House voted 330-93 not only to reauthorize the Export-Import Bank, but to increase its funding to $140 billion. The Ex-Im Bank is used to subsidize U.S. exports, and most of the benefit goes to a couple of large companies such as Boeing Co. and General Electric Co. Yes, it is good that Boeing exports its planes to other countries, but you, the taxpayer, should not be on the hook to finance these exports. There is plenty of private money available. Only 93 Republicans and no Democrats voted against the bill to protect the taxpayers’ pockets.

What is particularly disappointing is that some of the people elected with help from the Tea Party voted against many of the amendments, which indicates they already are being co-opted by Washington. Perhaps the Tea Party needs to run a couple of primaries against people they helped elect in order to improve their memories.

More government spending means higher taxes in the long run and less prosperity and liberty. Those politicians who keep voting for bigger government and more restrictions on individual liberty have forgotten why many of their own ancestors risked everything, including their lives, to come to America. Perhaps, the voters should retire them so they have time to learn more about their own families’ history.

Richard W. Rahn is a senior fellow at the Cato Institute and chairman of the Institute for Global Economic Growth.

Drones Pose a Threat to Americans' Privacy by Gene Healy

Mon, 21 May 2012 00:00:00 -0400

"Don't drone, me, bro!" — that's one way to sum up Charles Krauthammer's heated reaction to last week's news that the Federal Aviation Administration had loosened restrictions on local police departments' use of surveillance Unmanned Aerial Vehicles.

"Stop it here, stop it now," Krauthammer exclaimed on Fox News's "Special Report" Monday, "I don't want to see it hovering over anybody's home... I'm not encouraging, but I am predicting that the first guy who uses a Second Amendment weapon to bring a drone down that's been hovering over his house is going to be a folk hero in this country."

The neoconservative Krauthammer is rarely mistaken for a civil libertarian, yet here he finds himself to the left of the ACLU. And he has a point. "Drones present a unique threat to privacy," the Electronic Privacy Information Center explains; they're designed to "undertake constant, persistent surveillance," and with special equipment, they're capable of "peering inside high-level windows," perhaps even "through solid barriers, such as fences, trees and even walls."

In several cases, the Supreme Court has held that warrantless surveillance by manned aircraft doesn't violate the Fourth Amendment. But small, cheap, maneuverable, and often undetectable drones may create cases in which a difference in degree becomes a difference in kind.

Pressure is mounting to normalize the use of drones in the United States. A 2010 Department of Defense report emphasizes the Pentagon and the Department of Homeland Security's need for "routine access to U.S. airspace" in order "to execute a wide range of missions including... surveillance and tracking operations."

The Bureau of Customs and Border Protection, under the aegis of the Department of Homeland Security, has seven non-weaponized Predator drones in operation, one of which it used to assist a North Dakota sheriff with an arrest last summer, and "the FBI and Drug Enforcement Administration have used Predators for other domestic investigations," the Los Angeles Times reported in December.

From Miami, Florida, to Arlington, Texas, local police departments have received federal grants to purchase UAVs. Police in Ogden, Utah, used federal tax dollars for a surveillance blimp outfitted with night-vision cameras. "We believe it will be a deterrent to crime when it is out and about," says the mayor.

In an incident that typifies everything wrong with the growing militarization of U.S. law enforcement, members of a Houston-area sheriff's department brought some of their coolest gear out to a defense contractor's training facility last September for a drone demonstration-slash-photo op. The $300,000 "Shadowhawk" UAV they were looking to buy with DHS grant money lost control and crashed into the SWAT Team's "Bearcat" armored personnel carrier (also purchased with DHS boodle).

Not to worry — they bought a Shadowhawk drone anyway. Chief Deputy Randy McDaniel enthused: "I absolutely believe it will become a critical component on all SWAT callouts and narcotics raids and emergency management operations."

Over the past decade, the creeping militarization of the homefront has proceeded almost unnoticed, with DHS grants subsidizing the proliferation of security cameras and military ordnance for local police departments.

On April 19, Reps. Ed Markey, D-Mass., and Joe Barton, R-Texas, co-chairs of the Congressional Bipartisan Privacy Caucus, sent a letter to the head of the FAA urging the adoption of privacy protections, given the "potential for drone technology to enable invasive and pervasive surveillance." But Congress needn't wait on Obama's FAA to start protecting Americans' privacy rights.

It's well past time we stopped sleepwalking toward dystopia and had a serious public debate about where the lines should be drawn.

Gene Healy is a vice president at the Cato Institute and the author of The Cult of the Presidency: America's Dangerous Devotion to Executive Power.

JPMorgan Chase and Casino Banking by Gerald P. O'Driscoll Jr.

Mon, 21 May 2012 00:00:00 -0400

JPMorgan Chase & Co., one of the nation’s leading banks, revealed in May that a London trader racked up trading losses reportedly amounting to $2.3 billion over a 15-day period. The losses averaged over $150 million per day, sometimes hitting $200 million daily. The bank originally stated the trades were done to hedge possible losses on assets that might suffer due to Europe’s economic woes. There is now doubt whether it was a hedge or just a risky financial bet.

A hedge is a financial transaction designed to offset possible losses in an asset or good already owned. The classic hedge occurs when a farmer sells his crop in a futures market for delivery at a specified date after harvesting. He sells today what he will only produce tomorrow, and locks in the price. If the price at harvest time is lower than today’s price, he has made money on the forward contract, while losing a corresponding amount of money on the crops in the ground. In a perfect hedge the gains and losses should exactly offset each other.

How did J.P. Morgan suffer such large losses on its hedges, and what are the lessons? The two questions are related.

Bad Predictions

It appears the London trader entered into financial transactions on the basis of observed relationships among various bond indices. The market relationships broke down. The indices moved differently from what historical patterns or financial models predicted. Such a breakdown has been at the heart of a number of spectacular financial collapses, notably that of Long-Term Capital Management (LTCM) in 1998 and a number of others during the financial meltdown of 2007-08.

LTCM invested the money of rich clients in financial bets based on the expected relationships among the prices of various assets. According to Nicole Gelinas in After the Fall: Saving Capitalism from Wall Street–and Washington, at the time of its collapse LTCM had $2.3 billion of client money. By borrowing, it leveraged that investment 53 to 1. Further, it employed derivatives to further magnify its bets so that its total obligations were a fantastic $1.25 trillion.

Derivatives are any security whose price movements depend on (are derived from) movements in an underlying asset. “Puts” and “calls” on equity shares are relatively simple derivatives familiar to many. Asset prices, like various bonds, move in predictable ways with respect to each other, and values of derivatives linked to the assets similarly move in a predictable fashion with respect to the prices of the underlying assets—in normal times.

But the summer of 1998 was not a normal time. There was turmoil in Asian financial markets, then Russia threatened to default on its domestic debt. Global credit and liquidity dried up, and LTCM could not fund itself. It collapsed spectacularly.

Housing Turmoil

A decade later there was turmoil in housing finance. The housing bubble was bursting. Mortgage lenders were under pressure, and some were failing. Many mortgages had been packed together in mortgage-backed securities, which were sold to or guaranteed by Fannie Mae and Freddie Mac. Fannie and Freddie, allegedly private entities but in reality guaranteed by the government, were failing. Lehman Brothers, an investment bank, was heavily involved in housing finance; it borrowed short-term, even overnight, to finance long-term holdings; it employed heavy leverage; and it made liberal use of derivatives contracts. It declared bankruptcy on September 15, 2008.

The specifics varied between 1998 and 2008, and between LTCM and Lehman. But the reliance on certain asset prices moving in predictable fashion was one shared element. So, too, was the heavy use of borrowed money (leverage), and also the reliance on derivatives contracts. The volatility of complex derivatives contracts led legendary investor Warren Buffett to characterize them as “financial weapons of mass destruction.”

In short there is nothing new in what happened to JPMorgan. It claimed it was not trying to make risky financial bets, but hedge risks already booked on its balance sheet. While details of the trades that led to losses are sketchy at this writing, they apparently employed both leverage and derivatives. As documented here these are elements present in major financial blowups and collapses going back decades (and further). LTCM, Lehman, and Fannie and Freddie all thought they had at least some of their risks hedged. But hedges have a tendency to unravel just when needed most: in times of financial turmoil. Even so, financial institutions permit their traders to make the same kind of dangerous bets over and over again. We used to have financial crises every decade or so. Now the cycle seems to be halved.

In the past I have dubbed today’s banking practice of placing dangerous financial bets as “casino banking.” It differs little from the activities conducted at gaming tables in Las Vegas and has little or no reference to the fundamentally healthy activity of matching viable businesses with capital and credit.

Model Problems

In a Cato Policy Analysis, “Capital Inadequacies: The Dismal Failure of the Basel Regime of Bank Capital Regulation,” Kevin Dowd and three coauthors examined some of the technical problems with standard risk models used by large banks. It is an exhaustive analysis, and I commend it to those interested. The authors delve into many issues, but concentrate on the many flaws of the complex mathematical models used by banks to control risks.

In August, 2007, Goldman Sachs Chief Financial Officer David Viniar puzzled over a series “25-standard deviation moves” in financial markets affecting Goldman. (Returns deviated from their expected values by 25 standard deviations, a measure of volatility.) Such moves should occur once every 10-to-the-137th power years if the assumptions of the risk model were correct (a Gaussian, or “normal,” distribution of returns). As Dowd and his coauthors put it, “Such an event is about as likely as Hell freezing over. The occurrence of even a single such event is therefore conclusive proof that financial returns are not Gaussian-or even remotely so.” And yet here were several in ten years. In Dowd & Co.’s telling, the models lie, the banks swear to it, and the regulators pretend to believe them. All of this goes to answer how the losses at Morgan might have happened. Traders rely on flawed models to execute their trades.

Now to the lessons.

Risky Behavior Goes On

Major financial institutions continue to take on large risks. Why? Assume the trades made by Morgan really were to hedge the bank’s exposure to events in Europe. That implies, of course, that risky investments had already been put in place (since they then needed to be hedged). Additionally, the risks were so complex that even a highly skilled staff (which Morgan certainly employs) could not successfully execute hedges on them.

Reports indicate that senior management and the board of directors were aware of the trades and exercising oversight. The fact the losses were incurred anyway confirms what many of us have been arguing. Major financial institutions are at once very large and very complex. They are too large and too complex to manage. That is in part what beset Citigroup in the 2000s and now Morgan, which has until now been recognized as a well-managed institution.

If ordinary market forces were at work, these institutions would shrink to manageable sizes and levels of complexity. Ordinary market forces are not at work, however. Public policy rewards size (and the complexity that accompanies it). Major financial institutions know from experience they will be bailed out when they incur losses that threaten their survival. Morgan’s losses do not appear to fall into that category, but they illustrate how bad incentives lead to bad outcomes.

Taxpayers’ Business

Some commentators have argued that politicians and the public have no business in Morgan’s losses. Only Morgan’s stockholders, who saw its share price drop over 9 percent in one day, and senior management and traders who lost their jobs should have an interest. But in fact losses incurred at major financial institutions are the business of taxpayers because government policy has made them their business.

Large financial institutions will continue taking on excessive risks so long as they know they can offload the losses on taxpayers if needed. That is the policy summarized as “too big to fail.” Let us not forget the Troubled Asset Relief Program (TARP), signed into law by President George W. Bush in October 2008. It was a $700 billion boondoggle to transfer taxpayer money to stockholders and creditors of major banks—and to their senior management; don’t forget the bonuses paid out of the funds.

Banks may be too big and complex to close immediately, but no institution is too big to fail. Failure means the stockholders and possibly the bondholders are wiped out. Until that discipline is reintroduced (having once existed), there will be more big financial bets going bad at these banks.

Difficult Policy Change

Changing the bailout policy will not be easy because of what is known as the time-inconsistency problem. Having bailed out so many companies so many times, the federal government cannot credibly commit in advance not to do so in the future. It can say no to future bailouts today, but people know that when financial collapse hits tomorrow, government will say yes once again. The promises made today will not match the government’s future actions. There is inconsistency between words and deeds across time.

What to do in the meantime? The Volcker Rule was a modest attempt to rein in risk-taking. Former Fed Chairman Paul Volcker wanted to stop banks from making risky trades on their own books (as opposed to executing trades for customers). Industry lobbying has hopelessly complicated the rule and delayed its issuance.

Morgan’s chief executive officer, James Dimon, asserted the London trades would not have violated the rule. If true, it suggests that an even stronger rule needs to be in place. Various suggestions have been made to address excessive risk-taking by financial firms backed by the taxpayers. It is time to take them more seriously.

Gerald O'Driscoll, a senior fellow at the Cato Institute, was vice president at the Federal Reserve Bank of Dallas and later at Citigroup.

'Wrong Way' Krugman Flies Again, and Again by Steve H. Hanke

Mon, 21 May 2012 00:00:00 -0400

The infamous pilot Douglas Corrigan was dubbed "Wrong Way" in 1938, after he filed a flight plan that would have taken him on a transcontinental flight from New York to Long Beach, California. Instead, Wrong Way took a transoceanic flight from New York to Dublin, Ireland.

Corrigan's "Wrong Way" attribution should be applied to the fiscalists led by Nobelist, Princeton professor and hyper-productive New York Times columnist Paul Krugman. He argues that the only way to put the major economies around the world back on track is to "stimulate" them via deficit-financed government spending. There is just one problem: Prof. Krugman and his fiscalist followers are selling snake oil. If nothing else, Prof. Krugman's "success" proves the wisdom of advice which management guru Prof. Peter Drucker imparted to me over lunch in 1998: "the key to successful salesmanship is nothing more than repetition enhanced by incremental product improvement."

Statements made by the likes of Nobel laureates carry weight — even if those statements amount to nothing more than factoids. Recall that, according to the Oxford English Dictionary, a factoid is "an item of unreliable information that is reported and repeated so often that it becomes accepted as fact." The famous "Dr. Fox Lecture," which was presented at the University of Southern California's Medical School, illustrates just how so-called "experts" can effectively work and influence a crowd. The lecture was presented by Dr. Myron Fox —an advertised heavyweight — to an academic audience. The response to Dr. Fox's lecture was unanimously favorable.

Little did the audience know that "Dr. Fox" was an actor who had been cloaked with an impressive fake curriculum vitae and trained to deliver a nonsensical lecture filled with contradictory statements, double-talk and non sequiturs. When the big guns sound off, they are heard.

In the political sphere, the fiscal factoid is catching on. France has just dumped an economically incoherent Nicolas Sarkozy and replaced him with FranÃƒÂ§ois Hollande, who is the first Socialist to reside in the Ãƒï¿½lysÃƒÂ©e Palace since FranÃƒÂ§ois Mitterrand did 17 years ago. Not surprisingly, President Hollande is proudly flying the fiscal stimulus flag. And that's not all.

Greece has just announced that a government couldn't be cobbled together after the 6 May 2012 elections, and that new elections would be held on 17 June 2012. In the wake of the May elections, the fly in the ointment has been the surge in support for the Coalition of the Radical Left (SYRIZA), which is lead by Alexis Tsipras. Where does SYRIZA stand? A top adviser to Mr. Tsipras, Prof. Euclid Tsakalotos couldn't have been clearer when he recently rejected fiscal austerity and embraced the fiscal factoid. To finance more government spending, he asserted: "We need a central bank that prints money, euro bonds, and a system that transfers money from rich countries to poor countries." It looks like Wrong Way Krugman has found his man in Prof. Tsakalotos. Both should be grounded, pending the completion of a short course on the efficacy of fiscal stimulus programs.

Let's take a closer look at the fiscal facts and the effectiveness of the Keynesian fiscal elixir. Nobelist Milton Friedman addressed the issue in a 1999 Wall Street Journal column (8 January 1999). Prof. Friedman wrote:

The Keynesian view is that government deficit spending is cyclically stimulative whether it is financed by borrowing or by newly created money. The monetarist view is that spending financed by newly created money is cyclically stimulative whether the spending is by the government or the private sector. Government spending financed by borrowing may or may not be stimulative depending on how much private spending is crowded out by government spending. Either outcome is possible, depending on conditions.

It is not easy to distinguish between these views on the basis of empirical evidence, because fiscal stimulus generally is accompanied by monetary stimulus. The relevant evidence is provided by those rare occasions when fiscal and monetary policy go in different directions.

To test whether the Keynesian or monetarist view was supported by the empirical evidence, Prof. Friedman recounted two episodes in which fiscal and monetary policies moved in different directions. The first was the Japanese experience during the early 1990s. In an attempt to restart the Japanese economy, repeated fiscal stimuli were applied. But monetary policy remained "tight," and the economy remained in the doldrums.

Prof. Friedman's second example was the U.S. experience during the 1990s. When President Clinton entered office, the structural fiscal deficit was 5.3% of potential GDP. In the ensuing eight years, President Clinton squeezed out the fiscal deficits and left office in 2000, with the government's accounts showing a structural surplus of 1.5%. Ironically, the two years in which fiscalist Prof. Lawrence Summers was President Clinton's Secretary of the Treasury (1999-2000), the U.S. registered a structural surplus of 0.9% and 1.5% of GDP. Those years were marked by "tight" fiscal and "loose" monetary policies, and the economy was in an expansionary phase. Note that Prof. Summers has clearly had a sip of snake oil since his heady days of 1999-2000.

Prof. Friedman concluded with the following remark: "Some years back, I tried to collect all the episodes I could find in which monetary policy and fiscal policy went in opposite direction. As in these two episodes, monetary policy uniformly dominated fiscal policies."

We can further demonstrate the existence of the fiscal factoid by comparing changes in the output gaps and general government structural balances. In the accompanying table, the first column records the output gap. When the gap is positive (negative), actual output is above (below) the economy's potential. The second column in the table is the general government's structural balance. When it is negative (positive), a fiscal deficit (surplus) exists. The third and fourth columns record the changes in the output gap and general government structural balance, respectively. A positive (negative) change in the output gap implies an economic expansion (contraction), and a negative (positive) change in the general government structural balance implies a fiscal stimulus (consolidation).

If the fiscalists are correct, we should observe an inverse relationship between changes in the rate of growth in output (the third column of the table) and the budget balance (the fourth column of the table). From 2001 through 2016, as projected by the International Monetary Fund, the U.S. economy does not behave in the way that Prof. Krugman and other Keynesians have asserted and proselytized. Indeed, the number of years in which the economy responds to fiscal policy in an anti-Keynesian fashion is more than double those in which the economy follows the Keynesian dogma.

As it turns out, there is plenty of austerity out there. But, in general, it's not fiscal austerity, with real cuts in government spending, as the fiscalists claim — a cut is when you have spent $1 billion last year and will spend $900 million this year. Never mind. As Prof. Friedman taught us, money matters. And when we look at money, we see two pictures. One is the size of the central banks' balance sheets. They have exploded since the Lehman bankruptcy of September 2008 (see the accompanying chart). If you just focused on those balance sheets and the associated growth in high-powered money, you would conclude — as many have done — that we are facing a wall of money and liquidity and that hyperinflation is just around the corner. But that would be a wrongheaded conclusion.

The second picture, one that plots the course of broad money (derivative measures of high-powered money), shows very subdued growth in the money supply (see the accompanying chart). Indeed, in the United Kingdom, broad money is contracting. No wonder the U.K. economy is mired in a double dip recession. It has little, if anything, to do with the Cameron government's alleged fiscal austerity, but everything to do with the U.K.'s money and banking policies. Note that I include the word "banking." Most economists nowadays might find this strange since their models don't even include banks.

In the wake of the financial crisis that has engulfed us, the chattering classes have embraced a wrongheaded set of policies to make banks "safe." One who led the charge was Britain's former Prime Minister Gordon Brown. In the prologue to his book Beyond the Crash, he glorifies the moment when he underlined twice "Recapitalize NOW." It turns out that Mr. Brown attracted many like-minded souls, including his successor, David Cameron, as well as the central bankers who endorsed Basel III, which mandates higher capital-asset ratios for banks.

In response to Basel III, banks have shrunk their loan books and dramatically increased their cash and government securities positions (both of these "risk free" assets are not covered by the capital requirements imposed by Basel III and related capital mandates). This explains, in large part, why the explosion in high-powered money has not flowed through to broad money measures and why we have not bounced back from the crisis induced slump that our friendly central bankers pushed us into.

We are in deep trouble — trouble that has nothing to do with alleged fiscal austerity. Today, the source of our economic malfunction resides with government-mandated bank regulations that have thrown a monkey wrench into the banking system. Wrong Way Krugman and his followers should abandon the fiscal factoid and keep their eyes on what matters — money. They can start by contemplating the monetary contraction in Greece: in the last year, broad money (M3) contracted by 17.1%.

Steve H. Hanke is a Professor of Applied Economics at The Johns Hopkins University in Baltimore and a Senior Fellow at the Cato Institute in Washington, D.C.

NATO as Nero: Alliance Postures While Europe Burns by Doug Bandow

Sun, 20 May 2012 00:00:00 -0400

NATO leaders are meeting in Chicago with a full agenda. It's the biggest NATO meeting ever, with some 60 governments in attendance. But no one is asking the most important question: why is America still defending Europe?

The North Atlantic Treaty Alliance once had an obvious purpose: to defend North Atlantic countries. More precisely, the U.S. was to protect everyone else. The war-ravaged western European states feared pressure, if not conquest, by the Soviet Union. NATO also helped tie a rearmed Germany to its neighbors.

The alliance finished its work on November 9, 1989 when the Berlin Wall fell. Soon the Warsaw Pact dissolved and the Soviet Union disappeared.

There then ensued a desperate attempt to find a new role for the alliance. Some officials suggested that NATO could fight the illicit drug trade, promote the environment, or even aid student exchanges. Alliance advocates settled on engaging in “out-of-area” activities. That is, NATO abandoned its traditional role of defending its members and switched to pursuing social engineering around the globe, as well as acting as a tool to socialize former communist states.

One thing did not change. The U.S. continued to subsidize the defense of everyone else. NATO essentially stood for North America and The Others. If anything was going to happen, it would have to be organized and paid for by Washington.

Even during the Cold War the Europeans would promise to increase military spending, only to welsh when budgets got tight. Once the threat from the Soviet Union dissipated so did the continent’s heretofore modest interest in self-defense. Before he retired as Defense Secretary, Robert Gates complained that European military budgets “have been chronically starved for adequate funding for a long time, with the shortfalls compounding themselves each year.”

The consequences have been grave. According to the group Notre Europe, the continent suffers “some alarming shortfalls in the areas of strategic transportation, communication, intelligence, logistics and satellites, requiring the implementation of costly reforms in terms of resources.” Despite having 1.8 million men under arms, at most 100,000 of them “are equipped and sufficiently trained to be able to be deployed in crisis theaters.”

Successive crises have driven down European military outlays. The International Institute for Strategic Studies (IISS) has detailed cuts in Austria, France, Germany, Italy, Poland, Spain, and others. Even Great Britain, which traditionally maintained the most serious European military with the greatest expeditionary capabilities, is dramatically cutting outlays and capabilities. James Russell of the Naval Postgraduate School complained: “The European countries have made a strategic-level to disarm essentially.”

For years the Europeans talked of creating a continental military capability separate from NATO. The 2009 Lisbon Treaty was supposed to boost this process. However, the idea was stillborn. It’s not much good having a Common Defense and Security Policy without the military necessary to back it up.

The problem was evident in 1999 when the allies bombed essentially defenseless Yugoslavia. America did most of the work since Europe was estimated to have barely 10 to 15 percent of U.S. combat capabilities.

Last year’s intervention in the Libyan civil war was no better. It was supposed to be a European-led operation, but the Europeans took months to push the opposition to victory over the ragtag forces of Moammar Qaddafi.

Just eight NATO members contributed anything militarily; most contributions were minimal. Several countries ran short of munitions. According to the IISS: “the NATO air operations center in Italy managing the campaign had been designed to run 300 sorties a day, but was struggling to manage 150, about one-third the number flown over the much smaller Serbia/Kosovo theater in 1999.” Washington was responsible for destroying anti-aircraft defenses, launching drone attacks, providing 80 percent of aerial refueling, and, of course, resupplying the Europeans when their weapon stocks ran low. “Europe is dead militarily,” one general told Robert Kaplan of the Center for a New American Security.

However, for the Obama administration there is no looking back. America’s NATO ambassador, Ivo Daalder, wants the alliance to go global. Secretary of State Hillary Clinton recently opined: “Of course, NATO is and always will be a transatlantic organization. But the problems we face today are not limited to one ocean and neither can our work be.”

Where will the necessary forces come from? National Security Adviser Tom Donilon admitted: “We know that allies need more advanced intelligence, surveillance and reconnaissance capabilities. They face shortages in helicopters and transport aircraft. They need to make greater investments in the precision munitions and unmanned systems that are critical on today’s battlefields and will be even more important in the future.” Last year only two of the other 27 NATO members devoted more than two percent of GDP to the military.

Defense Secretary Leon Panetta said: “We need to use this moment to make the case for the need to invest in this alliance, to ensure it remains relevant to the security challenges of the future.” Similarly, NSA Donilon noted that President Barack Obama was “asking the alliance to ensure that it has cutting-edge capabilities.”

Greece appears headed out of the European monetary union. Voters in France, Germany, and Italy have revolted against fiscal austerity. Britain’s economy has fallen back into recession. The government in the Netherlands collapsed with early elections to follow. The economic news in Spain continues to worsen. Who in Europe is going to spend more money to provide “cutting-edge capabilities”?

An embarrassed NATO Secretary General Andes Fogh Rasmussen has proposed “smart defense,” which means “money spent more effectively. It is shared defense. It is efficient defense.”

Which in practice means NATO is going to remain North America and The Others. Washington will still be on call to meet European as opposed to American security needs, as in Libya.

With the end of any existential threat to Europe, NATO today only fights wars in which the members have no common interest. The Balkans conflicts were tragic, but had only minimal impact even on European alliance members. The status of the former Yugoslav republics was of no meaningful interest to America. Yet Washington essentially fought that war for the Europeans, who have since ruled Bosnia as colonial overlords and are attempting to force the ethnic Serb minority in Kosovo to submit to another artificial state based in Pristina.

The U.S. dragged the Europeans into a more than decade long war in Afghanistan against the wishes of the European peoples. They have little interest in establishing a modern, liberal democratic state in Central Asia. Which is why most European countries imposed “caveats”—an incredible 83 at the start—limiting their personnel’s exposure to combat.

The Europeans now all desperately want out. The Chicago summit was supposed to formalize a gradual withdrawal timetable. However, newly elected French President Francois Hollande promised to pull his nation’s 3300 troops out by the end of the year, though doing so may be logistically difficult. With the NATO military mission formally scheduled to last until the end of 2014, the Obama administration fears Paris’s plan may spark a rush to the exit.

Britain and France returned the favor in Libya when they effectively got the rest of Europe and the U.S. to fight their war. Similar efforts are brewing to ensnare NATO—which means America—in Syria’s civil war. For instance, the foreign minister of Belgium, which has all of 34,300 men under arms, recently pushed for debate over invading Syria to create “humanitarian corridors.” Everyone knows who would be doing the bulk of the fighting, and it wouldn’t be Belgium.

It brings to mind Luxembourg Foreign Minister Jean Asselborn’s insistence last year that stopping Qaddafi “requires military action.” The Grand Duchy had a population of less than a half million, no air force or navy, an army of 900 men, and a paramilitary gendarmerie of 612. Just whose military did Minister Asselborn expected to do the stopping?

Yet NATO expansion is in the air. In March Sen. Richard Lugar (R-Ind.), just defeated for reelection in his party’s primary, and Rep. Michael Turner (R-Ohio) introduced the “NATO Enhancement Act” to extend the alliance. Unfortunately, NATO expansion adds security liabilities rather than military abilities.

Originally the alliance was created to protect Western Europe from the Soviet Union. Today no country is in a position to dominate Eurasia. The idea of an attack on western—or central—Europe is but a paranoid fantasy. Russia may be an unpleasant neighbor, but it has reverted to pre-1914 great power mode. Moscow wants secure borders and international respect. Florid threats to preempt a missile defense system to the contrary, even Vladimir Putin at his most aggressive isn’t likely dreaming of a revived Red Army marching down the Unter den Linden in Berlin or Champs-Elysees in Paris.

If there is genuine danger of Russian military action, it is in the east, precisely where NATO is expanding. However, these areas were part of or dominated by both Imperial Russia and the Soviet Union. America still has an interest in the liberated states’ development into vibrant democracies, but that does not warrant potential war with a nuclear-armed power.

Morgan Lorraine Roach and Luke Coffey of the Heritage Foundation argue that adding new members “is critical to mobilizing Europe and its allies around a collective transatlantic defense.” But look at the list of potential new members.

The top tier of aspirants, endorsed by Sen. Lugar’s legislation, holds Bosnia and Herzegovina, Georgia, Macedonia, and Montenegro.

Bosnia and Herzegovina is an artificial country ruled by the European Union’s “High Representative.” Bosnia exists only because Western military intervention forced Serbs and Croats to remain in a territory dominated by Bosniaks. There is little more unity today than in 1995 when Bosnia was established by the Dayton Accords. Bosnia’s internal tensions—Serbs in the Republic Srpska continue to strongly resist “national” rule—would become an American problem with NATO membership. The IISS describes the Bosnian armed forces as “an uneasy amalgam of troops from all three formerly warring entities.” Bringing such an entity into NATO would be little short of madness.

Adding Georgia would be even more foolish. Tbilisi desperately wants to join NATO, but has a very bad relationship with Russia, with which it fought a brief war in August 2008. Georgia’s human rights record remains “uneven,” according to Human Rights Watch. Indeed, Freedom House reports “electoral problems such as the abuse of state resources, reports of intimidation aimed at public employees and opposition activists, and apparent voter-list inaccuracies.”

Worse, President Mikhail Saakashvili started the 2008 conflict by attacking Russian forces in the breakaway territory of South Ossetia. Many suspect that he did so because he expected Western support. The Georgian people deserve to be free and secure, but not at the risk of war for America. For Moscow border security is a vital interest: imagine America’s reaction if Russia forged a seemingly hostile military alliance with Mexico.

Macedonia also wants in but has been blocked by Greece in a dispute over the former’s name, which refers to territory included within the latter’s boundaries. Macedonia also has been caught in the riptide of Albanian nationalism, barely avoiding a destructive civil war like that in Kosovo. Freedom House warned that “poor relations between the Macedonian Slav majority and the ethnic Albanian minority have raised doubts about the country’s long-term viability.” Last year the International Crisis Group cited “rising ethnic Macedonian nationalism, state capture by the prime minister and his party, decline in media and judicial independence, increased segregation in schools and slow decentralization” which “risk undermining the multi-ethnic civil state Macedonia can become.” With a military of just 8000 Macedonia would add little to the alliance.

Montenegro is much the same, only it has an even smaller armed forces and closer economic relationship with Russia, the chief target of NATO. Montenegro also managed to achieve a peaceful separation from Yugoslavia and avoided being pulled into the violent whirlpool of Albanian separatism next door. But there is no reason to add it as a new American defense client.

Kosovo, Serbia, and Ukraine are on some lists as well.

Kosovo is another artificial state born of war with allied military support. Kosovo has been recognized only by about half of the world’s states. It remains under allied occupation without a formal military. Its government contains men charged with criminal involvement and war crimes; corruption and human rights remain problems. The European Commission acknowledged that “public administration reform in Kosovo remains a major challenge.” The north of Kosovo, with an ethnic-Serb majority, continues to maintain a separate existence with close links to Belgrade.

Another candidate is Serbia, which NATO countries bombed for 78 days in 1999. Now Belgrade wants to join the onetime aggressors. However, Serbia continues to refuse to recognize Kosovo—a perfectly reasonable decision, but one in conflict with the policy of most NATO members. And while the Serbian military is larger than Montenegro’s, it would require bountiful American subsidies to bring it up to alliance standards.

Ukraine also has its supporters, though a majority of Ukrainians oppose the idea and the Yanukovich government is in very bad odor in the West. Kiev is capable of deterring an attack from Russia. Moreover, adding Ukraine would further poison relations with Moscow, appearing as part of an American-inspired effort at encirclement. NATO membership also would make Ukraine’s disputes with Russia America’s disputes.

Advocates of NATO expansion treat security guaranties as hotel chocolates to be placed on every nation’s pillow, irrespective of America’s national interests. The U.S. has nothing at stake which warrants the expense necessary to upgrade the alliance aspirants’ militaries or the risk of going to war for them against a nuclear-armed power. Adding these nations would not fulfill the most basic purpose of any alliance: to enhance America’s security.

Of course, while war with Moscow is unlikely, it remains possible. As Kaplan argued, it would be wrong to assume “that Europe will face no geopolitical nightmares in its future.” However, this argues against moving NATO further eastward. For Russia border security is a vital concern. Four years ago Russia demonstrated its willingness to defend those interests with military force, if necessary. The deterioration in that nation’s conventional forces means that Moscow would be forced to rely on nuclear weapons as the ultimate equalizer in any confrontation with the West. Warned Gen. Nikolai Makarov, chief of the Russian General Staff: “In certain conditions, I do not rule out local and regional armed conflicts developing into a large-scale war, including using nuclear weapons.”

Europe still should be defended. But by Europeans.

Before the Chicago summit former U.S. NATO ambassador Kurt Volker complained about “things that are not on the agenda that are the most important issues.” He pointed to Syria, Iran, and the Arab Spring, none of which NATO could—or should—do much about. But one important issue was left off the agenda: NATO’s future.

Last June Secretary Gates predicted “a dim if not dismal future” for the alliance. He warned “that there will be dwindling appetite and patience in the U.S. Congress — and in the American body politic writ large — to expend increasingly precious funds on behalf of nations that are apparently unwilling to devote the necessary resources or make the necessary changes to be serious and capable partners in their own defense.” Last October Gates’ successor, Leon Panetta, was only slightly less blunt: “legitimate questions about whether, if present trends continue, NATO will again be able to sustain the kind of operations that we have seen in Libya and Afghanistan without the United States taking on even more of the burden.”

Of course, the answer obviously was no, and nothing decided in Chicago will change it.

To coin a phrase, it is time for a change. Washington once opposed an independent European defense. Now the U.S. should insist on it. Or rather—since it is not America’s place to decide Europe’s future for Europe—should adopt policies likely to lead to that result. Washington should bring home the 80,000 troops which remain in Europe and announce that it will be formally leaving NATO after a “decent interval.” The Europeans could use the existing alliance structure to organize continental military affairs, perhaps in cooperation with the European Union. (Albania, Croatia, Iceland, and Turkey are not currently EU members, but Croatia is slated to join next year and the others are candidates for membership; Canada is the only true outlier.)

The U.S. should not “leave” Europe but forge a less formal cooperative relationship including intelligence sharing, joint maneuvers, and mutual base access. In the rare case where military action served both America and Europe, such as confronting Somali piracy, they should act together. In the unlikely case of an uncontainable hegemonic threat against Europe—which currently enjoys about ten times the GDP and more than three times the population of Russia—the U.S. could intervene. However, normal responsibility for protecting Europe and ensuring security in adjoining regions would be left to Europe.

Retrenchment is necessary to better defend the U.S. Washington should not entangle America’s future in geopolitical controversies of no concern to the U.S. At a time of fiscal stringency Washington cannot afford to continue to protect America’s prosperous and populous allies. And the only way they will do more for themselves is if the U.S. does less for them. Welfare dependency is not only a domestic problem.

NATO played an important role during the Cold War. The collapse of communism and the Soviet Union have eliminated its raison d’être. Even NATO admits that the alliance’s “value is less obvious to many than in the past.”

Instead of desperately concocting new missions for an old alliance, the U.S. should applaud NATO’s success and turn the organization over to the Europeans. America no longer need protect a continent that is both richer and more populous than our own nation.

Doug Bandow is a senior fellow at the Cato Institute and former special assistant to President Ronald Reagan.

When All Is Politics, Nothing Is Law by Roger Pilon

Fri, 18 May 2012 00:00:00 -0400

Long-time establishment apologists Norman Ornstein (AEI) and Thomas Mann (Brookings) have generated a lot of ink lately, pro and con, over their claim that our “dysfunctional” government is the fault of Republican “extremists” whose party has become “an insurgent outlier in American politics,” blocking measures for economic recovery, climate change, health-care reform, and much else.

Well, for the legal branch there’s a more complex but not much more subtle variation of the Ornstein/Mann thesis that academic lawyers of the progressive persuasion — I repeat myself — have been peddling in recent years. It’s that “a nascent movement of pro-business and libertarian federal judges and think tank activists” have been working for some time to resurrect “a series of legal doctrines that have been dormant since the New Deal,” all “to dismantle the post-New Deal regulatory state” and restore something called “the Constitution in Exile.” Coined by D.C. Circuit Judge Douglas H. Ginsburg in a 1995 Cato Institute article, that term refers to the limited government Constitution we all pretty much lived under for 150 years, before Franklin Roosevelt’s infamous 1937 Court-packing threat cowed the Court into crafting what now passes for “constitutional law” — not to be confused with the Constitution itself.

The legal version of the Ornstein/Mann thesis is on display in, among many other places, The New Republic of May 4, in George Washington University Professor Jeffrey Rosen’s “Second Opinions,” from which the above quotes are taken. Rosen’s title alludes to the six and a half hours of Obamacare oral argument in the Supreme Court at the end of March — a “train wreck” for those who’d confidently predicted the Act’s constitutionality. But it alludes also, and more immediately, to an opinion that came down two weeks later from the D.C. Circuit, Hettinga v. United States. There the three-judge panel upheld a 2005 amendment to a complex system of milk marketing price controls dating back to 1937, the effect of which was to penalize an enterprising dairyman for the benefit of cartelized competitors — an egregious assault on economic liberty. As an inferior court, the panel had no choice, due to long-standing precedents, but to uphold the statute. But the decision generated a blistering concurrence by Judge Janice Rogers Brown, joined by Chief Judge David Sentelle, “notable not only for its anti-statist editorializing,” Rosen writes, “but also because it suggests that the Affordable Care Act will be far from the last federal regulation to be threatened by conservative judicial activism.”

And so we come to the heart of the problem for Rosen and his progressive colleagues — it’s the “conservative judicial activism” against which Obama himself railed after the High Court made it clear that his major legislative accomplishment was constitutionally suspect. Trouble is, though, you’ve got to say more than “activism” if you’re going to make the charge stick; you’ve got to show why, for example, it’s acceptable for judges to defer to the political branches when “mere” economic liberties are at issue, and Rosen’s piece is devoid of any such effort. As the Pacific Legal Foundation’s Tim Sandefur noted, nowhere in his article does Rosen even try to address the substance of the matter. Instead, he gives us a “caricature of a one-sided partisan cabal,” Sandefur says. He continues:

Rosen finds it easier to draw this conflict as a merely partisan one — and to emphasize not the broader legal debates, not whether or not Judge Brown’s criticism of modern constitutional law has merit, but instead simply to emphasize the vulgar personal benefits that the current, distorted constitutional doctrine brings to a specific class of people, and the risk to their personal income, should these disputes gain an audience at the Supreme Court.

Like the Ornstein/Mann thesis, then, it’s all politics, not law. And for good reason: that’s what the New Deal constitutional revolution that Ornstein, Mann, and Rosen are defending was all about — politicizing law. This distinction between economic and noneconomic liberties, which so animates Judge Brown’s trenchant concurrence, stems not from the law of the Constitution but from the famous footnote four of the Court’s 1938 Carolene Products decision. The Court drew it to enable the New Deal’s regulatory and redistributive schemes to pass constitutional muster — through a further distinction between “strict” judicial scrutiny, which the Court would give to statutes implicating noneconomic liberties, and “rational basis” scrutiny, which the Court would employ when economic liberties were at issue, a test that in practice has removed virtually all constitutional protection from the kind of political assault Mr. Hettinga endured.

To be clear, it’s not that Rosen is oblivious to these issues — far from it. In fact, he asks why it was that “a relative moderate” like Judge Thomas Griffith, who did not join Judge Brown’s concurrence, would nonetheless “profess himself ‘by no means unsympathetic’ to the views of the most radical partisans of the Constitution in Exile.” He speculates:

Perhaps because the terms of legal debate have been so dramatically changed by [Georgetown University Law Professor Randy] Barnett. In less than two years, he has managed to transform the notion that the health care mandate was unconstitutional from a far-fetched idea into a principle that may soon be endorsed by all five of the Supreme Court’s conservatives.

Yes, Barnett has made a major contribution to shifting the constitutional debate over the health care mandate; and yes, that debate is just part of a much larger one about the role of the courts in restoring the “Constitution in Exile,” as Rosen goes on to say. But that debate has been going on for far longer than two years, since the mid-1970s, even if many in the insulated legal academy have been slow — or disinclined — to acknowledge it. (Cato’s 1984 conference on “Economic Liberties and the Judiciary” is but one example.) As Barnett wrote recently at the Volokh Conspiracy, comparing academic and media commentary on Obamacare:

The “mainstream” media coverage of the ACA lawsuits has been remarkably fair and balanced throughout. Not only have they been reporting what both sides say, and accurately conveying the color and substance of oral arguments below, but the reporters seem to have a more sophisticated grasp of the legal arguments — and their relative merits — than is evinced by some law professors.

This reluctance to grapple with the substance — casting opponents as “activists” pursuing a political agenda — comes starkly to the fore as Rosen draws his piece to a conclusion. “If the Roberts Court strikes down health care reform by a 5-4 vote,” he writes, the Court would be “resurrecting the pre-New Deal era of economic judicial activism with a vengeance” and returning us to “a time when crusading judges struck down progressive economic regulations in the name of hotly conservative economic doctrines that a majority of the country didn’t favor.”

There you have it. Echoing Justice Oliver Wendell Holmes’s infamous Lochner dissent, Rosen invites us to believe that the old, pre-New Deal Court was invoking economic, not legal doctrines, that the Constitution is neutral on the question of economic arrangements, and that transient majorities can determine those arrangements as they wish, even to the point of cartelizing much of the economy, as progressives have done, and all of that free from any constitutional constraints. That’s politics trumping law with a vengeance, and it undermines the very point of a written constitution.

Roger Pilon is vice president for legal affairs at the Cato Institute and director of Cato's Center for Constitutional Studies.

Nicholas Kristof's Bogus Anti-Beer Crusade by Walter Olson

Fri, 18 May 2012 00:00:00 -0400

Is there a New York Times columnist as insufferably moralistic, or as neglectful of facts that contradict his argument, as Nicholas Kristof? Last week Kristof mounted yet another of his high-horse save-the-children campaigns, this time against beermasters Anheuser-Busch. Kristof asks readers to join his boycott of the leading brewer for (he says) improperly permitting its output to be sold in large volumes in tiny Whiteclay, Neb., just across the state line from the Oglala Sioux's Pine Ridge Reservation in South Dakota. Though notionally dry, the reservation is in practice wracked with alcoholism.

This state of affairs is not new, but is making headlines because a Nebraska lawyer has filed a lawsuit on behalf of the Oglala Sioux tribe against Anheuser-Busch, Miller, and various other defendants. The lawsuit claims $500 million in damages—reparations, really—for letting the malt beverages be sold in places where Pine Ridge residents can so easily get at them.

Unlike Kristof's column and blog post, the Times' earlier reporting on the dispute at least makes a few concessions about how the tribe's alcoholism problem has more complicated origins than the lawsuit would make it seem. For example, it quotes Oglala members who say the unusual Pine Ridge policy of complete alcohol prohibition within its boundaries has been a failure; other reservations, such as the nearby Rosebud, choose to legalize liquor sales, which tends to establish a class of local sellers more interested in staying in the community's good graces. Kristof by contrast appears to have swallowed the lawsuit's contentions in one hearty draft. And lawsuit contentions, like beer itself, can be dangerous when over-quaffed by the naive.

It took me about thirty seconds online to find the brewers' brief on behalf of their joint motion to dismiss the case, filed April 27 more than a week before Kristof's column. Of its many arguments as to why the case should fail, this one jumped out at me:

Nebraska's statutory three-tier distribution system prohibits Brewers from selling to the public at retail and from controlling the chain of distribution in Nebraska. By law, Brewers cannot control their independent, state-licensed wholesalers. Nebraska law also prevents Brewers from controlling the independent, state-licensed retailers or their sales to the general public.

Those familiar with state beer regulation will recognize what's going on here. Most states—specifically those with the "three-tier" system—carefully cultivate the profitability of the licensed beer wholesaling business by limiting the legal rights of brewers (as well as retailers and end-consumers) to work around them. If Nebraska is typical, that would make it unlawful for the brewers to arm-twist the wholesalers through economic threats into curtailing supplies to the Whiteclay border sellers. Maybe the tribe's lawyers will turn out to have some great answer to this objection, but for Kristof not even to bring it up seems surpassingly naive.

And yet naivete runs like an ever-freshening stream through the Kristof oeuvre. Thus the columnist effusively praises a proposal by former Sen. James Abourezk (D-S.D.) "for the Obama administration to extend Pine Ridge reservation lines to include Whiteclay." Were such a proposal to go forward (and wouldn't the tiny hamlet's landowners and residents, to say nothing of the state of Nebraska, have plausible grounds to object?) the stores would have to close down. Victory! But then what would happen when new stores popped up just past the redrawn boundary?

It's fine with me if Kristof doesn't want to drink Bud, so long as I don't have to read him.

Walter Olson is senior fellow at the Cato Institute and has written frequently on FCPA.

How to Kill the Nuclear Triad by Benjamin H. Friedman

Fri, 18 May 2012 00:00:00 -0400

Thanks to weak enemies and economic austerity, the U.S. nuclear triad—the ability to deliver nuclear weapons with land and submarine based ballistic missiles and bomber aircraft— is getting wobbly. As Congress struggles to squeeze the defense budget under self-imposed caps, it should embrace proposals, like the one just offered by the former Vice Chairman of the Joint Chiefs of Staff James Cartwright, to scrap either the bomber leg or land missile leg of triad and reduce the others’ size. That would save billions annually without sacrificing security.

The triad grew from bureaucratic compromise, not strategic necessity. After World War II, nukes seemed like the weapon of the future. The Air Force saw their delivery as part of the strategic bombing mission that had just given their service independence. Their ownership of that mission, and eventually land-based intercontinental ballistic missiles, won them budget share at the expense of other services. The Navy, eager to avoid a becoming something like a transoceanic bus service, found an ingenious way to get into the nuclear game: they put missiles on submarines.

As the Soviet nuclear arsenal grew, academic theorists justified the triad with the logic of survivability—multiple means of delivering nuclear strikes would make it harder for the Soviets to disarm us with a first strike or to blackmail us with that threat. But, as the Cold War wore on, hardened missile bunkers, surveillance technologies and raw numbers of delivery vehicles increasingly guaranteed the U.S. arsenal’s survival from a Soviet strike. And it became harder to imagine that Communist leaders were crazy enough to bet their state on the proposition that they could find and destroy every deployed U.S. nuclear weapon.

These factors explain the steady decline in the arsenal’s size even before the Cold War’s end. Since then, the case for the triad weakened further. One reason is nuclear weapons’ reduced contribution to peace among great powers. Mutually assured destruction contributes less to peace than other pacifiers—capitalism and trade’s reduction of war’s benefits, nationalism and conventional weapons’ heightening of its costs, and people’s gradual appreciation of these changes.

Second, predictions about waves of nuclear proliferation proved false. New nuclear powers deploy only handfuls of delivery vehicles, most incapable of reaching American shores. China remains uninterested in developing an arsenal that threatens ours, building only enough long-range missiles to achieve minimum deterrence. Russia has proven eager to shift resources from nuclear to conventional forces. Our triad strengthens the hand of Russians opposed to that shift.

Third, in recent decades, the U.S. military has vastly increased its ability to precisely target enemy forces with conventional and nuclear weapons. This dramatically reduces the number and explosive force of the weapons needed to hold enemy targets at risk.

These changes allow a far smaller nuclear force—something like General Cartwright’s proposal for roughly 500 warheads primarily based on submarines—to provide all the nuclear deterrence we need. Unfortunately, strategic arguments cannot themselves end the triad. It survives thanks to bureaucratic inertia and the political pull of its beneficiaries—those in the ranks, the shipyards, production lines, bases, and weapons labs. These forces thwarted the only real attempt to shift to a dyad or monad, which was undertaken in President Clinton’s Pentagon.

Political support for the triad may now be weakening. Nuclear weapons provide the Air Force and Navy with little prestige or budgetary advantage because of their irrelevance to modern war. With their budgets under pressure, service chiefs may see nuclear weapons like step-children taking food from hungry, true sons. Obama’s historically modest defense cuts have already produced Pentagon proposals to shift nuclear weapons funding to conventional programs closer to the service’s core missions. The Air Force wants to develop its new bomber initially without the ability to carry nuclear bombs—a subtle invitation to remove a leg of the triad. The Navy hopes to eventually operate ten ballistic missile submarines rather than the current fourteen. And with each boat’s procurement cost alone now expected to exceed $5 billion, the Navy may have to drastically change its design to protect the rest of its shipbuilding budget.

The Obama administration suggests that it will consider big changes in the nuclear arsenal only as part of a new arms control agreement with Russia. That’s a mistake. The Russians are likely to reduce their arsenal if we cut ours, treaty or not. And we should not give them a veto over our fiscal needs.

The opportunity to reform the triad may not last. A deficit deal might soon limit pressure on the defense budget and thus the military’s willingness to shed nuclear missions. Bigger defense cuts today may induce the Pentagon to kill the triad itself.

Benjamin H. Friedman is a research fellow in Defense and Homeland Security Studies at the Cato Institute.

Bumps on the New Silk Road by Malou Innocent, Tridivesh Singh Maini

Fri, 18 May 2012 00:00:00 -0400

As the North Atlantic Treaty Organization (NATO) meets on May 20 in Chicago, coalition partners hope to stabilize Afghanistan with development projects beyond 2014. One initiative is the "New Silk Road," which aims to revamp Afghanistan's ancient position as the regional trade hub linking the West and Far East. But there are several roadblocks to turning this fantasy into reality.

Secretary of State Hillary Clinton proclaimed late last year in Dushanbe, "we want Afghanistan to be at the crossroads of economic opportunities going north and south and east and west, which is why it's so critical to more fully integrate the economies of the countries in this region in South and Central Asia."

The New Silk Road would develop the economic and political connectivity of countries across the region through the improvement of transit and energy infrastructure, the liberalization of trade barriers, and the removal of bureaucratic customs procedures.

While such a project seems feasible at an academic level, U.S. officials have been pushing this scheme since the Silk Road Strategy Act of 1999, with little effect.

First, Afghanistan's instability poses the most daunting challenge. Indeed, April was 2012's bloodiest month for U.S. troops, and 2011 was the fifth straight year in which civilian casualties rose. It is unrealistic to assume that Afghanistan's security will miraculously improve over the next 18 months and beyond, much less that it will yield the stable environment conducive to private sector-led growth any time soon.

Second, the relationship among countries in Central Asia remains strained, making regional political and economic integration that much harder. The border between Uzbekistan and Kyrgyzstan has been closed for nearly 21 months following violence in southern Kyrgyzstan in 2010. Tensions between Tajikistan and Uzbekistan have impacted the economic ties between them. The latter has hiked cargo transit fees five times in the last two years, and Tajikistan too has raised its tariffs twice over the same period.

Unsurprisingly, some regional actors view America's New Silk Road with immense suspicion. Russia, an important member of the Shanghai Cooperation Organization, has been critical of U.S. motives for the initiative, while China, another member, is building its own version of the Silk Road that has legitimacy in the eyes of many in the region.

Finally, Pakistan and Iran, both critical players in the region, have extremely tense relations with the U.S. As Andrew C. Kuchins, one of America's leading experts on Central Asia says, "Iran and Pakistan are skeptical of the New Silk Road strategy to the extent that they view it as a U.S. plan."

Indeed, ties between Washington and Islamabad have deteriorated significantly, especially in the aftermath of Operation Geronimo, which killed al Qaeda leader Osama bin Laden inside Pakistani territory last year. And despite Islamabad's soaring energy needs, in March, Secretary Clinton warned that Washington would impose sanctions if Pakistan pushed ahead with a proposed gas pipeline project with Iran. Such inconsistent policies — of calling for regional integration and subsequently sabotaging it — does not enhance confidence that the U.S. will limit its meddling in the region.

Meanwhile, relations between Washington and Tehran are virtually non-existent. Not only has the U.S. not operated an embassy in Tehran since 1979, but also continually threatens to attack Iran and has repeatedly slapped it with sanctions. On the nuclear issue, both seem unwilling to engage in direct talks, much less make reciprocal concessions.

Iran and Pakistan aside, Washington has few effective instruments to submerge the differences among various countries in the region, most notably between India and Pakistan in the pursuit of common objectives.

The reasoning behind the New Silk Road is that economic incentives will reinforce political integration and long-term stabilization. This, however, puts the cart before the horse. For centuries, Central Asia has been a hotbed of regional competition. Consequently, anything approaching an adequate or even plausible strategy must accept the likelihood that the region's underlying historical rivalries might be immutable. Moreover, America's interests are not the same as that of various countries in the region, and to assume otherwise hinders the ability to shape a coherent regional economic strategy.

The U.S. and NATO officials continue to call for pursuing greater regional diplomacy. They have yet to put forward concrete ideas about the content of such a negotiation that will include all of Afghanistan's neighbors.

Malou Innocent is a foreign policy analyst at the Cato Institute. Tridivesh Singh Maini is an associate fellow at the Observer Research Foundation.

How Entitlements Can Perpetuate Youth Unemployment by Jagadeesh Gokhale

Fri, 18 May 2012 00:00:00 -0400

Persistently high postrecession unemployment is ravaging the economic prospects of younger workers, delaying their skill development and eroding their work ethic. Some pundits have argued for more government spending on job training and infrastructure to speed the recovery of the economy and labor market.

But blaming the recession alone is misguided. We must also address longer-term trends in education, labor, and capital, largely due to government policies. Social Security and Medicare, for example, are shifting wealth away from younger generations, discouraging saving and therefore education and skill acquisition.

That’s not to say that the recession did not play a role. The collapse of the housing and banking sectors and ensuing credit squeeze engulfed the rest of the economy, making a quick recovery difficult, if not impossible. Three years after the recession officially ended, financial institutions and lending remain impaired, constraining firms’ ability to expand and hire.

Apart from the recession, however, long-term labor shifts are hurting employment. Many middle-class jobs have shifted from manufacturing to services over the past two decades. At the same time, the information-technology revolution has made it harder for lower-skilled workers to find higher-paying jobs. Some who were laid off from such jobs continue to demand higher wages, further delaying the recovery of employment.

A declining education system and low savings rates are also hurting employment among the young. The share of workers with postsecondary education leveled off during the 1990s. Moreover, national savings have declined considerably since the ’70s, leaving less capital available to promote employment growth. Now that the gains of the boom years have vanished, the importance of old-fashioned saving and investment has reemerged.

The labor environment of yesteryear is unlikely to return. Henceforth, better pay will be more closely associated with better skills. Workers will have to innovate on the job and use new technologies. Efficiency will become more important as globalization proceeds, requiring workers to continuously update their skills.

The policy implications are clear: We should give workers incentives to acquire the right skills. But how should such incentives be funded?

One key reason for low national savings rates is the constant transfer of massive wealth from younger savers to older consumers. Under current policy, for example, Social Security will shift $20.5 trillion to older generations, funded by younger and future generations’ payroll taxes. Medicare is expected to transfer even more — $27.8 trillion — even with questionable savings under Obamacare. Research shows that very little of this will flow back to younger generations. And by making retired Americans less dependent on their grown children, these benefits give parents less incentive to promote and fund their children’s education and skill acquisition.

What’s the antidote? Long-term measures to help young people acquire more skills and education without penalizing employers or workers. Two examples would be higher taxes on retirees’ Social Security benefits and higher co-pays for Medicare benefits. The resulting revenue could fund tax credits for adults who acquire new professional qualifications and whose children complete high school and college.

The labor market for young people can be strengthened only by encouraging them to acquire skills. The best incentives would be financed not by further taxing workers or employers, but by reversing policies that reduce young people’s savings and capital. This would boost their ability to invest in their own productivity and, ultimately, make Social Security and Medicare more sustainable.

Jagadeesh Gokhale is a senior fellow at the Cato Institute and a member of the Social Security Advisory Board. He is a co-author of Fiscal and Generational Imbalances: New Budget Measures for New Budget Priorities (AEI Press, 2003), Social Security: A Fresh Look at Policy Alternatives (University of Chicago Press, 2010), and The New Health Care Law's Effect on State Medicaid Spending: A Study of the Five Most Populous States, Cato Institute White Paper no. 31, April 2011.

Proposed Reforms Won't Fix Alabama's Immigration Law by Alex Nowrasteh

Wed, 16 May 2012 00:00:00 -0400

Wednesday the Alabama Senate will consider welcome reforms to that state's controversial immigration law. Unfortunately the proposed changes will leave expensive economic regulations largely intact, impeding much needed job growth.

Complaints about the law prompted House Majority Leader Micky Hammon (R-Decatur) to introduce a bill that removes controversial provisions that forced schools to gather information on students’ immigration status and other potential civil liberties abuses. Immigration laws like Alabama’s, however, are largely about regulating businesses and whom they employ — often the most important choice confronting entrepreneurs and the largest part of most business expenses, and the bill does not reach these issues.

The Alabama immigration law makes the vital choice of hiring more expensive and the outcome less certain by mandating that all employers use E-Verify for every hire. E-Verify is an expensive federally run electronic workforce verification system that checks the employee’s identification papers against various federal databases, essentially forcing the employer to ask the federal government for permission to hire the employee.

E-Verify is wrong about four percent of the time, with unauthorized workers slipping through the system or legal workers being caught in its net. On first pass, workers denied permission to work can contest the decision or identify and correct errors and inconsistencies in the worker's identification.

In a late 2010 report, the Government Accountability Office found that many workers filed a Privacy Act Request to discover and correct their identity information in government databases, which takes an average of 104 days to fulfill (as of 2009). If the worker is unsuccessful in contesting the government's decision in a short amount of time, he must be fired.

E-Verify is largely ineffective at weeding unauthorized workers out of the labor force — missing them more than half of the time — but very effective at imposing large costs on employers and American employees. Around one percent of legal American workers are initially denied employment by E-Verify and many of them have to spend many months sorting out the problems — all because the government has forced them to ask permission to work.

Alabama’s immigration law required all employers to enroll with E-Verify in early April, but so far only about 7 percent of them have done so. Arizona mandated that all businesses do the same in 2008. Since that year, only 70 percent of new hires have been run through the system with the other 30 percent hired in the quasi-informal economy thanks to E-Verify. Alabama can expect a similar pattern going forward if it keeps E-Verify.

The only advantage to using E-Verify is that it’s a defense against an even worse punishment in the Alabama immigration law: the so called business death penalty.

Currently, the second time a business knowingly or intentionally hires an unauthorized worker the state revokes all of its licenses and permits. Hammon’s bill gives more flexibility to judges in determining this punishment, but it’s odd that the only utility of one strict business regulation is as a defense against an even worse one.

Alabama’s $5 billion a year agricultural industry, where unauthorized immigrants are a major source of labor, perhaps even a majority of pickers according to some estimates, is already being impacted by E-Verify.

If Alabama farmers had to use legal means to hire workers through the costly and bureaucratic H-2A visa or by raising wages, they will either stop growing or shift production to less profitable machine harvested crops. That reaction to government-created scarcity in the low-skilled labor market is inefficient, unprofitable, and will drain the otherwise healthy profits of the state’s agricultural producers. The right policy solution is one that increases the supply of labor, not further restricts it.

Proponents of Alabama’s immigration law are quick to note that Alabama’s unemployment rate has declined since mid-2011, around the time Alabama’s immigration law was passed. But the unemployment rates in Louisiana and Tennessee also declined over the same period even though they did not pass similar immigration laws. Alabama’s immigration law is not responsible for that improvement in economic conditions, and likely impeded it by placing more regulations on business creation.

Alabama’s immigration law expands the informal economy with E-Verify, increases regulatory uncertainty with the business death penalty, and turns good businesses into lawbreakers. It endangers the state’s agricultural sector and overall economic recovery. Allowing for the freer flow of labor, not further restricting it, is the better policy.

Alex Nowrasteh is the immigration policy analyst at the Cato Institute's Center for Global Liberty and Prosperity.

Questions Not Yet Asked about Mitt Romney by Nat Hentoff

Wed, 16 May 2012 00:00:00 -0400

As Mitt Romney exults in his rise to the very top of the Republican Party, I was struck by a tiny story deep in The New York Times last week. At a campaign stop in Euclid, Ohio, a woman in the audience stood up, arguing that President Barack Obama “is operating outside the (structure) of our Constitution... he should be tried for treason” (“Romney Says Treason Comment Doesn’t Reflect His Views,” Ashley Parker, The New York Times, May 8).

She went on to ask Romney, as I have several times here, “I want to know what you are going to be able to do to help restore balance between the three branches of government and... restore our Constitution in this country?”

In response, “Romney sidestepped the woman’s comments about treason, talking generally about the Constitution.”

What he should have said is: The Constitution breaks down without separation of powers.

There wasn’t a word from Romney about Obama’s specific unconstitutional actions, such as signing into law the National Defense Authorization Act for Fiscal Year 2012, allowing the president to imprison an American citizen indefinitely without trial who is just “suspected of association” with terrorists (“Congress, Obama Codify Indefinite Detention,” Sheldon Richman, The Future of Freedom Foundation, fff.org, Dec. 27, 2011).

As I’ve previously documented, Obama often imposes his will outside the Constitution. But Romney has yet to even mention — let alone rebuke the president for — any of those unconstitutional breaches.

I must add that later on, after his brief dialogue with the woman speaking for the Constitution, Romney emphasized that he did not agree with her that President Obama should be tried for treason.

Even if there were a try for impeachment for treason (bribery, or other high crimes and misdemeanors), Obama can rest easy because there would be far too few members of Congress who’d vote to convict. Democrats are loyal to their leader in such accusations — even those Democrats who stingingly attacked George W. Bush and Dick Cheney for encouraging torture and other U.S. and international crimes but are largely silent about Obama’s assaults on the Constitution.

And with few notable exceptions, such as Ron Paul (who just dropped out of the race), the Republicans campaigning forcefully against Obama’s re-election have avoided any substantive mention of his “operating outside the (structure) of our Constitution” in the name of national security.

However, I was recently startled to discover revealing evidence of Romney’s principles in defining the Constitution and selecting the judges, including those on the Supreme Court, who rule on these issues.

Last month, eminently skilled reporter-columnist Robyn E. Blumner of the Tampa Bay Times disclosed that Mitt Romney had chosen Robert Bork to co-chair his presidential campaign advisory committee on the law, the Constitution and the judiciary (“Don’t let us get Borked,” Tampa Bay Times, April 29).

Reading that, I got up and shouted, “Wow!”

Bork was all over the news when Ronald Reagan nominated him to the Supreme Court in 1987, resulting in a fiery national debate that became more raucous when a bipartisan Senate voted 58-42 to reject his confirmation. I covered that story almost daily and was even on a TV panel that included Bork to discuss it. He was not pleased by my questions.

Among Bork’s interpretations of constitutional issues reaching the high court, he claimed there was no general right of privacy in the Constitution.

The Fourth Amendment is full of typos?

Then there was Bork’s outrage when, in 1996, the Supreme Court confronted the all-male Virginia Military Institute (VMI) with the Constitution’s equal protection of the laws for every American and ordered the public college to admit women.

Romney’s present adviser on the Constitution and judges responded, “VMI is only one example of a feminized court transforming the Constitution.”

Women are third-class citizens? Not up to dealing with the Constitution?

Bork, whom Blumner called Romney’s “simpatico legal thinker,” had also demonstrated that he “supports the constitutionality of literacy tests and poll taxes in state elections — those notorious instruments the South used to keep blacks from voting.”

So where did Blumner get this jarring news of Bork joining Romney’s forces? She told me it’s from an Aug. 2, 2011, press release on Romney’s campaign website: “Mitt Romney Announces Justice Advisory Committee” (www.mittromney.com/press/2011/08/mitt-romney-announces-justice-advisory-committee).

And dig this applause line from the chairpersons of the advisory committee, including Bork: “Mitt Romney... will nominate judges who faithfully adhere to the Constitution’s text, structure and history, and he will carry out the duties of president as a zealous defender of the Constitution.”

This is from Robert Bork?

Among the other members of Romney’s Justice Advisory Committee is Steven Bradbury, a lawyer in the Bush administration’s Office of Legal Counsel who, in 2005, wrote three secret opinions approving exceptionally severe interrogation techniques.

What does Romney think of torture?

I’m also going to find out more of Romney’s views on the Bush-Cheney-Obama presidential state secrets mandates. These mandates prevent trials from proceeding that may embarrass an administration currently dedicated to keeping secret its Constitutional basis for targeting American citizens with drone strikes.

Has Romney said anything about this?

I’ve written that I will vote for Romney to defeat the most dangerous presidential destroyer of American liberties in our history. But what will be the meaning of America to its citizens and the world after just four years of Mitt Romney? Or four more of Obama?

Of course the long-range cruelties of the economy and the health-rationing price of Obamacare will be among the basic issues in the imminent elections. But if either Obama or Romney wins, how much more of our constitutional liberties will ultimately be lost?

Nat Hentoff is a senior fellow at the Cato Institute.

Where's the Accountability? by Michael D. Tanner

Wed, 16 May 2012 00:00:00 -0400

Late last week JPMorgan Chase announced that it had lost some $2.3 billion, and possibly more, as a result of bad investment decisions made by its risk-hedging operation. Predictably, some have seized on this misstep to call for greater regulation of the banking industry.

White House spokesman Jay Carney said: “The president fought very hard against Republicans and Wall Street lobbyists to get Wall Street reform passed... I think that this event merely reinforces why the President was right to take on this fight and why we still need to make sure it’s implemented.” Massachusetts Democratic Senate candidate Elizabeth Warren released a new radio ad warning, “Wall Street isn’t going to change its ways until Washington gets serious about strong oversight and real accountability.” Paul Krugman called JPMorgan Chase “an object demonstration of why Wall Street does, in fact, need to be regulated.”

There is reason to question whether more regulation would, in fact, have done anything to prevent JPMorgan’s losses. Bloomberg notes that bank regulators and the Federal Reserve already had the power to examine the books of the London branch of the investment office, where the trades in credit-derivative indexes were made. And while these investments may have lost money, and may indeed have been unduly risky, such risk hedging is crucial to making it possible for banks to lend money. Comptroller of the Currency Thomas Curry says that it is too soon to know whether the so-called Volcker Rule would have prohibited the trades in question.

Regardless, JPMorgan has already been punished for its mistakes — by the market. The company’s reputation has been damaged, and its share price has dropped roughly 10 percent since the news came out. Its executives, who are heavily compensated through stock options, have lost millions. The top investment officer, Ina Drew, has been forced into retirement, and other corporate officers may also be on the way out. CEO Jamie Dimon must now face angry shareholders. All of this, despite the fact that JPMorgan Chase will still make a profit overall this year.

JPMorgan Chase’s losses show that the private sector sometimes does stupid things. Well, duh! But in a truly capitalist system — not the crony capitalism of bailouts and TARP — the market enforces accountability. Compare that with government.

The federal government borrows more than $2.3 billion every day. But that’s only the tip of the iceberg when it comes to government failure and stupidity. The federal government will spend $668 billion this year on 126 separate anti-poverty programs, but fail to reduce poverty. The federal government will spend another $67 billion on education, but fail to educate our children. Government job-training programs actually leave workers less prepared for employment than before they received the training.

The federal government has managed to run the Social Security program $22 trillion into the red. The health-care programs it operates, Medicare and Medicaid, are models of dysfunction and are driving the country toward bankruptcy. Even the collapse of the housing bubble and the banking failures that followed are traceable, at least in part, to government policies.

Where’s the accountability? Where’s the outrage? Who is being fired? The government drops $535 million on Solyndra (roughly a quarter of what JPMorgan Chase just lost), but Energy Secretary Steven Chu still has his job. The new health-care bill turns out to cost far more than advertised, adding hundreds of billions to the federal deficit, and HHS Secretary Kathleen Sebelius is hardly asked a tough question.

For that matter, when was the last time that the government eliminated a program simply because it didn’t work? The failures of government are too often met with... calls to give the government still more money, power, and control.

Accountability — it’s a capitalist thing.

Michael Tanner is a senior fellow at the Cato Institute and author of Leviathan on the Right: How Big-Government Conservatism Brought Down the Republican Revolution.

U.S. Doesn't Need Industrial Policy by Daniel J. Ikenson

Tue, 15 May 2012 00:00:00 -0400

For a nation whose consumers spend twice as much on services than on goods, and where 90% of the workforce is employed outside the manufacturing sector, the obsession with manufacturing is misplaced.

This romanticized notion about manufacturing's value to the U.S. economy often fosters policies with pernicious long-term economic effects: tax breaks, subsidies, trade barriers and other coddling market distortions.

Even Christina Romer, an architect of President Obama's "stimulus" plan and one who is obviously not averse to government tinkering with the economy, concludes: "American consumers value health care and haircuts as much as washing machines and hair dryers. And our earnings from exporting architectural plans for a building in Shanghai are as real as those from exporting cars to Canada... A persuasive case for a manufacturing policy remains to be made."

Manufacturing apologists erroneously point to China's near-double-digit growth during the sluggish U.S. economic recovery as further evidence that top-down economic policies can ensure economic health.

But China's evolution from subsistence to midlevel manufacturing is not instructive for an economy at the technological fore. Industrial policy is anathema to value-driven innovation, and thus doesn't play to America's strengths.

China engages in industrial policy because it doesn't have the advantages of the U.S., such as a culture that values dissent and experimentation and that has cultivated institutions supporting innovation, branding and entrepreneurship.

With America's pre-eminence in innovation and entrepreneurship still intact, the U.S. is situated at the top of the global value chain. Staying there will require policies that bolster the rule of law, inject greater certainty into the business climate, and encourage the best and the brightest to come and stay in the country. We must treat entrepreneurs as rock stars, not with contempt.

If we really want our companies — manufacturing and otherwise — to be competitive, policymakers should start by reducing the cost of superfluous regulations, frivolous lawsuits and runaway health care costs.

Daniel Ikenson is director of the Herbert A. Stiefel Center for Trade Policy Studies at the Cato Institute.

Mitt Romney: The Foreign Policy of Know-Nothingism by Doug Bandow

Tue, 15 May 2012 00:00:00 -0400

Former Massachusetts Gov. Mitt Romney has become the inevitable Republican Party presidential nominee. Despite the weak economy, he faces an uphill race. It’s never easy to defeat an incumbent president. Moreover, Romney can’t rely on the GOP’s traditional foreign-policy advantage.

Throughout the Cold War Republicans posed as the party of national defense. That stance served the GOP well until the wreck of George W. Bush’s presidency. The public rallied around President Bush when he ordered the invasion of Iraq but soured when it became clear that the war was an unnecessary disaster begun on a lie.

Republican politicians continue to beat the war drums. All of this cycle’s GOP presidential contenders, save Rep. Ron Paul, charged President Barack Obama with weakness, indeed, almost treason. But the public isn’t convinced. The president who increased military spending, twice upped troop levels in Afghanistan, started his own war with Libya, talked tough to North Korea, loudly threatened Iran and Syria, and oversaw the hit on Osama bin Laden just doesn’t look like a wimp.

In fact, a recent Washington Post-ABC poll found that Americans prefer Barack Obama to Mitt Romney on international issues by 53 percent to 36 percent. Republican apparatchiks Karl Rove and Ed Gillespie nevertheless claim, “the president is strikingly vulnerable in this area,” but so far Romney is convincing only as a blowhard with a know-nothing foreign policy. Noted Jacob Heilbrunn of the National Interest, the GOP is “returning to a prescription that led to trillion-dollar wars in the Middle East that the public loathes.”

Romney’s overall theme is American exceptionalism and greatness, slogans that win public applause but offer no guidance for a bankrupt superpower that has squandered its international credibility. “This century must be an American century,” Romney proclaimed. “In an American century, America leads the free world and the free world leads the entire world.” He has chosen a mix of advisers, including the usual neocons and uber-hawks — Robert Kagan, Eliot Cohen, Jim Talent, Walid Phares, Kim Holmes, and Daniel Senor, for instance — that gives little reason for comfort. Their involvement suggests Romney’s general commitment to an imperial foreign policy and force structure.

Romney is no fool, but he has never demonstrated much interest in international affairs. He brings to mind George W. Bush, who appeared to be largely ignorant of the nations he was invading. Romney may be temperamentally less likely to combine recklessness with hubris, but he would have just as strong an incentive to use foreign aggression to win conservative acquiescence to domestic compromise. This tactic worked well for Bush, whose spendthrift policies received surprisingly little criticism on the right from activists busy defending his war-happy foreign policy.

The former Massachusetts governor has criticized President Obama for “a naked political calculation or simply sheer ineptitude” in following George W. Bush’s withdrawal timetable in Iraq and for not overriding the decision of a government whose independence Washington claims to respect. But why would any American policymaker want to keep troops in a nation that is becoming ever more authoritarian, corrupt, and sectarian? It is precisely the sort of place U.S. forces should not be tied down.

In contrast, Romney has effectively taken no position on Afghanistan. At times he appears to support the Obama timetable for reducing troop levels, but he has also proclaimed that “Withdrawal of U.S. forces from Afghanistan under a Romney administration will be based on conditions on the ground as assessed by our military commanders.” Indeed, he insisted: “To defeat the insurgency in Afghanistan, the United States will need the cooperation of both the Afghan and Pakistani governments — we will only persuade Afghanistan and Pakistan to be resolute if they are convinced that the United States will itself be resolute,” and added, “We should not negotiate with the Taliban. We should defeat the Taliban.”

Yet it’s the job of the president, not the military, to decide the basic policy question: why is the U.S. spending blood and treasure trying to create a Western-style nation state in Central Asia a decade after 9/11? And how long is he prepared to stay — forever? On my two trips to Afghanistan I found little support among Afghans for their own government, which is characterized by gross incompetence and corruption. Even if the Western allies succeed in creating a large local security force, will it fight for the thieves in Kabul?

Pakistan is already resolute — in opposing U.S. policy on the ground. Afghans forthrightly view Islamabad as an enemy. Unfortunately, continuing the war probably is the most effective way to destabilize nuclear-armed Pakistan. What will Romney do if the U.S. military tells him that American combat forces must remain in Afghanistan for another decade or two in order to “win”?

The ongoing AfPak conflict is not enough; Romney appears to desire war with Iran as well. No one wants a nuclear Iran, but Persian nuclear ambitiions began under America’s ally the Shah, and there is no reason to believe that the U.S. (and Israel) cannot deter Tehran. True, Richard Grenell, who briefly served as Romney’s foreign-policy spokesman, once made the astonishing claim that the Iranians “will surely use” nuclear weapons. Alas, he never shared his apparently secret intelligence about the leadership in Tehran’s suicidal tendencies. The Iranian government’s behavior has been rational even if brutal, and officials busy maneuvering for power and wealth do not seem eager to enter the great beyond. Washington uneasily but effectively deterred Joseph Stalin and Mao Zedong, the two most prolific mass murderers in history. Iran is no substitute for them.

Romney has engaged in almost infantile ridicule of the Obama administration’s attempt to engage Tehran. Yet the U.S. had diplomatic relations with Hitler’s Germany and Stalin’s Russia. Washington came to regret not having similar contact with Mao’s China. Even the Bush administration eventually decided that ignoring Kim Jong-Il’s North Korea only encouraged it to build more nuclear weapons faster.

Regarding Iran, Romney asserted, “a military option to deal with their nuclear program remains on the table.” Building up U.S. military forces “will send an unequivocal signal to Iran that the United States, acting in concert with allies, will never permit Iran to obtain nuclear weapons... Only when the ayatollahs no longer have doubts about America’s resolve will they abandon their nuclear ambitions.” Indeed, “if all else fails... then of course you take military action,” even though, American and Iranian military analysts warn, such strikes might only delay development of nuclear weapons. “Elect me as the next president,” he declared, and Iran “will not have a nuclear weapon.”

Actually, if Tehran becomes convinced that an attack and attempted regime change are likely, it will have no choice but to develop nuclear weapons. How else to defend itself? The misguided war in Libya, which Romney supported, sent a clear signal to both North Korea and Iran never to trust the West.

Iran’s fears likely are exacerbated by Romney’s promise to subcontract Middle East policy to Israel. The ties between the U.S. and Israel are many, but their interests often diverge. The current Israeli government wants Washington to attack Iran irrespective of the cost to America. Moreover, successive Israeli governments have decided to effectively colonize the West Bank, turning injustice into state policy and making a separate Palestinian state practically impossible. Perceived American support for this creates enormous hostility toward the U.S. across the Arab and Muslim worlds.

Yet Romney promises that his first foreign trip would be to Israel “to show the world that we care about that country and that region” — as if anyone anywhere, least of all Israel’s neighbors, doesn’t realize that. He asserted that “you don’t allow an inch of space to exist between you and your friends and allies,” notably Israel. The U.S. should “let the entire world know that we will stay with them and that we will support them and defend them.” Indeed, Romney has known Israeli Prime Minister Benjamin Netanyahu for nearly four decades and has said that he would request Netanyahu’s approval for U.S. policies: “I’d get on the phone to my friend Bibi Netanyahu and say, ‘Would it help if I say this? What would you like me to do?’” Americans would be better served by a president committed to making policy in the interests of the U.S. instead.

Romney’s myopic vision is just as evident when he looks elsewhere. For instance, he offered the singular judgment that Russia is “our number one geopolitical foe.” Romney complained that “across the board, it has been a thorn in our side on questions vital to America’s national security.”

The Cold War ended more than two decades ago. Apparently Romney is locked in a time warp. Moscow manifestly does not threaten vital U.S. interests. Romney claimed that Vladimir “Putin dreams of ‘rebuilding the Russian empire’.” Even if Putin has such dreams, they don’t animate Russian foreign policy. No longer an ideologically aggressive power active around the world, Moscow has retreated to the status of a pre-1914 great power, concerned about border security and international respect. Russia has no interest in conflict with America and is not even much involved in most regions where the U.S. is active: Asia, the Middle East, and Latin America.

Moscow has been helpful in Afghanistan, refused to provide advanced air defense weapons to Iran, supported some sanctions against Tehran, used its limited influence in North Korea to encourage nuclear disarmament, and opposes jihadist terrorism. This is curious behavior for America’s “number one geopolitical foe.”

Romney’s website explains that he will “implement a strategy that will seek to discourage aggressive or expansionist behavior on the part of Russia,” but other than Georgia where is it so acting? And even if Georgia fell into a Russian trap, Tbilisi started the shooting in 2008. In any event, absent an American security guarantee, which would be madness, the U.S. cannot stop Moscow from acting to protect what it sees as vital interests in a region of historic influence.

Where else is Russia threatening America? Moscow does oppose NATO expansion, which actually is foolish from a U.S. standpoint as well, adding strategic liabilities rather than military strengths. Russia strongly opposes missile defense bases in Central and Eastern Europe, but why should Washington subsidize the security of others? Moscow opposes an attack on Iran, and so should Americans. Russia backs the Assad regime in Syria, but the U.S. government once declared the same government to be “reformist.” Violent misadventures in Kosovo, Afghanistan, Iraq, and Libya demonstrate that America has little to gain and much to lose from another attempt at social engineering through war. If anything, the Putin government has done Washington a favor keeping the U.S. out of Syria.

This doesn’t mean America should not confront Moscow when important differences arise. But treating Russia as an adversary risks encouraging it to act like one. Doing so especially will make Moscow more suspicious of America’s relationships with former members of the Warsaw Pact and republics of the Soviet Union. Naturally, Romney wants to “encourage democratic political and economic reform” in Russia — a fine idea in theory, but meddling in another country’s politics rarely works in practice. Just look at the Arab Spring.

Not content with attempting to start a mini-Cold War, Mitt Romney dropped his nominal free-market stance to demonize Chinese currency practices. He complained about currency manipulation and forced technology transfers: “China seeks advantage through systematic exploitation of other economies.”

On day one as president he promises to designate “China as the currency manipulator it is.” Moreover, he added, he would “take a holistic approach to addressing all of China’s abuses. That includes unilateral actions such as increased enforcement of U.S. trade laws, punitive measures targeting products and industries that rely on misappropriations of our intellectual property, reciprocity in government procurement, and countervailing duties against currency manipulation. It also includes multilateral actions to block technology transfers into China and to create a trading bloc open only for nations genuinely committed to free trade.”

Romney’s apparent belief that Washington is “genuinely committed to free trade” is charming nonsense. The U.S. has practiced a weak dollar policy to increase exports. Washington long has subsidized American exports: the Export-Import Bank is known as “Boeing’s Bank” and U.S. agricultural export subsidies helped torpedo the Doha round of trade liberalization through the World Trade Organization.

Of course, Beijing still does much to offend Washington. However, the U.S. must accommodate the rising power across the Pacific. Trying to keep China out of a new Asia-Pacific trade pact isn’t likely to work. America’s Asian allies want us to protect them — no surprise! — but are not interested in offending their nearby neighbor with a long memory. The best hope for moderating Chinese behavior is to tie it into a web of international institutions that provide substantial economic, political, and security benefits.

Beijing already has good reason to be paranoid of the superpower which patrols bordering waters, engages in a policy that looks like containment, and talks of the possibility of war. Trying to isolate China economically would be taken as a direct challenge. Romney would prove Henry Kissinger’s dictum that even paranoids have enemies.

Naturally, Romney also wants to “maintain appropriate military capabilities to discourage any aggressive or coercive behavior by China against its neighbors.” However, 67 years after the end of World War II, it is time for Beijing’s neighbors to arm themselves and cooperate with each other. Japan long had the second largest economy on earth. India is another rising power with reason to constrain China. South Korea has become a major power. Australia has initiated a significant military build-up. Many Southeast Asian nations are constructing submarines to help deter Chinese adventurism. Even Russia has much to fear from China, given the paucity of population in its vast eastern territory. But America’s foreign-defense dole discourages independence and self-help. The U.S. should step back as an off-shore balancer, encouraging its friends to do more and work together. It is not America’s job to risk Los Angeles for Tokyo, Seoul, or Taipei.

Romney similarly insists on keeping the U.S. on the front lines against North Korea, even though all of its neighbors have far more at stake in a peaceful peninsula and are able to contain that impoverished wreck of a country. The Romney campaign proclaims: “Mitt Romney will commit to eliminating North Korea’s nuclear weapons and its nuclear-weapons infrastructure.” Alas, everything he proposes has been tried before, from tougher sanctions to tighter interdiction and pressure on China to isolate the North. What does he plan on doing when Pyongyang continues to develop nuclear weapons as it has done for the last 20 years?

The American military should come home from Korea. Romney complained that the North’s nuclear capability “poses a direct threat to U.S. forces on the Korean Peninsula and elsewhere in East Asia.” Then withdraw them. Manpower-rich South Korea doesn’t need U.S. conventional support, and ground units do nothing to contain North Korea’s nuclear ambitions. Pull out American troops and eliminate North Korea’s primary threat to the U.S. Then support continuing non-proliferation efforts led by those nations with the most to fear from the North. That strategy, more than lobbying by Washington, is likely to bring China around.

Romney confuses dreams with reality when criticizing President Obama over the administration’s response to the Arab Spring. “We’re facing an Arab Spring which is out of control in some respects,” he said, “because the president was not as strong as he needed to be in encouraging our friends to move toward representative forms of government.” Romney asked: “How can we try and improve the odds so what happens in Libya and what happens in Egypt and what happens in other places where the Arab Spring is in full bloom so that the developments are toward democracy, modernity and more representative forms of government? This we simply don’t know.”

True, the president doesn’t know. But neither does Mitt Romney. The latter suffers from the delusion that bright Washington policymakers can remake the world. Invade another country, turn it into a Western-style democracy allied with America, and everyone will live happily every after. But George W. Bush, a member of Mitt Romney’s own party, failed miserably trying to do that in both Afghanistan and Iraq. The Arab Spring did not happen because of Washington policy but in spite of Washington policy. And Arabs demanding political freedom — which, unfortunately, is not the same as a liberal society — have not the slightest interest in what Barack Obama or Mitt Romney thinks.

Yet the latter wants “convene a summit that brings together world leaders, donor organizations, and young leaders of groups that espouse” all the wonderful things that Americans do. Alas, does he really believe that such a gathering will stop, say, jihadist radicals from slaughtering Coptic Christians? Iraq’s large Christian community was destroyed even as the U.S. military occupied that country. His summit isn’t likely to be any more effective. Not everything in the world is about Washington.

Which is why Romney’s demand to do something in Syria is so foolish. Until recently he wanted to work with the UN, call on the Syrian military to be nice, impose more sanctions, and “increase the possibility that the ruling minority Alawites will be able to reconcile with the majority Sunni population in a post-Assad Syria.” Snapping his fingers would be no less effective.

Most recently he advocated arming the rebels. But he should be more cautious before advocating American intervention in another conflict in another land. Such efforts rarely have desirable results. Iraq was a catastrophe. Afghanistan looks to be a disaster once American troops come home. After more than a decade Bosnia and Kosovo are failures, still under allied supervision. Libya is looking bad.

Even without U.S. “help,” a full-blown civil war already threatens in Syria. We only look through the glass darkly, observed the Apostle Paul. It might be best for Washington not to intervene in another Muslim land with so many others aflame.

Despite his support for restoring America’s economic health, Romney wants to increase dramatically Washington’s already outsize military spending. Rather than make a case on what the U.S. needs, he has taken the typical liberal approach of setting an arbitrary number: 4 percent of GDP. It’s a dumb idea, since America already accounts for roughly half the globe’s military spending — far more if you include Washington’s wealthy allies — and spends more in real terms than at any time during the Cold War, Korean War, or Vietnam War, and real outlays have nearly doubled since 2000. By any normal measure, the U.S. possesses far more military resources than it needs to confront genuine threats.

What Romney clearly wants is a military to fight multiple wars and garrison endless occupations, irrespective of cost. My Cato colleague Chris Preble figured that

Romney's 4 percent gimmick would result in taxpayers spending more than twice as much on the Pentagon as in 2000 (111 percent higher, to be precise) and 45 percent more than in 1985, the height of the Reagan buildup. Over the next ten years, Romney's annual spending (in constant dollars) for the Pentagon would average 64 percent higher than annual post-Cold War budgets (1990-2012), and 42 percent more than the average during the Reagan era (1981-1989).

If Mitt Romney really believes that the world today is so much more dangerous than during the Cold War, he should spell out the threat. He calls Islamic fundamentalism, the Arab Spring, the impact of failed states, the anti-American regimes of Cuba, Iran, North Korea, and Venezuela, rising China, and resurgent Russia “powerful forces.” It’s actually a pitiful list — Islamic terrorists have been weakened and don’t pose an existential threat, the Arab Spring threatens instability with little impact on America, it is easier to strike terrorists in failed states than in nominal allies like Pakistan and Saudi Arabia, one nuclear-armed submarine could vaporize all four hostile states, and Russia’s modest “resurgence” may threaten Georgia but not Europe or America. Only China deserves to be called “powerful,” but it remains a developing country surrounded by potential enemies with a military far behind that of the U.S.

In fact, the greatest danger to America is the blowback that results from promiscuous intervention in conflicts not our own. Romney imagines a massive bootstrap operation: he wants a big military to engage in social engineering abroad which would require an even larger military to handle the violence and chaos that would result from his failed attempts at social engineering. Better not to start this vicious cycle.

America faces international challenges but nevertheless enjoys unparalleled dominance. U.S. power is buttressed by the fact that Washington is allied with every industrialized nation except China and Russia. America shares significant interests with India, the second major emerging power; is seen as a counterweight by a gaggle of Asian states worried about Chinese expansion; remains the dominant player in Latin America; and is closely linked to most of the Middle East’s most important countries, such as Israel, Saudi Arabia, Egypt, Jordan, and Iraq. If Mitt Romney really believes that America is at greater risk today than during the Cold War, he is not qualified to be president.

In this world the U.S. need not confront every threat, subsidize every ally, rebuild every failed state, and resolve every problem. Being a superpower means having many interests but few vital ones warranting war. Being a bankrupt superpower means exhibiting judgment and exercising discretion.

President Barack Obama has been a disappointment, amounting in foreign policy to George W. Bush-lite. But Mitt Romney sounds even worse. His rhetoric suggests a return to the worst of the Bush administration. The 2012 election likely will be decided on economics, but foreign policy will prove to be equally important in the long-term. America can ill afford another know-nothing president.

Doug Bandow is a senior fellow at the Cato Institute and former special assistant to President Ronald Reagan.

Once Again, Break up the Banks by Arnold Kling

Tue, 15 May 2012 00:00:00 -0400

Et tu, Jamie Dimon? The embarrassing announcement of a large trading loss at J. P. Morgan has brought the issue of bank regulation back to the fore.

J. P. Morgan’s announcement was particularly shocking because Morgan was one of the few banks to emerge from the financial crisis with its reputation intact, or even enhanced. In Fool’s Gold, Gillian Tett’s narrative of the financial crisis, she singled out J. P. Morgan and its CEO for praise. Supposedly, although Morgan traders had invented some of the synthetic credit instruments that were at the center of the financial crisis, the bank had behaved more conservatively than its competitors, and Dimon appreciated risk better.

Last Thursday, however, it was Dimon who had to announce one of Wall Street’s biggest losses in years, a $2 billion trading write-down. Based on the public record, I can’t exactly piece together how the loss took place. The losses reportedly were incurred on credit-default swaps owned by J. P. Morgan’s chief investment office, which undertakes hedging. I remember in 1986 Freddie Mac suffered an embarrassing loss incurred by the unit that was hedging its multifamily-mortgage commitments. It turned out that the trader was using his judgment about when to hedge: When he thought interest rates were going up, he hedged; and when he didn’t, he didn’t. What this strategy amounted to was speculation, that is, making bets on positions to which the bank didn’t already have exposure — the opposite of hedging. I assume that something similar took place at Morgan: If they were truly hedging, then the loss on their trades would have been offset by a gain somewhere else in their portfolio.

In Washington, the trading loss at Morgan could lead to several possible reactions.

First, policymakers could ignore the loss. It was big enough to hurt Morgan’s profits, but not big enough to put the bank in jeopardy. However, this does not guarantee that we will never see a larger loss at Morgan, one large enough to threaten the bank’s solvency, or a devastating loss at some other large bank.

Second, policymakers could claim that as Dodd-Frank is fully implemented, regulators will devise means to make it impossible for large banks to fail. This requires confidence in regulators’ having God-like powers to perceive everything from the big picture in financial markets down to the details of how banking units operate. All that would be needed in order to make this work is regulators who know more about banking than Jamie Dimon — who might be rather difficult to find.

Third, policymakers could renew the cry for the “Volcker Rule,” which would prohibit banks from engaging in speculation. The problem here is that the line between speculative activities and “real banking” is often clear only in retrospect. For example, nobody would have said that the mortgage-lending activity of savings-and-loans in the mid-1970s was speculation, but they suffered large losses when interest rates soared. In words often attributed to Warren Buffett, you find out who is swimming naked when the tide goes out.

A final option is to concede that there is no foolproof way to regulate banks. Modern finance is complex and fast-paced. Try as we might, it is impossible to outlaw errors in judgment, overconfidence, misguided innovation, or unforeseen events.

I believe that our best hope lies somewhere other than making our largest financial institutions impossible to break. Instead, I think we need to make our financial system easy to fix. It was with that idea in mind that, writing in National Review two years ago, I proposed breaking up the big banks. J. P. Morgan’s announced loss serves to reinforce my view.

My biggest objection to large financial institutions continues to be what I see as the inevitable collusion of politics and economics that results. When large banks have resources, politicians will be tempted to treat them as piñatas, taking whacks at them in order to extract money to distribute to constituents (see the recent “foreclosure settlement,” or the pressure being placed on Freddie Mac and Fannie Mae to write down principal on loans). When large banks get in trouble, politicians will be tempted to bail them out.

In my view, we do not need the thousands of pages of regulation represented by Dodd-Frank. We do not need to ask regulators to divine the difference between speculation and “real banking,” as envisioned by the Volcker Rule. Instead, we should seek limits on the asset size of individual banks. J. P. Morgan today is about ten times as large as any bank ought to be. The general public should not have to lose sleep worrying about this or any other individual bank’s fate, and with smaller banks, they wouldn’t have to.

Arnold Kling is an adjunct scholar at the Cato Institute and a member of the Financial Markets Working Group at the Mercatus Center at George Mason University.

JPMorgan Losses Do Not Make the Case for Regulation by Mark A. Calabria

Tue, 15 May 2012 00:00:00 -0400

Unsurprisingly, President Obama and others have used the recent $2 billion loss by JPMorgan Chase as a call for more regulation. Obviously, our existing regulations have worked so well that more can only be better!

What the president and his allies miss is that recent events at JPMorgan illustrate how the system should — and does — work.

Let's compare two cases. In September 2003, when warned of problems at Freddie Mac and Fannie Mae, then-House Financial Services Chair Barney Frank stated, "I want to roll the dice a little bit more in this situation." Well, Chairman Frank did indeed "roll the dice," and now the American taxpayer is almost $200 billion poorer.

JPMorgan rolled the dice, betting that the U.S. economy would improve — essentially a bet on Obama's economic agenda. That bet went south. JPMorgan lost $2 billion, one hundredth of the losses so far on Fannie Mae and Freddie Mac.

But the losses at JPMorgan were borne not by the American taxpayer, but by JPMorgan. The losses also appear to have been offset by gains so that in the last quarter JPMorgan still turned a profit.

This is the way the system should work. Those who take the risk, take the loss (or gain). It is a far better alignment of incentives than allowing Washington to gamble trillions, leaving someone else holding the bag.

The losses at JPMorgan have also resulted in the quick dismissal of the responsible employees. Show me the list of regulators who lost their jobs, despite the massive regulatory failures that occurred before and during the crisis. In fact, some of the most incompetent, such as the previous president of the New York Federal Reserve Bank, actually got promotions.

Talk about twisted incentives. In the private sector, you gamble, you take the loss, and you may lose your job and your career. In the public sector, you gamble and the taxpayer takes the hit, and you might even get a promotion out of it.

President Obama has warned that "you could have a bank that isn't as strong, isn't as profitable making those same bets and we might have had to step in." Had to step in? What the recent JPMorgan losses actually prove is that a major investment bank can take billions of losses, and the financial system continues to function even without an injection of taxpayer dollars. It is no accident that many of those now advocating more regulation are the same people who advocated the bailouts. Banks need to be allowed to take losses.

The president also sets up a ridiculous standard of error-free financial markets. All human institutions, including banks and even the White House, are characterized by error and mistake. Zero mistakes is an unattainable goal in any system in which human beings are involved.

What we need is not a system free of errors, but one that is robust enough to withstand them. And the truth is that the more small errors we have, the fewer big errors we will have. I am far more concerned over long periods of calm and profit than I am with periods of loss. The recent JPMorgan losses remind market participants that risk is omnipresent. It encourages due diligence on the part of investors and other market participants, something that was sorely lacking before the crisis.

One should also remember that while JPMorgan lost just over $2 billion, somebody made $2 billion. Net losses in the system were zero. The event was in no way "systemic," even under the very loose definitions pushed by Treasury and the Fed. Someone is correct, they make money; another other party is incorrect, so they lose money.

But it isn't just a gamble. JPMorgan was engaged in hedging activity in the corporate bond market, which ultimately helps increase liquidity in that market; helping corporations to grow and expand employment.

Just as the Dodd-Frank Act used the cover of a crisis to reward special interests and ignore the actual fault lines in our financial system, President Obama and others are attempting to use JPMorgan's recent losses to cover up and distract from regulatory failings. If Dodd-Frank had actually ended Too-Big-To-Fail, as the president promised at the time, then JPMorgan's losses would be irrelevant. Rather than point the finger elsewhere, the president should admit his mistake, call for the repeal of Dodd-Frank and begin the process of actually fixing our financial system.

Mark A. Calabria is director of financial regulation studies at the Cato Institute.

Killers of Banks and Jobs by Richard W. Rahn

Mon, 14 May 2012 00:00:00 -0400

Last week, Jamie Dimon, CEO of the nation’s largest bank, JPMorgan Chase, revealed that the bank had made a $2 billion-plus trading mistake. The bank has more than $2 trillion in assets and made a profit of about $20 billion last year. So it lost one-tenth of 1 percent of its assets and an amount equal to about 10 percent of its income for last year. No big deal, despite all the hand-wringing of the political and media class.

Predictably, Sen. Carl Levin, Michigan Democrat and arguably the most irresponsible member of Congress, immediately issued a press release calling for more bank regulation. One can understand that the bank’s stockholders and board are unhappy with the mistake, because the bank’s stock took the expected hit. Heads are rolling already. That is, the board is fulfilling its responsibilities without more rules from Congress.

Congress has the oversight responsibility for the U.S. government, in much the same way a corporate board has the oversight responsibility for a corporation. Mr. Levin has the responsibility (along with his colleagues) to make sure taxpayer dollars are spent wisely and not wasted or stolen. Medicare, for example, spends more than $500 billion annually. Sen. Tom Coburn, Oklahoma Republican, who, unlike Mr. Levin, tries to be fiscally responsible, estimates that about 20 percent, or $100 billion, of Medicare spending is fraudulent. Other estimates of Medicare fraud, including those of the U.S. government, range between $20 billion and $100 billion. The point is that Mr. Levin and many of his colleagues prefer to spend their time bashing private businesses rather than protecting the taxpayer, which is their responsibility.

Whatever the real or imaginary problem is, Mr. Levin always has one answer: more regulation. There is never enough as far as he is concerned. How has that worked out? He and many others get all worked up about banks becoming “too big to fail,” which is a doubtful proposition to begin with. Yet they are in denial about the fact that their own actions have caused much of the banking consolidation and subsequent problems.

As can be seen in the accompanying table, before the advent of the Federal Reserve (the primary federal bank regulator) in 1913, the United States had more than 26,000 banks. The Fed and the federal government began aggressive bank regulation during the Great Depression in the 1930s, and the regulations and economic policies of the time led to a loss of approximately 40 percent of the nation’s banks. Subsequently, Fed and bank regulatory policies were relatively benign until the 1970s, when the Fed went off the rails again and banks were saddled with anti-money-laundering and other regulations which, in part, caused a further drop in the number of banks. The ever-growing bank regulations of recent years continue to result in a decline in the number of banks, as well as making it more difficult and costly for people to obtain bank accounts. In fact, people who move frequently because of their jobs or other reasons, or Americans living abroad, increasingly find it impossible to open a bank account where they live, causing great hardship.

Both large banks and small community banks — and even non-U.S. banks — must comply with most of the new regulations. A small community bank that engages in traditional banking by accepting deposits from local residents and then lending the money to local businesses and consumers now must comply with the tens of thousands of pages of new banking regulations just like the largest banks, even though the bank wisely may have just a few dozen employees — an impossible task. This fixed cost of regulation is far more burdensome to the smaller banks, helps drive banking consolidation and ultimately ends up with banks “that are too big to fail.”

Mr. Levin and many of his colleagues seem incapable of understanding that much of the banking and financial regulation that they have imposed has been not only counterproductive but downright destructive and is in the process of driving trillions of dollars of foreign investment out of the United States — and the millions of jobs dependent on such investment. They also seem to be willfully blind when one of their own, such as former Sen. Jon Corzine, runs his financial institution into the ground while apparently misusing more than $1 billion of his customers’ assets, which, if true, is criminal in manner. Yet the Obama Justice Department has yet to indict Mr. Corzine.

Rational people understand that bank executives have huge incentives — their jobs, wealth and reputations to begin with — to avoid mistakes that can cause losses, let alone those that endanger the existence of their bank. They don’t need the government to tell them that. Nor do they need the government to tell them to treat their customers and depositors well, because they understand that if they don’t, they will have neither.

In contrast, there is good evidence that government waste, fraud and mismanagement exceed the size of the deficit, but where are the calls by Mr. Levin for heads to roll at the top levels of the Obama administration and for corrective action? Jamie Dimon immediately apologized for making mistakes at JPMorgan Chase and promised corrective action to make sure that it does not happen again. How long will we have to wait for apologies from President Obama and his Cabinet officers and the corrective action to protect taxpayers from the massive fraud and ongoing waste in federal spending?

Richard W. Rahn is a senior fellow at the Cato Institute and chairman of the Institute for Global Economic Growth.

From Watergate to Wedgiegate by Gene Healy

Mon, 14 May 2012 00:00:00 -0400

From Watergate to Wedgiegate — the Washington Post's investigative journalism has sure come a long way. If last week's "expose" on Mitt Romney's prep-school bullying is any indication, from now on the fully informed voter will have to pore over every nasty prank potential candidates committed as kids.

Thanks to the Post, the punditocracy spent the better part of last week debating the forcible haircut that Romney gave a fellow student 47 years ago. The incident in question makes teenaged Mitt look like an abusive jerk. But it's not clear what it tells us about Romney's character nearly five decades later.

The story struck a chord however, perhaps because it comes amid massive state and federal efforts to eliminate bullying in our nation's schools.

No doubt some schools should do a better job disciplining or expelling children who abuse their peers, but much of the current anti-bullying crusade smacks of the misguided idea that every human problem can be sorted out with zero tolerance policies and skads of social workers.

Savor the irony that it was the pugnacious New Jersey Gov. Chris Christie — famous for bellowing at constituents — who in 2011 signed the nation's most sweeping anti-bullying law. The Anti-Bullying Bill of Rights mandates training programs for school employees and students, grades school districts on compliance, disciplines teachers who "should have known of an incident," and requires the appointment of "school liasion[s] to law enforcement." One New Jersey district has even formed a partnership with the local Crime Stoppers hot line, allowing middle-schoolers to report suspected bullying to the police via text message or email.

President Obama, who on the first day of school in 2009 took time out from running two wars to have himself piped into the nation's classrooms, urging students "to stand up for kids who are being teased," is working hard to catch up to Christie.

In a 2011 letter to the nation's school boards, Department of Education Assistant Secretary for Civil Rights Russlynn Ali outlined the administration's federal anti-bullying policy. As Competitive Enterprise Institute legal scholar Hans Bader noted at the time, the document "defined 'harassment' so broadly as to reach both speech protected by the First Amendment, and conduct the Supreme Court says does not legally qualify as harassment."

Indeed, the definition of bullying offered on the administration's website, stopbullying.gov, includes "spreading rumors," "attacking someone... verbally," and even "excluding someone from a group on purpose." This may be difficult to police.

More concerning still are the efforts to combat bullying — broadly defined — among young adults and grown-ups.

In 2010, New Jersey Democrats Sen. Frank Lautenberg and Rep. Rush Holt introduced the federal Tyler Clementi Higher Education Anti-Harassment Act, named after the Rutgers University student who committed suicide that year. The Clementi case was tragic, but the statute in question validates Radley Balko's axiom that "Laws named after crime victims and dead people are usually a bad idea." The law's broad wording would have the effect of reinvigorating campus speech codes that have come under constitutional challenge for violating the First Amendment.

Meanwhile, according to the Workplace Bullying Institute, legislation has been introduced in 17 states that would allow employees to sue when their boss is a jerk. One such law, passed by the New York Senate in 2010, proscribes behavior "that a reasonable person would find to be hostile, offensive and unrelated to the employer's legitimate business interests."

At its best, the anti-bullying movement has made progress disciplining truly abusive behavior. At the extremes, however, it resembles an effort to take the rough edges off of life by smothering school and workplace interactions with bureaucrats and lawyers.

As one New Jersey school administrator told the New York Times, "kids have to learn to deal with conflict." That goes double for adults.

Gene Healy is a vice president at the Cato Institute and the author of The Cult of the Presidency: America's Dangerous Devotion to Executive Power.

Eduardo Saverin, Not the U.S. Government, Is Entitled to the Wealth He Earned by Doug Bandow

Mon, 14 May 2012 00:00:00 -0400

Facebook is going public and a number of people are going to get very rich. But one of them, Eduardo Saverin, will no longer be an American citizen.

The Brazilian-born Saverin—who moved to America in 1992 and became a citizen in 1998—originally owned a third of Facebook’s shares, but was squeezed out of the company. His apparent betrayal by Mark Zuckerberg was dramatized in the movie The Social Network.

Still, Saverin didn’t do badly. He ended up owning around ten percent of the enterprise, some portion of which he sold off to help finance a variety of start-ups in America and a lavish lifestyle in Singapore, where he moved in 2009. Now he stands to make $2 billion to $4 billion, depending on how many shares he still owns.

He also was among the 1780 Americans who renounced their U.S. citizenship last year. That compares to just 235 in 2008. Timothy Burns, a tax lawyer in Hong Kong, explained: “Fifteen or 20 years ago there was a big rush to make sure your kids became U.S. citizens, for access to U.S. schools for example. Now we’re seeing just the opposite.”

Saverin’s spokesman, Tom Goodman, blandly explained: “Eduardo recently found it more practical to become a resident of Singapore since he plans to live there for an indefinite period of time.” But that only explains why Saverin lives in Singapore, not why he dropped his American citizenship. The reason for his renunciation likely is taxes. Although Washington still hits up departing citizens for a tax on any unrealized capital gains—my Cato Institute colleague Dan Mitchell unkindly compared this to the “exit tax” imposed by German Nazis and Soviet Communists on departing Jews—the estimated value of his holding pre-public offering was significantly less than what he is about to realize.

Fewer people also might be seeking U.S. citizenship. International tax attorney Andrew Mitchel said: “My advice to, say, a small-businessman abroad would be to think twice about acquiring U.S. citizenship.” In his view the benefits might not be worth the hassle: “Many of these people do not realize what that means for their businesses until they start dealing with the IRS.”

Of course, most people are going to think long and hard before abandoning American citizenship. As my friend Bruce Bartlett points out, such a decision is complex, and “while there is no doubt that some people do migrate solely because of taxes, the number is small even when it doesn’t involve a loss of citizenship.” Indeed, the number of Americans renouncing their citizenship fell from 2005 to 2008 before rising dramatically. A number of studies dismiss tax rates as a decisive factor in causing people to move.

However, economist Arthur Laffer and Wall Street Journal writer Stephen Moore looked at migration among American states and concluded: “Dozens of academic studies—old and new—have found clear and irrefutable statistical evidence that high state and local taxes repel jobs and businesses.” Moreover, Mitchell observed, there’s “a lot of evidence of taxpayers escaping countries controlled by politicians who get too greedy.” In fact, France’s new president, Francois Hollande, has proposed pushing the top tax rate up to 75 percent, sparking interest among high earners in moving elsewhere in Europe, including to Great Britain. Ironically, a few years ago Britain’s top tax rate of 50 percent, since reduced, pushed wealthy entrepreneurs to France, as well as the Chanel Islands, which acted as tax havens.

The wealthier people are, the greater the role that economic incentives play in encouraging them to move abroad. Observed Richard Weisman, head of Baker & McKenzie’s tax practice, “The tax cost, complexity and the traps for the unwary are among the considerations.”

For instance, the U.S. is the only country which taxes worldwide compensation. Other nations limit their claim to a share of money earned within their borders. America’s corporate tax rate also is the world’s highest. Tax rates on income, dividends, and capital gains will rise next year if the Bush-era reductions are not extended. And if Congresses and Presidents continue today’s borrow-and-spend policies, big future tax hikes are inevitable.

On top of that, Washington has embarked upon a costly crusade around the world to combat tax evasion in America. One estimate is that individuals and companies use “tax havens” to deprive Washington of around $100 billion a year. That’s real money, but still not a lot compared to this year’s estimated deficit of $1.2 trillion.

However, any revenue raiser is seen as a better option than—perish the thought!—cutting government spending. So the U.S. government hasn’t let financial privacy, bank secrecy, or foreign sovereignty get in the way of its campaign to wring more money out of U.S. citizens. The misnamed “Patriot Act” imposed regulatory requirements which punished law-abiding Americans abroad in the name of combating terrorism. Washington then enacted detailed reporting rules on foreign bank accounts to flush out hidden assets. Tax attorney Phil Hodgen explained: “This system is widely perceived as overly complex with multiple opportunities for accidental mistakes, and life-altering penalties for inadvertent failures.”

Uncle Sam’s latest effort is the Foreign Account Tax Compliance Act, which takes effect on January 1. FATCA imposes reporting requirements on financial institutions overseas when dealing with U.S. citizens. This turns foreign firms into agents of the IRS, imposing compliance costs and creating legal risks. “It’s too complex, too challenging,” explained Renato de Guzman, CEO of Bank of Singapore. Weisman complained that “The U.S. is outsourcing a tax-compliance function, which is enormously expensive.” As a result, Bank of Singapore, DBS Group Holdings Ltd., Deutsche Bank AG, and HSBC Holdings Plc have begun turning away business with Americans. ABN Amro Bank, BNP Paribas, and Credit Suisse say they are studying the issue.

In Singapore—where Saverin is based—rejecting American clients is “quite a prevailing sentiment,” observed de Guzman. “I don’t open U.S. accounts, period,” said Su Shan Tan of DBS, the largest lender in Southeast Asia. “We have enough business in Asia, so we don’t want to make our lives too difficult,” admitted de Guzman. Matthew Ledvina, an American tax lawyer in Switzerland, explained: “It’s too risky to deal with Americans abroad.” By reducing investment and lending opportunities in an increasingly global world, Washington is punishing wealthier and more entrepreneurial Americans. Where U.S. banks don’t operate, Americans might find financial services simply unavailable. Warned Marylouise Serrato, executive director of American Citizens Abroad, “Americans either will not be allowed to enter into international partnerships or live and work overseas, and will be replaced by foreign nationals who do not have these limitations.” “We have become toxic citizens,”complained Andy Sundberg, of the Overseas American Academy in Geneva.

Taken together, taxes and regulation provide a potent reason to leave the U.S. legally as well as physically. Brian Knowlton of the New York Times wrote that “Amid mounting frustration over taxation and banking problems, small but growing numbers of overseas Americans are taking the weighty step of renouncing their citizenship.” An Ohio entrepreneur working in Switzerland told the Wall Street Journal that “The tax is only a small part of the issue. It’s the overall regulatory environment.”

What was once unthinkable now is an option. Bloomberg’s Giles Broom reported, “Shunned by Swiss and German banks and facing tougher asset-disclosure rules under [FATCO], more of the estimated 6 million Americans living overseas are weighing the cost of holding a U.S. passport.” Admitted Jacki Bugnion, also of ACA: “Before, no one would dare mention to other Americans that they were even thinking of renouncing their U.S. nationality. Now, it is an openly discussed issue.” She worried that “we are now seeing only the tip of the iceberg.”

Of course, those who sacrifice their citizenship often are dismissed as greedy tax traitors or economic Benedict Arnolds. Speaking of companies which reincorporated overseas, Sen. Charles Grassley (R-Iowa) declared: “These expatriations aren’t illegal, but they’re sure immoral.” After all, what kind of person or firm would put money before being an American?

Yet as Mitchell put it, “Attacking those who expatriate is the fiscal version of blaming the victim.” Being an American is a wonderful thing. But that is because what America is, or, at least, is supposed to be: the proverbial land of the free and home of the brave, which protects life, liberty, and property, provides opportunity, and values entrepreneurship.

If America stops being these things, then it loses its claim to the loyalty of its citizens.

America has provided a fertile environment in which Eduardo Saverin and others could get rich. In turn, their creations, such as Facebook, provided enormous benefits for Americans. The fact that such people have taken profitable advantage of America’s opportunities does not mean that they owe extra tribute to America’s governments, especially Washington.

Yes, localities provide services, including police protection. State courts enforce contracts. The federal government deters attack from foreign enemies. But these essential duties could be provided at a fraction of the current cost. Government today does as much to hinder as promote economic growth.

For instance, public education fails to prepare many students for work in a global economy. Economic, social, and other regulations are unnecessarily complex and costly. Laws and rules often are imposed to advantage influential economic interests, including competitors. Trade policy is as much about interrupting and controlling commerce as encouraging it. Success, as in the case of Microsoft, sometimes results in a visit from federal antitrust lawyers.

And then there are taxes.

Nevertheless, the case for remaining an American would be stronger if the exactions from government were well-spent. Billionaire Mark Cuban argued last fall that the “most patriotic thing you can do” is “bust your ass and get rich. Make a boatload of money. Pay your taxes.” But that makes little sense when the political system has degenerated into organized looting.

The way taxes are (mis)used is conveniently forgotten by those who campaign to squeeze as much as possible from producers, especially the “rich.” For instance, William B. Barker of Penn State’s Dickinson School of Law complained about the “ideology of liberty” and “moral perspective that supports a right to avoid over a duty to pay a fair share of taxes.” Sen. Grassley insisted that “Everyone ought to be pulling together. If companies don’t have their hearts in America, they ought to get out.” Decades ago New Deal Treasury Secretary Henry Morgenthau, Jr., opined that “too many citizens want the civilization at a discount.”

Yet those who most loudly shout about fairness and the public good usually are the most covetous and least civilized participants in the political process. Instead of ensuring that government does well the few things that it must do, spendthrift politicians constantly push to expand state power. Lawmakers toss away prodigious amounts of every taxpayer’s earnings to reward campaign supporters, win support from constituents, enrich favored interests, enhance political influence, expand personal power, and sometimes even receive payments, jobs, and other benefits in return. The real greed is not seeking to keep more of the money one has earned, but demanding the right to give away the money others have earned.

Indeed, the bulk of federal spending is redistribution, and not to the poor. The biggest welfare programs are for the middle class—Social Security and Medicare. Although both were sold as “social insurance,” in reality both are inter-generational transfer systems and operate like the infamous Ponzi scheme, paying beneficiaries with money collected from current workers.

Better-off Americans also collect a laundry list of business, education, and housing subsidies. Washington’s generous support for home buyers was an important cause of the 2008 financial crisis. Moreover, the budget is filled with corporate welfare: all manner of grants, loans, loan guarantees, loan insurance, and other subsidies for businesses, big and small alike. Do you want start-up money? Cheap credit? Free advertising? Just go to Washington.

The “defense” budget does more to protect other nations than America. The U.S. underwrites a large military, expansive international base structure, and manifold foreign troop deployments. Yet on September 11, 2001 the Department of Defense was unable to defend America. So Congress created the Department of Homeland Security to do real defense. A decade later Pentagon continues to devote most of its resources to subsidizing wealthy allies throughout Asia and Europe and rebuilding failed Third World states and enormous cost—and ultimately enriching Dwight D. Eisenhower’s famed “military-industrial complex.”

Alas, politicians’ attempt to extract more money from the population never stops. Last year Sen. Barbara Boxer (D-Cal.) advanced legislation to deny or revoke the passport of people who owed back taxes. The proposal didn’t even require a formal charge of tax evasion. Just the government’s claim that money was owed. She wants America to become like the Eagles’ famous Hotel California: you can check out whenever you want but you can never leave!

In fact, Americans have every right to avoid (which is different from evade) taxes. As Judge Learned Hand, who served on the federal appellate court, wrote in a 1934 case: “Anyone may arrange his affairs so that his taxes shall be as low as possible; he is not bound to choose that pattern which best pays the treasury. There is not even a patriotic duty to increase one’s taxes. Over and over again the courts have said that there is nothing sinister in so arranging affairs as to keep taxes as low as possible.” Indeed, Americans have a patriotic duty to reduce the amount of money politicians are able to appropriate and misuse.

Eduardo Saverin may not be spending his money wisely—he is likely to find out just how loyal his “friends” are if he ever runs out of cash. But he, not the U.S. government, is entitled to the wealth he earned. As more Americans renounce their citizenship to avoid high taxes and harsh regulations, Washington should respond by lightening the burden. America is worth living in because of what it is, not because of what the government does.

Doug Bandow is a senior fellow at the Cato Institute and former special assistant to President Ronald Reagan.

Corruption And Dynasties by Deepak Lal

Sat, 12 May 2012 00:00:00 -0400

In this column I shall discuss two themes that have become a regular part of a very confused Indian political discourse: corruption and the role of political and business dynasties.

There are two ways in which one can obtain an income: by “making” or by “taking”. The first refers to the usual economic means of earning a living in a competitive marketplace: the stuff of economics, and little more needs to be said about this benign process.

The second is a major feature of politics, and will be my main concern. Given the necessity of granting the state a monopoly of coercion and the power to tax (to prevent Hobbesian anarchy), it is best seen as a legal and essential Mafia-type protection racket, however decorously clothed. For, through the provision of order by providing the essential public goods of law and order, a functioning state aids the process of “making”. But given its power to tax, there is always the temptation to fleece the fattened “prey” by maximising the state’s net revenue to be used for its own purposes. This potential difference between the “takings” (which can be direct or indirect) and the genuine need for the public goods needed for “making” is the essential source of corruption.

This implicit surplus can take many forms: from the direct collections of monarchs to be used for their palaces, wives and mistresses, to the rent-seeking of modern day polities. The essential dilemma of politics — to which no one has found a solution to date — is how to prevent the state from “taking” more than is needed for maintaining the order that facilitates the “making” of its citizens, and using the surplus for its own purposes — whether personal appropriation or redistribution to buy “votes” — or, in short, to end corruption.

The link between corruption and dynasties is provided by another fundamental aspect of the human condition: the selfish gene. This may moderate the predatory “takings” by the state. Humans being mortal, it would be rational for a predatory incumbent to raise his/her takings from his/her prey in the later part of his life, even if this threatens his/her ownership of the natural monopoly — which is the state — from internal or external contestants. But if the individual predator cares about his/her genes embodied in his/her progeny, he/she will wish to create a dynasty where his/her natural monopoly in coercion is passed on to his/her kin. This dynastic motive will then prevent the ruler from acting myopically, allowing the natural monopoly to become contestable by raising the takings above the long-run sustainable level. But as this level of naturally sustainable surplus (or rent) and the accompanying tax burden is necessarily uncertain, it is as likely that, ceteris paribus, cycles of fiscal predation and thence the rise and fall of dynasties could emerge, as has happened in India for millennia (see my The Hindu Equilibrium: India c.1500 BC-2000 AD, Oxford, 2005, available on OSO). The recent political turmoil faced by the incumbent Indian dynasty could be seen as part of this historical cycle. But these dynasties may not necessarily be malign in their prime from the viewpoint of citizens (the “prey”).

The same dynastic motive underlies the rise and fall of business dynasties involved in the relatively benign processes of “making”. Nor is the role of such dynasties in the economy necessarily to be decried. One of the major problems of controlling enterprise emerges once the capital requirements for setting up a business grow beyond the means of small owner-managers. The rise of shareholder capitalism through joint-stock companies allows the agglomeration of smaller bundles of wealth dispersed among the population to overcome this problem. But this raises the well-known agency problem whereby the dispersed shareholders cannot control a management set on using the firm’s profits for its own ends rather than those of shareholders. Those business dynasties with a large agglomeration of wealth that succeed in maintaining a link between ownership and control through various devices have been able to overcome this problem.

All dynasties, however, are dependent upon the genetic lottery, which determines the quality of the successors of the founding dynast. With the reversion to the mean in the available genetic pool, the quality and ability of the successive generations of the dynasty cannot be assured. Hence the usual pattern of “rags to riches to rags”within a few generations of most business dynasties.

If neither political nor business dynasties are necessarily malign, the interaction of their respective entrepreneurs could be, if the political “takers” co-opt the business “makers” by providing them a share in state-generated rent-seeking. This is most likely if the survival of the incumbent political predator depends upon obtaining a share in the “makings” of the business entrepreneur. If, as in India, the election rules set limits on the financing of electoral candidates, there is a potent incentive for existing and potential political incumbents to use various tactics to obtain illegal contributions from legitimate businesses. It is an open secret that in India the necessary electoral expenses greatly exceed those legally permitted. So, all electoral aspirants need black money, raised by themselves and their families or their parties. This is the ultimate source of the pervasive corruption in the polity being decried. Going after foreign bank accounts, corrupt officials and bureaucrats, or setting up Lok Pals, cannot cure this malaise given the powerful incentives to generate and obtain these rents to gain or stay in power.

Instead of moralising and hoping to change human nature, there are two major means of reducing some of the incentives for “taking”. First, to limit policies giving discretion to officials. Thus, the recent Budget will have raised the dowries of entrants to the Indian Revenue Service! Second, to follow the recent example of the United States, where all political donations — of any size, and from and to anyone — are legal, but have to be declared. This would remove the ultimate source of corruption, to which even the most honest politician, faut de mieux , has to turn a blind eye.

Deepak Lal is the professor of international development studies at the University of California, Los Angeles, and a senior fellow at the Cato Institute.

UN Indian Land Claims Hatched on Campus by Walter Olson

Fri, 11 May 2012 00:00:00 -0400

The story made headlines abroad last week, but for some reason not so big a splash in the U.S. itself. “US should return stolen land to Indian tribes, says United Nations,” blared Britain’s Guardian. As the BBC explained:

A UN special rapporteur has called for the US to restore tribal lands, including the Black Hills of South Dakota, site of Mount Rushmore.

James Anaya announced the recommendation at the end of a 12-day tour, during which he met tribal leaders and government officials.

Mr. Anaya, the U.N. rapporteur, was sent on his mission by none other than the U.N. Human Rights Council, notorious, as Doug Bandow has written, for being “dominated by human rights abusers and their enablers.” (Fidel Castro has a seat, as did Libyan dictator Moammar Qaddafi until his overthrow.) What you wouldn’t have realized from most of the news reports — an exception was Claudia Rosett’s — is that Anaya is not just parachuting in from some U.N. redoubt in Geneva or the Hague. He’s an American law professor based at the University of Arizona and active in particular in the school’s Indigenous People’s Law and Policy Program, which he drew on to support his U.N. probe (he’s due to report to the Council itself this fall).

There’s a wider story here, which I told at some length in Chapters 10 and 11 of my book “Schools for Misrule” last year. In the 1970s, with inspiration from the law schools and backing from the Ford Foundation and other liberal funders, some advocates began a sustained effort to resuscitate old Indian land claims (often in the process casting a cloud on the title of European-descended occupants who have farmed or ranched the land for one or even two centuries). After years of havoc and uncertainty of rights, the U.S. courts in the past decade came down against the tribal claims, ruling that they are grounded neither in the Constitution nor in applicable statutory law. As it became clear that the land-claim litigation would fail in U.S. courts, advocates launched a new strategy of involving the U.N. system and other international organizations on the grounds that to deny the tribes the right to reoccupy old lands would be to violate their international human rights. Very helpful in this process has been the advance of a document called the U.N. Declaration on the Rights of Indigenous Persons (UNDRIP), which the U.S. long opposed and then, in an Obama turnabout last year, decided to support.

The law school at the University of Arizona has played a surprisingly prominent role through this process. It’s home to Ford and MacArthur Foundation honoree Robert A. Williams, Jr., whose 2005 book “Like a Loaded Weapon: The Rehnquist Court, Indian Rights, and the Legal History of America” argued for pursuing an international-law path to tribal land and sovereignty claims. The Arizona law school represented the Western Shoshone tribe in a complaint to the U.N. over a denied land claim, which led to a 2006 ruling by the U.N.’s Committee for the Elimination of Racial Discrimination (CERD) that the U.S. was in the wrong and should negotiate concessions to the tribe. It was hailed as the first victory for Indian complainants against the U.S. before the U.N. Now the plaintiff’s counsel of a few years back re-surfaces as the official instrument of a U.N. body, a revolving-door arrangement that is actually quite typical of the international human rights establishment, where a rather small band of crusading law professors, “civil society” activists and Guardian readers around the world seem to take turns investigating each other’s, or as the case may be their own, countries for putative human rights violations.

Per the Guardian, Anaya got a rather chilly reception on Capitol Hill: while he was allowed to brief a Senate panel on Indian affairs, “no members of Congress would meet him” individually. On the other hand, “Anaya said he had received ‘exemplary cooperation’ from the Obama administration.” Why is that somehow less than reassuring?

Walter Olson is senior fellow at the Cato Institute and has written frequently on FCPA.

Time for US to Normalize Ties with Pyongyang by Ted Galen Carpenter

Fri, 11 May 2012 00:00:00 -0400

With past and present policies clearly not working, it's time for a bold approach

US leaders have painted themselves into a corner regarding policy toward North Korea. For more than two decades, Washington's strategy has been to offer Pyongyang a stark choice: give up its nuclear program or face ever-greater isolation from the international community. President Barack Obama was especially blunt about presenting that alternative to North Korean leaders during his early weeks in office.

That approach clearly has not worked. Indeed, the Obama administration has created the risk of the worst possible outcome — a North Korea that is a nuclear power but lacks meaningful international economic ties, and has no formal diplomatic or economic relations with the US. It would be a blueprint for even more dangerous tensions on the Korean Peninsula and throughout East Asia than we face currently.

A new, radically different approach is needed. Instead of continuing the futile strategy of isolating North Korea, Washington should adopt a comprehensive strategy to normalize relations with Pyongyang. And China has a crucial role to play as the primary facilitator in that process.

The US would need to offer a number of conciliatory measures. Perhaps the most important step is to change the atmosphere of unrelenting hostility between the two countries. North Korean leaders undoubtedly fear that Washington might use its vast military power to intimidate Pyongyang or even engage in forcible regime change, as it did with Saddam Hussein. To reduce tensions, the Obama administration should offer to sign a non-aggression pact with North Korea. US leaders should also propose a peace treaty formally ending the armed hostilities on the Korean Peninsula.

This is where China's assistance could be extremely valuable. Since there is a pervasive lack of trust between the US and North Korean governments, it is predictable that the Kim government might react to such a constructive proposal with skepticism, perhaps even outright suspicion of a trap. Beijing can help overcome that problem, urging the North Korean government not to pass up such an important, unprecedented opportunity.

Realism on that score is necessary, though. US opinion leaders tend to overstate China's influence on North Korea. A few years ago, New York Times columnist Thomas Friedman asserted that the Chinese government could end the North Korea nuclear crisis with a simple phone call to Pyongyang. That attitude, which is fairly typical in the American foreign policy community, is absurd. Beijing does not, and cannot, dictate to the North Korean government.

But to the extent that North Korean leaders trust anyone outside their own country, China enjoys by far the greatest degree of trust. The Chinese government can use that influence to, in a quiet, subtle fashion, induce Pyongyang not to spurn an olive branch from Washington.

In addition to offering a non-aggression pledge and a peace treaty formally ending the Korean War, the Obama administration should propose to end the diplomatic chill on the peninsula. During the Cold War, Washington repeatedly proposed "cross recognition" of the two Korean governments. In other words, Moscow and Beijing would recognize Seoul, and Washington would recognize Pyongyang. That step was considered a prelude to North and South Korea establishing diplomatic relations with each other. The suggested pattern was similar to the thaw in relations that occurred regarding the two Germanys.

Once the Cold War ended, Beijing and Moscow did establish diplomatic — and extensive economic — relations with South Korea. But Washington reneged on its promise regarding North Korea. That decision needs to be reversed. The Obama administration should agree to establish formal diplomatic relations with North Korea, including the setting up of embassies and consulates in both countries.

Finally, Washington needs to terminate its economic "cold war" against North Korea. The administration should commit to rescind most of the current US economic sanctions on Pyongyang and to support the repeal of UN resolutions authorizing international economic sanctions. Some of those actions can be implemented by executive order. Others will require congressional approval, which is admittedly uncertain. But it is imperative for the Obama administration to do what it can through executive orders, and to go on record as favoring the normalization of economic relations.

Of course, Washington will want some concessions from Pyongyang in exchange for these proffered benefits. The most important goal would be with regard to the nuclear issue.

Realism is crucial regarding that point. The notion that Pyongyang would abandon all nuclear ambitions was overly optimistic from the outset. Yet that has been a key premise of the Six-Party Talks. Given that North Korea probably has processed enough plutonium over the past decade to build several nuclear weapons, and has an active uranium-enrichment program, such a maximalist goal is now completely detached from reality.

Washington should instead focus on getting North Korea to stop short of actually deploying an arsenal. That status of "one screwdriver turn away" from being a full-fledged nuclear-weapons power is hardly ideal, but it's probably the best US leaders can expect from North Korea — even in exchange for a new, normal relationship between the two countries.

A second concession the Obama administration should seek is a redeployment of North Korean military units away from the demilitarized zone on the border with South Korea. The South Korean government and people regard the current deployment as deeply threatening to the country's main population center — the Seoul metropolitan area. In a new environment of normalized relations, Pyongyang would have no legitimate justification for continuing its forward deployment of forces.

Again, China can play an important, constructive diplomatic role regarding that issue. Chinese officials need to convey to their North Korean counterparts that the redeployment is a necessary and appropriate concession, both on its own terms and to make certain that hawks in the US do not have a rallying cry to defeat the proposed normalization of relations between Washington and Pyongyang.

The Obama administration would be taking some considerable policy and political risks to offer a new relationship to North Korea. American advocates of the status quo will inevitably argue that the US would be making major concessions while getting very little in return. But it is evident that the current policy has not worked in the past, is not working now, and has little prospect of working in the future. Given that sobering reality, it is time to try something new.

And if Pyongyang reacted favorably, the outcome would be one of greatly reduced tensions on the Korean Peninsula — one of the most dangerous remaining military flashpoints in the world. That would be a great benefit to both Koreas, China, the US, and the entire East Asian region.

The bottom line is that Washington needs to adopt a bold alternative to the current strategy. When a policy has been in place for decades and is producing utterly sterile results, it is sheer folly to advocate staying the course.

Ted Galen Carpenter, a senior fellow at the Cato Institute, is the author of eight books on international affairs, including Smart Power: Toward a Prudent Foreign Policy for America.

Too Much Wavering on Budgets by Jagadeesh Gokhale

Wed, 09 May 2012 00:00:00 -0400

Notwithstanding the recently enacted EU fiscal pact, Europe is again facing a sovereign-debt crisis. Standard & Poor’s has downgraded a number of Spanish banks and Spain’s sovereign debt. For two years, Spain and other European countries, including those not facing an immediate crisis, such as France and Italy, have struggled to establish appropriate austerity policies to reduce fiscal deficits. Besides being unpopular, such measures produce an immediate negative result — a reduction in economic output. Will that effect continue to overshadow the expected positive result from improved market confidence among households and investors? It depends on how plans for reducing budget deficits are implemented.

The fortitude of Europe’s political leaders in the face of setbacks will be critical. Indications are that, although the thrust of budget consolidations that have been initiated by European governments is appropriate, policymakers lack the necessary conviction to stay the course.

Initially, with the backing of economists and prominent international institutions such as the IMF and OECD, European policymakers decided to cut government expenditures and adopt selective tax increases to reduce projected budget deficits and national debt. These policies were expected to set the stage for a robust European economic recovery.

The austerity policies, however, are generating severely adverse political reactions to the reduced investment and hiring that, as expected, ensued. It’s now doubtful that these policies will deliver deficit reduction. This raises the risk that stopgap and reactive policies will be adopted in an attempt to counter every economic shock and to seek every political advantage. But when policymakers waver on budget consolidations in order to pursue short-term economic and political goals, the economic uncertainties facing households and investors increase. This could prolong the recession in Europe.

Financial markets cannot proactively indicate what policy should be. All they can do is react positively or negatively to economic and political news. Markets reveal information by influencing asset prices and interest rates based on participants’ trading actions. In turn, those actions are based on expectations about the future economic environment under current policy settings. Market reactions would be generally positive if participants were convinced that budget consolidations would be sustained and national debt effectively reined in rather than continually revised. Uncertainty created by frequent policy adjustments is likely to dampen investor enthusiasm, cause greater volatility in markets, and postpone the recovery.

If austerity measures are adopted only after considerable delay or are not implemented as enacted, investor reactions are unlikely to be positive. Then the directly negative impact of austerity policies will dominate, leading to low or negative revenue growth and increased budget deficits. This can also occur when policymakers appear to change their minds and retract budget-consolidation measures midstream in response to political pressure. The resulting loss of market confidence can be long-lasting and damaging to prospects for economic growth.

Moreover, if adverse market reactions occur when particular policies are announced and implemented, it must mean that policymakers did not do their homework: They did not correctly judge the expectations of market participants. Indeed, some observers may believe that strongly adverse market reactions are themselves a source of economic shocks that need to be countered through policy revisions. This appears to be the case with the IMF’s recommendation, following its recent forecasts of reduced growth in Europe, to go slow on austerity measures.

What about the United States? It’s also an example of economic underperformance resulting from a wavering implementation of policies. No sooner was the Budget Control Act of 2011 signed into law than leaders of both parties began to explore ways to avoid its sequester provisions. The U.S.economy already faces gargantuan uncertainties: the fate of the health-care law, the future course of the Bush tax cuts, unsustainable Medicare and Social Security commitments, unavoidable post-election skirmishes on extending the federal debt ceiling, and strife over sorely needed fixes to the Alternative Minimum Tax and Medicare’s doctor-reimbursement rates. Such a long to-do list is surely curbing the willingness of investors to take risks and of employers to hire. Unfortunately, no cures will be forthcoming until after the elections in November, and perhaps not even then.

Leaders in Europe and the U.S. have used the trial-and-error method to precisely calibrate an optimal set of policies for boosting economic growth while simultaneously curbing government expenditures to reduce debt over the medium term. Given the political and economic uncertainty facing developed nations, that appears to be an exercise in futility. Policymakers should set a particular fiscal course for Europe as it faces its debt crisis — and then go on an extended vacation, to avoid continually recalibrating austerity measures. In the U.S., where medium-term national debt continues to escalate, expensive political theater will have to continue for a while longer.

At Last, Parents Rebel against Standardized Tests by Nat Hentoff

Wed, 09 May 2012 00:00:00 -0400

Around the country, more parents are protesting — and some even boycotting — the standardized collective tests that grade the progress of entire classes and whole schools. In New York City and state, where I live — and elsewhere — the results can cause teachers to lose their jobs and can shut down whole schools.

As for the kids, a parent, Coleen Mingo, describes the stress on her sixth-grade son, and on many other students nationally, in “A testing culture out of control,” (NYDailyNews.com, May 2, 2012):

“He worked hard on an unending slew of practice tests. He obsessed over each mistake as if it were proof he was doomed... ”

The Daily News article notes that a 2011 report commissioned by Congress and conducted by the National Academy of Sciences Committee found that America’s test-based accountability systems “have not increased student achievement.”

Moreover, an author of the report charged that “there is widespread teaching to the test and gaming of the systems that reflects a wasteful use of resources and leads to inaccurate or inflated measures of performance.”

And what of the many students who fail — and whose individual problems and backgrounds are not at all known to the test-makers? As I’ve learned from some of them through the years, they get depressed, and, deciding that they’re just plain dumb about this sort of thing, they drop out of school.

In the April 29 letters section of The New York Times, there are two penetrating insights that further explain the growing rebellion against this mechanical collective testing. Walt Gardner, who writes for Education Week, states:

“If one of the goals of schooling is to create lifelong learners, then high standardized test scores may be a Pyrrhic victory. That’s because long after the subject matter is forgotten, attitudes remain.”

A vital attitude lost in the non-individualized tests is emphasized in a letter from a Los Angeles mother, Pamela Beere Briggs, explaining why she has joined the opposition to standardized tests:

“A remark our 12-year-old daughter made in sixth grade — ‘There’s a certain part about getting good at something that involves loving it’ — lighted a spark of resistance in me. I knew that she was right. We ended up home-schooling for the seventh and eighth grades. This way we had a chance to focus on real learning. No tests. No homework! Lots of reading. Lots of writing. Lots of conversation. What happened? Our daughter not only loves school, but also is good at lots of things.”

One of my daughters has home-schooled her daughter and two sons. I enjoy talking with them. They’re full of ideas and questions about my views and ideas. And they read a range of books for pleasure.

More educators are also liberating children from standardized schools whose regimen of tests and more tests, with no time for appreciation of the arts, such as music, that release individual creative imaginations and emotions.

Dig this national movement from our sea to shining sea reported in Valerie Strauss’ Washington Post education blog, “The Answer Sheet,” on April 24:

Strauss writes about a national resolution against high-stakes tests that focuses on standardized testing and involves “a coalition of national education, civil rights and parents groups, as well as educators who are trying to build a broad-based movement against the Obama administration’s test-centric school reform program.”

I support the resolution, but I’m also not aware of any indication that a Republican administration’s approach to school reform would not also significantly depend on standardized tests.

According to the Washington Post, the forceful new resolution calls on “organizations and individuals to endorse (this) resolution, which asks officials in every state to ‘reexamine public school accountability systems’ and to ‘develop a system based on multiple forms of assessment which does not require extensive standardized testing’ and ‘more accurately reflects the broad range of student learning.’”

“We want our elected leaders to support real learning, not endless evaluation,” says Pamela Grundy of Charlotte, N.C., who helped Parents Across America lead a revolt last year against standardized testing.

Meanwhile, New York Daily News columnist Juan Gonzales lets us share this grinding spring season of New York public school students:

“Those dreaded state tests are here again. All third to eighth-graders in New York began Tuesday the first of three consecutive days of English language arts assessment, to be followed next week by three days of math tests.

“And those state tests have never been longer... Many middle class families now spend thousands of dollars for tutors to prepare their children for these tests. Meanwhile, poor and minority families who can’t afford tutors see their children fall farther behind.”

On the same page of that story: “Black and Latino students are nearly four times more likely than their white and Asian peers to be enrolled in the city’s lowest-performing high schools, a new study revealed.”

New York City Mayor Michael Bloomberg delights in calling himself “The Education Mayor.” He also never mentions that the New York City school system, as in many other big cities, is largely racially and ethnically segregated, not by law, but by differing residential choices.”

Nat Hentoff is a senior fellow at the Cato Institute.

Will Christie Volunteer You for Obamacare's Tax Hikes? by Michael F. Cannon

Wed, 09 May 2012 00:00:00 -0400

New Jersey’s legislature has approved a bill to create a new government bureaucracy — a health insurance “exchange” — that would help implement Obamacare’s individual and employer mandates, among other atrocities. Gov. Chris Christie (R) has until May 10 to sign the bill or veto it. Otherwise, it becomes law without his signature. New Jersey would rue the day it created one of these tax-hungry bureaucracies.

Even if you support Obamacare, there’s no point in creating an exchange today when the Supreme Court could strike down the entire law as soon as next month. Illinois Democrats have put their exchange bill on hold until after the court issues its ruling, expected in late June.

But even if the Supremes uphold Obamacare, there is no valid reason to create one of these things.

The proposed exchange would cost the state tens of millions of dollars per year. The bill raises that money by giving bureaucrats the power to tax all health insurance policies, without approval from the legislature. Every time Congress — or federal bureaucrats, or the state — heaps more requirements on the exchange, the bureaucrats can and will raise taxes again.

Supporters warn that if Trenton doesn’t create an exchange for New Jersey, the feds will. But so what? Obamacare gives federal bureaucrats a chokehold on New Jersey’s health insurance markets no matter who runs the exchange, because it requires state-run exchanges to do everything a federal exchange would do. Obamacare has already stripped New Jersey of its sovereignty. The only question is, should New Jersey also pay for the privilege?

The bill before Christie would also subject the state to a second unnecessary tax: Obamacare’s employer mandate. If employers fail to offer a government-defined package of health benefits, Obamacare whacks them with a tax of up to $3,000 per employee. When you tax hiring, you get fewer jobs.

Due to an odd quirk in Obamacare, however, that tax is only enforceable if a state creates an exchange itself. It disappears in states that don’t create exchanges. What that means is that even though Trenton has the power to block the employer mandate, state legislators are actively trying to subject New Jersey employers to Obamacare’s nastiest tax.

But if state officials block this and future exchanges, New Jersey will be able to lure jobs away from other states. New York and Connecticut are actively implementing exchanges, and thereby volunteering to impose that tax on their employers. New Jersey could lure jobs away from those states with the promise of no employer mandate.

In fact, it’s not an exaggeration to say that how New Jersey handles this legislation could determine whether Obamacare lives or dies. Obamacare can only work if states do the heavy lifting. Though the law authorizes the federal government to establish exchanges in states that don’t, it provides zero funding for that purpose. And good luck getting any new Obamacare funding past House Republicans.

New Jersey is under no obligation whatsoever to throw a lifeline to this unpopular, unworkable, and unconstitutional law. Why should state officials volunteer to implement it — and therefore to take the blame when it begins hurting people — when they lack the power to fix the problems it creates? Even if you support Obamacare, why should the State of New Jersey have to pay to implement a federal law? Where would that end?

There are much more productive ways for state officials to spend their time. The legislature can make access to quality health care more affordable and secure by allowing insurance carriers and clinicians licensed by other states to do business in New Jersey. They can reduce the cost of care by giving patients and doctors the freedom to adopt their own medical malpractice reforms, such as caps on non-economic damages.

But when it comes to volunteering for unnecessary taxes, government bureaucracies, or other headaches, New Jersey should tell the feds: Obamacare is your law. You implement it.

Michael F. Cannon is director of health policy studies at the Cato Institute and coauthor of Healthy Competition: What's Holding Back Health Care and How to Free It.

Guilt by Association by Patrick J. Michaels

Wed, 09 May 2012 00:00:00 -0400

My friends on the left make much of the apparent correlation between creationism and skepticism about assured climate disaster. It is the “some–all fallacy” writ large. “Some” climate scientists who happen to believe in intelligent design, a variant of creationism, also question the high-sensitivity climate model. Therefore “all” who hypothesize that warming has been overblown must also question evolution; i.e., they are ignorant dolts.

Note to the Left on this one: No one — scientist or otherwise — has yet come up with the definitive explanation of the first life forms on earth. There is no conclusive bridge between self-replicating molecules capable of mutation (a definition of life) and the primordial, lifeless, dimly-lit planet Earth of some 3 billion years ago. So even the most erudite thinkers must resort to aliens, life-bearing comets, God — or, in my case, beats-the-heck-out-of-me.

My lefty friends are somewhat condescending towards skeptical climate scientists. Who hasn’t heard of Chris Mooney’s drivel that Republicans (in general), and those who think climate change isn’t horrible (in particular), are mentally ill? I guess it’s a good way to win an argument; after all, I think the people I disagree with are nuts, too.

The “some” of the fallacy is the University of Alabama’s Roy Spencer, a climate physicist who argues (as do I) that the “sensitivity” of climate to dreaded carbon dioxide has been overestimated in computer models. Spencer also believes in intelligent design.

Spencer’s chosen form of belief to explain the mystery of the first life on Earth is hardly germane to a rational discussion of his interpretation of climate findings. There are plenty of productive and successful scientists who go to church — most of which preach that God created man. And there are plenty of good scientists who don’t.

So far as I can tell, the percentage of climate skeptics who are also religious is about the same as among the entire population of climate scientists in general. Some apocalyptic warmists believe in God, too, you know. At the University of Virginia, where I spent 30 years in the Department of Environmental Sciences, most of my colleagues didn’t attend church, but some did. There was little correlation between their religious beliefs and their scientific success. While the atmospheric scientists in that department were known for their skepticism about the upcoming climate disaster, none were churchgoers.

Away from academia, some creationists are successfully pushing state legislatures to dictate that their point of view, as well as global-warming skepticism, be a part of the public-school curriculum. These people are not just skeptics about climate change, but, rather, skeptics about science itself, because it is inconsistent with their belief system. Biblical literalists don’t like the easy demonstration that the Earth is billions of years old — and that’s merely the beginning of their complaints about science.

The lesson is that in the civilian world, people with strong beliefs try to manipulate science. But in the universe of scientific professionals, belief has little bearing on science. (This does not mean that there are no inherent biases in environmental science, but that’s a separate topic.)

While literalists are uncomfortable with science, they (generally) will go to a physician for science-based treatment, and (most) will immunize their children. That’s because they obtain gain — relief from pain, prevention of disease — from accepting modern medical science. Scientific skepticism is suspended when it can cost your life.

But things are different when a belief extracts no cost, which is the case with creationism. It doesn’t get suspended. On the other hand, science should be vigorously questioned if it indeed leads to massive societal costs, as must be the case if global warming is portrayed by scientists as a calamity.

It should not be forgotten that scientific history is littered with discredited theories that were once universally accepted as truth. I and others hypothesize that we will one day add to that list the dogmatic beliefthat global warming will spell the end of humanity as we know it. On that day, the river of criticism about the dangers of blind faith will flow in the other direction.

Let’s stop conflating the creationist hoi polloi with skeptical climate scientists. The mystery about how life arose on earth is simply unrelated to global-warming science, no matter what those scientists might believe.

Patrick J. Michaels is a Senior Fellow in Environmental Studies at the Cato Institute.

Europe's Failed 'Austerity' by Michael D. Tanner

Wed, 09 May 2012 00:00:00 -0400

In the wake of French and Greek elections last weekend, the backlash against European austerity is now in full swing. Meanwhile, in the U.S., advocates of big government are insisting that the European debacle proves we must reverse our efforts to reduce debt and deficits. After all, Paul Krugman writes in the New York Times, “claims that slashing government spending would somehow encourage consumers and businesses to spend more have been overwhelmingly refuted by the experience of the past two years.”

Given Europe’s continued slow growth, Professor Krugman might have an argument to make — if there actually had been any austerity in Europe over the last two years.

It is true that Europe has not been engaged in the same sort of massive Keynesian spending that characterized, say, the Obama stimulus package. Well, that’s not universally true. Portugal did try its version of stimulus spending: It pumped more than €2.2 billion into the Portugese economy in 2009, 1.25 percent of its GDP. The result was that economic growth stayed negative, while unemployment rose by roughly 3 million Portuguese workers. Recently, that country’s finance minister told the New York Times that “it didn’t turn things around, and may have made things worse.”

At the same time, the rest of Europe was hardly “dismantling” the welfare state, as the Washington Post’s Eugene Robinson claims. Of course, given that the average EU government consumes more than half of a country’s GDP, a bit of dismantling might be in order. But so far, European governments haven’t even been willing to take a penknife to the welfare state, let alone an axe.

In France, for example, the so-called austerity largely consisted of raising taxes. There was a 3 percent surtax on incomes above €500,000, an increase of one percentage point in the top marginal tax rate (from 40 to 41 percent), and an end to the automatic indexation of tax brackets for inheritance, wealth, and income taxes. There was also a 5 percent hike in the corporate income tax on businesses with revenue of more than €250 million, as well as a hike in the capital-gains tax, and closure of several corporate tax breaks. And even though most of these tax hikes were aimed at the wealthy, the middle class did not get off free. There was an increase in the Value Added Tax (VAT) and the excise taxes on tobacco and alcohol.

That’s an agenda that should gladden the heart of any tax-increase zealot — or even Paul Krugman.

True, there were some entitlement reforms and spending reductions. But they haven’t actually occurred yet. For example, France will raise its retirement age from 60 to 62, but not until 2017! A cap would also be put on government health-care spending, starting next year. It is a little hard, therefore, to discern whether it is budget cuts that may or may not happen some day in the future, rather than tax increases today, that have slowed French economic growth.

Or take Britain, where the Tory-Liberal coalition recently suffered a drubbing in local elections, in part as a reaction to so-called austerity measures. Among the Cameron government’s first “austerity” measures was to hike the personal income tax to 50 percent for those earning more than £150,000 a year. That measure managed to actually decrease income-tax revenues by £509 million. The U.K. did trim government payrolls and cut back on some government programs, but British government spending still consumes more than 49 percent of GDP. Government spending actually increased by £59.2 billion from 2009 to 2011.

Other European countries have taken the same approach: tax hikes today (especially) on the rich and promises of tiny benefit cuts in the dim and distant future. Spain imposed a “wealth tax” on citizens with €700,000 of assets, and a 7 percent income tax on those earning more than €300,000 per year; capital-gains taxes were also hiked. Italy imposed a “Solidarity Tax” of 3 percent on all taxpayers who earn more than €300,000. Greece increased taxes by nearly twice as much as it cut spending, including a 5 percent surtax on the wealthy. VATs were hiked nearly everywhere. And fuel, alcohol, and tobacco were also prime tax targets.

It should come as no surprise that all those new taxes, combined with a lack of spending restraint, has threatened to throw Europe back into a double-dip recession. Is it any wonder that French, Greek, and British voters were anxious to “throw the bums out”?

Wait, this sounds familiar. Tax hikes on the rich accompanied by vague promises of future spending restraint, while refusing to restructure entitlement programs. That sounds a lot like... Barack Obama.

Maybe the U.S. can learn something from Europe after all.

Michael Tanner is a senior fellow at the Cato Institute and author of Leviathan on the Right: How Big-Government Conservatism Brought Down the Republican Revolution.

Democrats' Leftward Drift Is Blocking Tax Reform by Chris Edwards

Tue, 08 May 2012 00:00:00 -0400

Is Washington gridlock the GOP’s fault? That’s what Norman Ornstein of the American Enterprise Institute and Thomas Mann of the Brookings Institution claim in a recent Washington Post op-ed. According to them, Republicans have become “ideologically extreme” and are blocking needed bipartisan reforms.

That certainly isn’t true, with respect to tax reform. The landmark Tax Reform Act of 1986, which slashed tax rates in a bipartisan deal, passed both chambers with large majorities. It was designed so as not to raise taxes on any income group. But today, the Democrats are not interested in any such revenue-neutral deal.

The comments by Harvard University’s Lawrence Summers, arguably the most important economist on the Democratic side for the last two decades, last week at Brookings exemplify this attitude. Summers discussed four priorities for tax reform.

First, he stressed the “central importance of revenue raising.” He opined that “any discussion of tax policy needs to start there” because the government needs a “significant increase in revenues.”

Next, he said he wants to strengthen “progressivity” and ensure that high earners pay a “fair share.” Summers implied that the tax code should be a tool for redistribution with government policy targeting the ratio of high-earner incomes to middle-class incomes.

Summers rated the other two goals of tax reform — economic efficiency and simplification — as less important. Indeed, he pooh-poohed them. Yet those two goals have long been synonymous with the meaning of “tax reform,” and were central to the policy thrust of the 1986 act.

Republicans today still support the goals of 1986 — cutting rates, ending loopholes and improving efficiency within a revenue-neutral package. House Budget Chairman Paul Ryan’s (R-WI) tax plan is a good example. But for Summers, President Obama and Democratic leaders in Congress, tax reform has morphed into an agenda of growing the government and penalizing high earners.

For further evidence of the Democratic shift, let’s compare Summers’ goals with the tax reform goals that Democrat Dick Gephardt (R-MO) described in his 1985 Cato Journal article. Gephardt — who would become House majority leader — was a key player in the 1986 tax reform effort. In his article, he says, “We in Congress take pride in the free market system,” which illustrates why he was able to forge a deal with free-market Ronald Reagan. You never hear Democratic leaders say that sort of thing today.

Gephardt said that the “most important” goal of tax reform was to “stimulate the growth of our economy” and to “achieve greater efficiency in the way the tax code works.” By contrast, with respect to tax efficiency and neutrality, Summers said that he puts “less emphasis on these questions right now in the United States than I would have over most of the last 25 or 30 years.”

Gephardt’s second most important goal for tax reform was “fairness,” but his usage of that word was different from the usage of today’s Democrats. For Gephardt, fairness meant closing loopholes and reducing tax rates. His aim was horizontal equity, meaning that people with similar incomes pay similar amounts of tax.

By contrast, today’s Democrats use “fairness” to mean raising taxes on high earners. Back then, Gephardt stressed the opposite: “If we are going to pass a tax reform bill, we desperately need to avoid the distributional debate.” The tax plan that he wrote with Senator Bill Bradley (D-NJ) — the Bradley-Gephardt Fair Tax — cut the top personal tax rate to 30 percent.

Today, President Obama puts redistribution at the center of his tax agenda, and he wants to hike the top rate to more than 40 percent. He is determined to raise income taxes on high earners, even though they currently pay a much larger share of taxes than they did in the 1980s. Obama’s emphasis dooms any chance of serious reform in the personal income tax.

Gephardt’s third goal was simplification. He wanted to reduce the “constant meddling” in the tax code and enact lower rates with fewer deductions, credits and other breaks. Today, Obama is proposing one special tax break after another.

The Bradley-Gephardt plan had serious flaws, as did the 1986 Tax Reform Act. And Gephardt was no champion of free markets in other policy areas. However, the Democrats of the 1980s were willing to give the Reagan pro-growth agenda a chance, not just on tax reform, but on deregulation as well.

Today, I wonder whether Ornstein and Mann can think of any policy areas where President Obama and Democratic leaders are willing to accept pro-market, small-government reform ideas.

Chris Edwards is the director of tax policy studies at the Cato Institute and the editor of Downsizing Government.org.

Austerity Is Blamed by Richard W. Rahn

Tue, 08 May 2012 00:00:00 -0400

Denial is leading to collective economic suicide in Europe and the United States. The French on Sunday elected a socialist president who wants to raise taxes on those elusive rich and keep spending as if there is no tomorrow.

Many on the left, including European socialists, the New York Times and its economist Paul Krugman, are falsely claiming that Europe and even the United States are being saddled with austerity. Their claim is that governments are not spending enough to reduce unemployment. They want higher taxes on the most productive plus bigger government. They suffer from a collective memory loss. Don't they remember that socialism did not work? Every time the big-government "solution" has been tried for the past two centuries, it has failed, but those on the left seem to be incapable of learning.

When the current economic crisis began — largely caused by a government-created housing bubble — we were told that if the government spent an extra trillion dollars or so and ran up the deficit, all would be well. Did it work as advertised in the United States? No. In the United Kingdom? No. In France? No. In Italy? No. In Spain? No. And not even the left wants to talk about Greece. The accompanying chart shows that rather than the austerity the left is whining about, government spending has risen as a share of gross domestic product (GDP) in all of the major economies. Again, the left said unemployment rates should have come down by now, but the opposite is happening. The U.S. unemployment rate has come down slightly, but the percentage of the labor force at work continues to decline, so the real unemployment rate is approximately 15 percent.

The irony is that the refusal by those on the left, in both Europe and the United States, to deal with the "entitlement" problem is going to cause an involuntary austerity in which real incomes are going to fall for most people. Incomes have not been rising as fast as inflation in the United States and most places in Europe, but what has happened is only a very mild introduction to what is going to happen.

Debt-to-GDP ratios keep rising in all the major economies, and realistically, this will continue until a reversal in policy or a surge in inflation begins to erode the value of the debt. Chancellor Angela Merkel in Germany has demanded that her fellow Europeans reverse the growth in spending to deal with fiscal reality and save the euro. The elections in France and Greece show that Mrs. Merkel's advice will be ignored and the European Central Bank will be pressured to keep printing money — by sovereign bond purchases and/or rate cuts on loans to banks — which ultimately will mean a lot more inflation, resulting in a real drop in incomes.

Of the major economies, only Germany has managed to reduce unemployment, and that was largely by major labor reforms, which now make it possible to fire German workers so employers no longer are so reluctant to hire new workers. Even so, the German economy is slowing down and may be dragged into the new recession that the other European economies are in or about to enter.

	Government Spending as a % of GDP		Unemployment Rate % (latest number for 2012)
	2007	2012*	2007	2012
US	36.7	40.0	4.6	8.1
UK	40.3	45.3	5.4	8.3
Germany	43.5	45.1	8.8	6.8
France	52.6	55.8	8.4	10.0
Spain	39.2	42.0	8.3	24.1
Italy	47.6	50.1	6.1	9.8
* estimated Sources: International Monetary Fund, The Economist

The next year is not going to be pleasant. The new European recession will only deepen and spread as, once again, the socialist "solutions" add to the problems. The United States is facing a massive 3.6 percent of GDP tax increase on Jan. 1, which will occur unless Congress extends the George W. Bush tax cuts and the other major personal and business tax provisions that are set to expire at the end of the year. The extensions will require both houses of Congress to pass them and President Obama to sign them into law. Even if the Republicans win both Houses of Congress and Mitt Romney is elected president, the Republicans will not take office until January — after the tax provisions' expiration date.

There is no guarantee that Mr. Obama and the Democratic Senate will pass the necessary tax extensions during the lame-duck session, whether they win or lose. Even if the Republicans win, they will not have the necessary 60 votes they might need in the Senate if the Democrats refuse to go along with the extensions. The uncertainty about what is going to happen will build through the remainder of the year, which will inhibit business expansion and job growth. This, coupled with the ongoing avalanche of new bank regulations, and foreign interest and dividend reporting requirements, is going to drive productive capital out of the United States. The rich in Europe and the U.S. are not just going to sit around to be fleeced by corrupt and incompetent governments. Being rich means you and your capital are mobile. There are many nice places on the globe where rich people and their money are well-treated.

Europe is in recession, and the odds are that by January the United States will be back in recession. The central banks will inflate the currency to deal with the government debt problems, the people will be poorer, and the rich will have left. It is all so unnecessary.

Richard W. Rahn is a senior fellow at the Cato Institute and chairman of the Institute for Global Economic Growth.

Libertarian Gary Johnson: Spoiler Alert? by Gene Healy

Tue, 08 May 2012 00:00:00 -0400

As a small-"l" libertarian, it's not often I can say that National Public Radio cheers me up on my way into work. But it did the trick yesterday morning with an All Things Considered feature titled "Libertarians Find Their Voice in 2012 Race."

"Somewhere on the path to the White House this year," the announcer declared, "a powerful set of ideas began to creep into the mainstream debate over which direction the country will take. ... free and open markets and extremely limited government. Those ideals are now becoming more mainstream." Case in point, according to NPR, was the Libertarian Party's decision Saturday to make former Republican Gov. Gary Johnson of New Mexico its nominee for president.

When the federally funded voice of urbane, upper-middle class liberalism says we're on the verge of a "libertarian moment," that's what the lawyers call an "admission against interest," and it's worth paying attention.

Watching the Libertarian Party over the years, I've sometimes had the feeling that, as George Bernard Shaw once snarked about socialism, "we should have had libertarianism already, but for the Libertarians."

In 2004, the LP's presidential standard-bearer was Michael Badnarik, a freelance constitutional lecturer who taught that the federal income tax was optional and refused to obtain a drivers' license despite campaigning by car. In 2006, the Montana LP nominated 67-year-old Stan Jones for the U.S. Senate. Because of his odd pallor, Jones quickly became known as "the blue guy." A survivalist who in the 1990s was worried about the impending Y2K crisis, Jones began taking a homemade antibiotic laced with collodial silver that permanently changed his complexion ("a true blue libertarian," the Washington Post called him). This weekend's LP convention, televised on C-Span, was a relatively buttoned-down affair, with most of the delegates in suits (though the irrepressible, omnipresent Starchild, libertarian activist and male exotic dancer, opted for a bare-midriff miniskirt number).

But Johnson is a far more appealing advocate for radical cuts in government than the LP has had in quite some time. And he got off some good lines in his convention speech Saturday. My favorite: "The libertarian candidate for president is the only candidate that's going to be talking about slashing welfare spending and warfare spending in the same sentence."

But to be a libertarian is to be eternally fractious and dissatisfied, refusing to take yes for an answer. So, of course, I have a bone or two to pick with the governor.

First, Johnson has gone on the record supporting President Obama's deployment of U.S. Special Forces to Uganda in a manhunt for Joseph Kony, murderous leader of the Lord's Resistance Army. This race deserves at least one candidate who won't send the U.S. military abroad in search of monsters to destroy.

Second, Johnson has told reporters he intends to seek millions of dollars in federal matching funds. If so, he'll be the first LP presidential candidate to have the taxpayers underwrite his campaign. That's a deviation that the self-styled "party of principle" should avoid.

One anti-Johnson argument that shouldn't get a lot of traction, however, is fear that the LP candidate will be a "spoiler;" that he will siphon off votes from Mitt Romney in a "lesser of two evils" race between the guy who practically invented Obamacare and the guy who passed it. If the major-party race is a battle between a president who's violated most of his campaign promises on civil liberties and a candidate who's already promised to do worse, then this election has arrived "pre-spoiled," through no fault of Gov. Johnson.

At the very least, Johnson's presence on all 50 state ballots could offer what a more libertarian GOP candidate once called "a choice, not an echo," in 2012.

Gene Healy is a vice president at the Cato Institute and the author of The Cult of the Presidency: America's Dangerous Devotion to Executive Power.

The U.S. And China: Seeking Cooperation, But Finding Confrontation by Doug Bandow

Mon, 07 May 2012 00:00:00 -0400

Beating up on China has become a favorite political pastime. This year Mitt Romney, playing against type—an avatar of corporate America—threatens to be tough on Beijing. This strategy might win a few votes but could end up discouraging reform within the People’s Republic of China.

China’s history is venerable but tragic. Mao Zedong dominated the PRC from its founding in 1949 until his death in 1976; his policies led to political chaos, pervasive poverty, and mass death. In contrast, his successors, led by Deng Xiaoping, moved China towards the market. The country remains authoritarian, but personal autonomy, economic freedom, and even civic space have expanded.

U.S. relations with Beijing never have been easy. Throughout the Cold War Washington recognized nationalist leader Chiang Kai-shek’s exile government on the island of Formosa, or Taiwan, as the legitimate government of all China. America and the Communist mainland had only minimal official contact until Richard Nixon’s 1972 trip there. Washington finally switched recognition to the PRC five years later.

The bilateral relationship then was based on containing Soviet power. Now some Americans fear another hostile superpower is being born. Yet despite the headlines, often dominated by conflicts, such as today’s controversy over the status of blind human rights attorney Chen Guangcheng, the U.S.-China relationship is overwhelmingly beneficial for both sides.

Politically the two governments are wary friends rather than bitter enemies. Rather than conduct real or shadow wars against each other Beijing and Washington have regular and routine peaceful contacts. Despite its disquiet over America’s determination to dominate the globe, China often acquiesces to U.S. policy.

Of course, Beijing remains an authoritarian state. Although personal autonomy has greatly expanded, there is no comparable political freedom: the surest way to win a trip to the laogai, or labor camps, is to advocate human rights over party prerogative. For instance, Chen earned official enmity by opposing coerced abortion and sterilization. However, the PRC today is far improved over the Maoist version, and there is at least reason to hope for continuing positive change.

Bilateral economic ties are broad. The PRC’s prosperity has expanded the global economic pie, which is good for Chinese, Americans, and most everyone else. In the PRC hundreds of millions of people have been lifted out of immiserating poverty. China’s economic reforms have been one of the most extensive anti-poverty programs in human history.

Americans, too, have benefited economically, most directly as consumers and investors, but increasingly as sellers and investees. The PRC also helps finance the U.S. government. The U.S. trade deficit is large, but that figure has little meaning: it is merely an accounting aggregation of private transactions. Moreover, America’s deficit with the rest of Asia has fallen as production has shifted to China.

With Beijing’s economic rise has come a greater international presence. Nevertheless, the U.S. has little to fear so far. China has aided such pariah regimes as Burma, North Korea, Sudan, and Zimbabwe while providing aid and purchasing resources throughout Africa and South America. However, like America during the Cold War, Beijing is learning how hard it is to turn temporary advantage into permanent gain. For example, Burma is moving to the West, North Korea routinely ignores the PRC’s wishes, Sudan has split apart, and Zimbabwe’s Robert Mugabe is fading. In countries like Zambia we now see the Ugly Chinese instead of the Ugly American.

Even greater alarms have been raised about Chinese military spending. Beijing has become world number two, but a distant number two, devoting an estimated $100 to $150 billion annually to the military, compared to more than $700 billion by the U.S. The PRC is determined to build a competent force, and who can blame it? Since the late 1800s China has been at war (or at least fought battles) with Great Britain, a coalition of Western nations, Japan, South Korea, America, India, Russia, and Vietnam. Beijing has special interest in deterring the U.S. given Washington’s penchant for regime change, regular naval patrols in East Asia, support for Taiwan, constant attempts to “strengthen” East Asian alliances, and persistent talk of containing the PRC. But China is years if not decades away from building a military which could challenge American global primacy and threaten the U.S. homeland.

American policy toward China must reflect this range of complex interests. Washington wants the PRC to liberalize politically, open more economically, support U.S. objectives internationally, and remain militarily vulnerable. It’s an ambitious agenda that isn’t likely to be fulfilled—and certainly not quickly, easily, and under American pressure.

Trade issues remain divisive. Mitt Romney has promised to “begin on Day One by designating China as a currency manipulator,” followed by imposing a variety of “punitive measures,” including “creating a trading bloc open only for nations genuinely committed to free trade.”

No doubt, the Chinese don’t play fair. But what country does? Romney maintains the charming fiction that America is an economic ingénue “genuinely committed to free trade” being gang-raped by an ugly world. However, the U.S. maintains a long list of trade restrictions. Moreover, in practice American anti-“dumping” laws are another protectionist barrier used by domestic industries to hamper international competition.

Washington also has consciously followed a weak dollar policy, hoping, just like Beijing, to spur exports worldwide. Moreover, the dollar’s status as a reserve currency allows the U.S. to export inflation. No wonder the Chinese have complained about irresponsible American fiscal policies and reduced their purchase of Treasury securities.

With the PRC now possessing the world’s second largest economy, Washington has lost any ability to dictate. Instead of name-calling and threatening—which the Obama administration also initially engaged in—America’s best approach is negotiation. In fact, progress apparently was made during the recent meetings in Beijing, despite the simultaneous controversy over Chen’s status. For example, China agreed to further open its markets, cut business subsidies, and implement broader economic reforms. More remains to be done, but U.S. threats are unlikely to achieve much.

Whining will be no more effective when it comes to China’s international and military policies. The good news for Washington is that the PRC remains behind and the path forward is anything but smooth. China remains a poor nation with an economy built on pampered state enterprises, bad banks, and a property bubble. A highly distorted demographic future due to the “one child” policy could leave the country old before it is rich. Without the natural release of democracy the PRC looks like a volcano ready to blow: violent protests against abusive local governments are routine, while the public battle surrounding now disgraced party official Bo Xilai demonstrates the national political structure’s fragility. Beijing may surmount all of these challenges, but becoming the next superpower will not be easy.

Still, while the PRC’s trajectory is uncertain, China almost certainly will become a stronger competitor to the U.S. Even so, Beijing does not want conflict. Commerce has brought riches, which have helped satisfy an emerging middle class. Derail the economic gravy train and the unelected Communist Party will lose its legitimacy. Challenge America militarily and risk losing a devastating war. The residents of Zhongnanhai are ambitious, not suicidal.

Anyway, the U.S. would do better to improve its game than complain. Washington’s dominance over the last two or three decades has been unnatural and will inevitably decline. Accommodating rather than resisting change will better preserve American power and influence. Particularly important will be strengthening economic competitiveness and diplomatic skills. Instead of simply issuing demands when it wants something from the PRC, such as support against Iran and North Korea, America will need to persuade Beijing that the policy is in the latter’s interest as well.

As for security, the U.S. and China are bound to have disagreements over the years, but none should threaten vital American interests and thus lead to conflict. Rather than confront militarily a nuclear-armed power in its own region over interests which it views as essential, Washington should expect its allies to do much more in their own defense.

Perhaps the toughest challenge will continue to be human rights. Washington long has supported democracy and liberty only in the breach. During the Cold War the U.S. backed a gaggle of thugs since they were anti-Communists. Even today Washington cheers democracy activists in the Middle East—except in Bahrain, Jordan, and Saudi Arabia. Human rights in Central Asia are a painful afterthought when it comes to U.S. military bases. Anti-democratic excesses among friends such as Malaysia, Pakistan, and Singapore are passed by. And grievous human rights problems in Afghanistan and Iraq are embarrassments best ignored.

Still, the fact that Washington often is hypocritical doesn’t change the fact that Beijing remains a tough authoritarian system which sometimes deploys brutal repression. Human rights are universal and Americans should promote liberty when possible. Yet the Chen saga reminds us that principle must be leavened with pragmatism when dealing with other nations.

U.S. power is limited. Washington has found it impossible to compel smaller and weaker, even impoverished, starving states—Burma, Iran, Iraq, North Korea, Serbia, Syria—to do its bidding. All of these ignored ever tougher sanctions, several rebuffed military threats, and a couple even resisted military attacks.

America’s ability to compel China to respect human rights is even less. Wei Jingsheng, another courageous Chinese human rights activist, complained: “The Chinese leadership does not fear the United States government; it only fears the loss of its power.” But that is simple reality. War is unthinkable. Sanctions would leave America friendless across Asia and Europe, undermine the weak U.S. economy, and turn Beijing into an active adversary if not enemy. Which leaves diplomacy and publicity.

Admittedly, such steps are of limited effectiveness. Nevertheless, the PRC has much at stake in its relationship with America and thus has an incentive to keep Washington minimally satisfied. China also worries about its international image: beating up on dissidents does not win friends and influence people.

However, the regime faces important countervailing pressures. Gaining and maintaining power are the most important objectives of any authoritarian political system. Weakening the system of repression risks emboldening opposition forces. Moreover, no leader of a rising country with a nationalistic population wants to be seen as genuflecting to the American government. “Appeasement” and “weakness” are charges that can be tossed about with equal enthusiasm in Beijing as in Washington.

The challenge for the U.S. is to push hard, while anticipating Chinese reactions and proposing creative solutions. Although Chen is not yet free, a face-saving modus vivendi appears to be in place. Like other Chinese, Chen will leave with his family to “study” abroad; if he never returns to subject himself to Chinese “justice,” so be it.

In short, the Obama administration appears to have handled a difficult situation reasonably well, despite the exaggerated criticism from those like Mitt Romney, who denounced the “day of shame for the Obama administration.” While Chen was in the U.S. embassy Washington had a moral obligation, irrespective of Beijing’s desires, not to turn him over for likely prosecution or persecution. (The situation was different than for Wang Lijun, Bo’s top cop who fell afoul of his political mentor and sought refuge at an American consulate in February; the U.S. owes nothing to those with blood on their hands.) If the Chinese government would not let Chen leave the country, he should have been allowed to stay in the embassy as long as he wished. In fact, after Tiananmen Square the late astrophysicist Fang Lizhi and his wife remained at the U.S. embassy for 13 months before being allowed to depart China.

However, once Chen left the embassy—the exact circumstances remain in dispute—U.S. officials could do little for him. Rep. Chris Smith (R-NJ) proclaimed that Chen’s status was “a test to the United States of whether or not human rights really matter.” The Washington Post editorialized: “the United States must defend him and his family—and not allow business as usual in U.S.-Chinese relations.” If only it was that easy.

Even had the embassy sent someone to the hospital with him, it could not watch over him day and night for the rest of his life. Nor could Washington effectively protest every new sanction imposed by Beijing for every new offense, real or imagined. Washington cannot dictate how another country treats a particular citizen or enforce another government’s promise to treat him a certain way. In fact, in 2006 the Bush administration unsuccessfully pushed for Chen’s release on criminal charges, for which he spent nearly four years in prison. Chen’s apparent change of heart, deciding that he wanted to leave China, was understandable, but left Washington with little leverage. The “study abroad” tactic probably was the best option available.

Nevertheless, there are some who seem prepared to sacrifice the entire bilateral relationship in an attempt to advance human rights. For instance, The Patriot Post, a conservative online publication, lamented that “Obama’s lack of leadership on the world stage has repeatedly left democracy activists around the world at the mercy of their repressive regimes.” Actually, the chief miscreant in such cases is “their repressive regimes.” Anyway, what, one wonders, would the critics have the president do to such governments—including several important American allies—if they resist U.S. pressure? Nuke ‘em?

Human rights cannot become the sum of America’s relationship with China. First, the U.S. has a range of interests at stake. Economic ties are important and involve more than just corporate profits: job creation and economic growth also matter. Beijing also can advance or impede important American geopolitical interests, including nuclear proliferation, international conflict, and human rights—consider issues involving Burma, Iran, North Korea, and Sudan, to name a few.

Most important is the maintenance of peace. One of the most dangerous international moments occurs when a new weltmacht challenges established powers. In the case of Germany two world wars resulted. This history must not be repeated with China. That requires fostering a cooperative rather than confrontational relationship, despite sometimes important differences.

Second, Washington’s human rights pressure may help one person while paradoxically hurting others. Chen apparently will get to leave, but this very public battle may encourage Beijing to crack down more ferociously on other opposition figures—at least to ensure that next time house arrest is not so easily evaded. Already the regime apparently has detained or placed under house arrest some activists who aided Chen’s flight to the embassy. The Financial Times declared this to be “unacceptable,” without suggesting a practical response. Other human rights activists fear that the PRC might target them to discourage further challenges. Warned Liu Feiyue, “after the Chen Guangcheng incident, the situation for us will just become worse and worse.”

Moreover, it is difficult to gauge the impact of Washington’s high-profile involvement on the leadership dynamic within Zhongnanhai. For instance, Bo Xilai’s fall appeared to embolden more pragmatic reformers. Indeed, one of Bo’s allies thought to face increased pressure is Zhou Yongkang, a hard-liner in charge of internal security. Yet the Chen imbroglio may have dealt a nationalist trump card to him and others like him. The official Chinese media has been busily bashing America for interfering in Chinese affairs.

This doesn’t mean Chen did anything wrong. To the contrary, the villain is an authoritarian state that fears its own people. However, in responding U.S. officials have an obligation to consider more than any particular case in front of them. Finding the right balance is rarely likely to be easy. Washington will do best if it practices its own ideals—for instance, Chinese citizens have noticed when American officials act with humility, contra Chinese political elites—and gets its own economic house in order.

Much is at stake in the evolving relationship between the globe’s superpower and the likely next superpower. The PRC is not an inevitable adversary, but much could go wrong between two great nations. Washington and Beijing together must prevent that from happening. To the contrary, both countries could do much working together to promote economic growth, advance geopolitical stability, and confront global problems. And—hopefully, some day—together promote respect for the life and dignity of every human being. As Bob Fu of the China Aid Association put it, “China will move toward the ‘right side of history’ only when it recognizes that people like Chen are its strength, not its enemy.”

Doug Bandow is a senior fellow at the Cato Institute and former special assistant to President Ronald Reagan.

Of Course 70% Tax Rates Are Counterproductive by Alan Reynolds

Mon, 07 May 2012 00:00:00 -0400

President Obama and others are demanding that we raise taxes on the "rich," and two recent academic papers that have gotten a lot of attention claim to show that there will be no ill effects if we do.

The first paper, by Peter Diamond of MIT and Emmanuel Saez of the University of California, Berkeley, appeared in the Journal of Economic Perspectives last August. The second, by Mr. Saez, along with Thomas Piketty of the Paris School of Economics and Stefanie Stantcheva of MIT, was published by the National Bureau of Economic Research three months later. Both suggested that federal tax revenues would not decline even if the rate on the top 1% of earners were raised to 73%-83%.

Can the apex of the Laffer Curve—which shows that the revenue-maximizing tax rate is not the highest possible tax rate—really be that high?

The authors arrive at their conclusion through an unusual calculation of the "elasticity" (responsiveness) of taxable income to changes in marginal tax rates. According to a formula devised by Mr. Saez, if the elasticity is 1.0, the revenue-maximizing top tax rate would be 40% including state and Medicare taxes. That means the elasticity of taxable income (ETI) would have to be an unbelievably low 0.2 to 0.25 if the revenue-maximizing top tax rates were 73%-83% for the top 1%. The authors of both papers reach this conclusion with creative, if wholly unpersuasive, statistical arguments.

Most of the older elasticity estimates are for all taxpayers, regardless of income. Thus a recent survey of 30 studies by the Canadian Department of Finance found that "The central ETI estimate in the international empirical literature is about 0.40."

But the ETI for all taxpayers is going to be lower than for higher-income earners, simply because people with modest incomes and modest taxes are not willing or able to vary their income much in response to small tax changes. So the real question is the ETI of the top 1%.

Harvard's Raj Chetty observed in 2009 that "The empirical literature on the taxable income elasticity has generally found that elasticities are large (0.5 to 1.5) for individuals in the top percentile of the income distribution." In that same year, Treasury Department economist Bradley Heim estimated that the ETI is 1.2 for incomes above $500,000 (the top 1% today starts around $350,000).

A 2010 study by Anthony Atkinson (Oxford) and Andrew Leigh (Australian National University) about changes in tax rates on the top 1% in five Anglo-Saxon countries came up with an ETI of 1.2 to 1.6. In a 2000 book edited by University of Michigan economist Joel Slemrod ("Does Atlas Shrug?"), Robert A. Moffitt (Johns Hopkins) and Mark Wilhelm (Indiana) estimated an elasticity of 1.76 to 1.99 for gross income. And at the bottom of the range, Mr. Saez in 2004 estimated an elasticity of 0.62 for gross income for the top 1%.

A midpoint between the estimates would be an elasticity for gross income of 1.3 for the top 1%, and presumably an even higher elasticity for taxable income (since taxpayers can claim larger deductions if tax rates go up.)

But let's stick with an ETI of 1.3 for the top 1%. This implies that the revenue-maximizing top marginal rate would be 33.9% for all taxes, and below 27% for the federal income tax.

To avoid reaching that conclusion, Messrs. Diamond and Saez's 2011 paper ignores all studies of elasticity among the top 1%, and instead chooses a midpoint of 0.25 between one uniquely low estimate of 0.12 for gross income among all taxpayers (from a 2004 study by Mr. Saez and Jonathan Gruber of MIT) and the 0.40 ETI norm from 30 other studies.

That made-up estimate of 0.25 is the sole basis for the claim by Messrs. Diamond and Saez in their 2011 paper that tax rates could reach 73% without losing revenue.

The Saez-Piketty-Stantcheva paper does not confound a lowball estimate for all taxpayers with a midpoint estimate for the top 1%. On the contrary, the authors say that "the long-run total elasticity of top incomes with respect to the net-of-tax rate is large."

Nevertheless, to cut this "large" elasticity down, the authors begin by combining the U.S. with 17 other affluent economies, telling us that elasticity estimates for top incomes are lower for Europe and Japan. The resulting mélange—an 18-country "overall elasticity of around 0.5"—has zero relevance to U.S. tax policy.

Still, it is twice as large as the ETI of Messrs. Diamond and Saez, so the three authors appear compelled to further pare their 0.5 estimate down to 0.2 in order to predict a "socially optimal" top tax rate of 83%. Using "admittedly only suggestive" evidence, they assert that only 0.2 of their 0.5 ETI can be attributed to real supply-side responses to changes in tax rates.

The other three-fifths of ETI can just be ignored, according to Messrs. Saez and Piketty, and Ms. Stantcheva, because it is the result of, among other factors, easily-plugged tax loopholes resulting from lower rates on corporations and capital gains.

Plugging these so-called loopholes, they say, requires "aligning the tax rates on realized capital gains with those on ordinary income" and enacting "neutrality in the effective tax rates across organizational forms." In plain English: Tax rates on U.S. corporate profits, dividends and capital gains must also be 83%.

This raises another question: At that level, would there be any profits, capital gains or top incomes left to tax?

"The optimal top tax," the three authors also say, "actually goes to 100% if the real supply-side elasticity is very small." If anyone still imagines the proposed "socially optimal" tax rates of 73%-83% on the top 1% would raise revenues and have no effect on economic growth, what about that 100% rate?

Alan Reynolds is a senior fellow at the Cato Institute and the author of Income and Wealth (Greenwood Press 2006).

European Project's Contradictory Nature Ensures Its Failure by Alberto Mingardi

Mon, 07 May 2012 00:00:00 -0400

Is the European Union going to last? With Francois Hollande as the new French president, and the Greeks massively voting for extreme parties — real communists and Nazis — the entire European project is called into question. The fruits of the European crisis are acrid indeed.

The more the time passes, the more it is clear that the dream of unifying Europe was based upon an ambiguity: Was Europe to be an economically integrated area, or a bigger version of a nation-state?

In other words, was the European Union to be modeled on Switzerland — a confederation in which cantons have a high degree of autonomy — or on France, the quintessential centralized state?

The economic integration of Europe after the Second World War was considered a means to avoid new conflicts between European states. Europe had been economically integrated before. Between 1814 and 1914, the continent enjoyed free trade and prosperity. The crescendo of nationalism in the first half of the 20th century wiped away that golden age.

In 1958, German economist Wilhelm Roepke, a great believer in free trade and in some way an inspirer of the economic reforms that paved the way for the German postwar economic miracle, was skeptical from the beginning that the attempt to reintegrate Europe economically could succeed.

Became Schizophrenic

For one thing, Roepke remarked in 1958 that economic integration in the 19th century was not purely "regional." It was "inseparably bound with worldwide economic integration." Free trade wasn't considered good exclusively within the European shores.

But after WWII, the European Economic Community was created as a customs union, with internal free trade but tariffs on imports from other states. Such a customs "bloc" allowed for free trade internally, but only up to a point. The service markets aren't fully integrated, and neither are labor markets.

Even today, services account for 70% of the European GDP but only for 20% of trade in the internal market. Attempts to liberalize the movement of service were basically stopped by trade unions, as was the case in 2005.

When Europe was truly economically integrated in the 19th century, public spending was limited and the free movement of workers was facilitated by the virtual absence of an entitlement system. Economic integration in the 19th century was the byproduct of limited government, whereas the European Union was built in the very years that saw the dominance of bigger government.

This is the contradiction the European project was built on: allegiance to free trade with policies that increased the size of government and reduced the scope for free trade. The European elites wanted both a common trade zone and a common currency, to decrease the likelihood of trade wars, rightly understood as inevitably preceding real wars.

But while national states pledged to renounce protectionist measures against each other, national and European regulation flourished. In effect, Europe developed in a sort of schizophrenia: Nation states pledged to free trade between them but did not want to renounce their interventionist policies within their respective borders and protectionist policies abroad.

Italian Model

The electoral victory of Hollande in France will force other European leaders to stop dissembling. The new French president does not like austerity in public finance. Nor does he recognize the value of sound money and anti-inflationary policies. He will force Europeans to choose: Do they want to integrate economically or do they want to integrate politically?

The first option should be based on sound money, free trade and free movement of people. The second option can easily be based on highly inflationary policies, high regulation and fragmented labor markets with some minimal top-down standards being imposed.

If we look back to the history of Europe, the euro and the common market seemed to imply Europe was going in the direction of the Swiss model: economic integration, pluralism in government. That was what Europe essentially was, before the Great War.

Other features of the European projects (agriculture subsidies, over-regulation in the service market, over-regulation of some tiny details of economic life like the size of artichokes) were anticipating the building of a greater France, under the European flag.

Perhaps pantographed nationalism on a European scale may be exactly what European rulers dream of. But is it economically sustainable?

Voters have a sense that the European dream may become a nightmare. Unified Europe may end up being neither like Switzerland nor France, but like Italy, a highly centralized state with extreme economic contrasts between North and South, and a transfer system that unsuccessfully tries to equalize the two.

For a ruling class that believes that the European political unification is per se a goal, this might be a bearable price to pay. But will European voters agree?

Albert Mingardi is Director General of Istituto Bruno Leoni, an economic think tank based in Milan, and an adjunct scholar at the Cato Institute.

The Only Reality That Matters to Obama Is Political by Neal McCluskey

Sun, 06 May 2012 00:00:00 -0400

Watch President Obama rail about the rich and brandish his Buffett Rule and it's hard not to see class warfare.

Look at the spending the president proclaims is most important, however especially on education and you might conclude that he isn't prosecuting a class war. He's just giving up on reality.

First of all, it's tough to argue that the wealthy don't pay their fair share in taxes. According to the Tax Foundation, the oft-maligned 1 percent earn 17 percent of the nation's adjusted gross income, yet pay 37 percent of federal taxes. The top 5 percent garner 32 percent of all income, yet furnish 59 percent of taxes.

The rich are paying more than their fair share. Another tough argument is that the spending priorities the president is determined to protect are really so critical at all. In the business world, few would pass an honest cost-benefit analysis. A perfect case in point is education.

As Mr. Obama insisted in a speech at Florida Atlantic University recently, it is investments ... in things like education and research and health care ... that lead to strong and durable economic growth.

Here's where one wonders whether the president is a class warrior, or someone who's just given up on grappling with reality. As reflexively good as investing in education sounds, the overwhelming evidence shows that federal education spending is a colossal waste.

Begin with Head Start, the federal government's signature, $8.1 billion prekindergarten program. According to the most recent federal assessment, it's an investment black hole, producing no lasting gains.

Then there's elementary and secondary education, which has seen inflation-adjusted federal largess leap from $33 billion in 1970 to $115 billion in 2010. Meanwhile, scores for 17-year-olds on the National Assessment of Educational Progress the socalled nation's report card have been wearing cement shoes, climbing not at all.

Finally there's higher education, where surely more federal dough is needed. After all, prices are hurtling toward the moon and no can be expected to pay without help.

The problem is, federal investment has been a leading cause of, not cure for, rampant inflation.

Schools simply couldn't keep raising prices if students couldn't pay them, but for decades Washington has ensured that they could pay ever more.

Between 1970 and 2010, according to the College Board, inflation-adjusted federal aid took off right along with college prices, launching from $18 billion in 1970 to $169 billion in 2010.

Of course, enrollment increased markedly in that time. But that's largely been bad news, with lots of people lacking either the ability or desire to do college work enrolling, taking on debt, but never finishing.

According to the latest federal figures, 43 percent of first-time, full-time college students in four-year programs don't graduate within six years, and most of those will never finish. Worse, 72 percent of students in two-year programs don't complete within three years. Add to that the one-third of bachelor's holders who are in jobs that don't require the degree, and massive over-consumption not underinvestment is clearly our biggest college problem.

Given the horrendous federal education track record not to mention the nearly $16 trillion national debt there's no reasonable way to conclude that yet more federal outlays are needed.

But let's be fair: President Obama almost certainly knows that. He's a smart guy, and this information is pretty easy to find.

The fact is, the president is being very realistic about this — politically realistic. Throw all the tax and education reality you want at him, as long as voters believe the rich are getting away with taxation murder, or that more money for education necessarily means better education, the president would be politically crazy not to do what he's doing.

Polling suggests he's on target. A recent survey of swing-state voters commissioned by the College Board found that 67 percent think that education is extremely important, placing it just behind jobs and the economy and government spending. Most also feel education needs greater funding, including student aid. And it doesn't hurt that focusing on aid curries favor with both Occupy Wall Street types and middle-class voters staring down tuition bills.

So is the president engaging in class warfare? Seems so. Is he ignoring the waste of federal education policy? Absolutely. Has he given up on reality? No way it's just that it's political reality that matters.

Neal McCluskey is associate director of the libertarian Cato Institute's Center for Educational Freedom and author of the study How Much Ivory Does This Tower Need? What We Spend on, and Get from, Higher Education.

President Obama's "All of the Above" Energy Duplicity by Robert L. Bradley Jr.

Sun, 06 May 2012 00:00:00 -0400

There's been a noticeable sea change in the way President Obama talks about energy.

It began in January with his State of the Union address. The White House's most prominent energy initiative up to that point was Solyndra — the failed solar panel manufacturer that left taxpayers out a half-billion dollars. Big-bet Solyndra perfectly embodied what had been driving the Obama energy agenda: tunnel vision toward "green" tech and a deep antipathy for oil and natural gas, not to mention coal.

So it was a surprise when the President told Congress that he favored expanding domestic oil and natural gas development as part of an "all-of-the-above" energy strategy. Last political cycle, all-of-the-above was Republican-speak for "fossil fuels, too," given the Administration's green dreams.

And it's a position Obama's repeated over and over since. He's wants to convince the American public that he's a new man — an oil man. At a recent stop in Cushing, Oklahoma, Obama told a crowd that "as long as I'm President, we're going to keep on encouraging oil development and infrastructure." He added, "producing more oil and gas here at home has been, and will continue to be, a critical part of an all-of-the-above energy strategy."

The Left intelligentsia did not hold their collective tongues. The Center for American Progress titled one article: "Obama's Worst Speech Ever: 'We've Added Enough New Oil And Gas Pipeline To Encircle The Earth'."

Don't buy the makeover. The new Obama is running from his record — and plans to revert to old ways after what he calls "my last election" with all the tools at his disposal.

The President had to switch talking points. The economy continues to lag. Government-dependent "green" companies have produced few jobs for their budget-deficit damage. And gas prices have jumped over 50 cents since January to near a politically perilous $4.00 per gallon — and with driving season ahead.

To simply stick with the pro-green, anti-oil strategy was political peril. So Obama went surreal with an "all-of-the-above" energy agenda.

But old habits die hard. In the White House's recently unveiled 2013 budget plan, a big revenue generators is closing $38.6 billion in "tax breaks for Big Oil," to quote the document. (Probably a better term for the largest public-held energy companies is "Big America").

Obama and his team have framed these "breaks" as outright subsidies and special interest handouts — as if Uncle Sam just signs a huge check to ExxonMobil every year.

But that's simply not the case. The bulk of the tax benefits afforded to oil and natural gas manufacturers are deductions on certain business operations — precisely the kind of "breaks" that are available to other America's manufacturers, covering such things as equipment depreciation, salaries for rig operators, and exploration expenses.

And don't forget the federal government already takes 18 cents per gallon of gasoline sold. State and local governments tack on an average 30 cents. Together, that's between 10 and 15 percent of the pump price. Repealing the oil industry's tax "breaks" would just aggravate high prices a little more.

Obama's Environmental Protection Agency recently issued new rules that will force 32 mostly coal-powered plants to close and threaten another 36 facilities. The agency has also issued "blackout" regulations that effectively prohibit the creation of any new coal-fired plants because of unaffordable (if even available) technology upgrades.

That's the real agenda—and Obama can get away with it given that record-low natural gas prices are keeping electricity generated from natural gas affordable.

So much for "all of the above" with coal, the nation's largest electricity generation source, on the chopping block.

The president has bragged that his administration is set to open up "millions of acres for gas and oil exploration." Granted, and laudably, new territory has been added. But this administration still actively opposes drilling in a number of highly promising regions, including the mid-Atlantic coast, the entire Gulf of Mexico, the Rockies, the Florida coast, and the Arctic National Wildlife Refuge.

This White House has also clamped down on the number of permits provided to developers for lands that are already approved for exploration. The Congressional Research Service reports that since 2007, 96 percent of the increase in domestic oil production has occurred on private lands.

And according to the Institute for Energy Research, while oil production on private property grew by 14 percent in 2011, the same on federal land shrank 11 percent.

Obama's new energy rhetoric must be elevated to a new energy philosophy. Democrats and Republicans value affordable, plentiful energy for all the right reasons. Can we envision policy reversals at EPA and Interior to free energy in what Obama hopes is another four years?

As it stands, it's tough not to see this "all of the above" talk as nothing more than hollow political posturing. In this case, Term 2 for the Administration would be walking back the talk.

Robert Bradley is an adjunct scholar of the Cato Institute, president of the Institute for Energy Research in Houston, and author of Climate Alarmism Reconsidered (Institute of Economic Affairs).

Bad Idea of Cellphone-Driver Bans Could Go National by Walter Olson

Fri, 04 May 2012 00:00:00 -0400

U.S. Transportation Secretary Ray LaHood has called on Congress to enact a new law banning (quoting Reuters) "talking on a cellphone or texting while driving any type of vehicle on any road in the country."

LaHood's war on "distracted driving" has made headlines before, but this latest round marks a new escalation in federal intrusiveness:

Nationalizing local traffic laws. A federally prescribed traffic code imposes uniformity on a subject for which the optimal rule might well be different on a North Carolina country lane than in Los Angeles. That may be one reason the Constitution's framers wisely excluded such authority from among the federal government's enumerated powers.
Ignoring the evidence. Much legislation so far aimed at distracted driving hasn't seemed to work well: for example, per the Insurance Institute for Highway Safety as quoted on NPR, "states with cellphone bans have seen no real decrease in accident rates," and even bans on texting don't seem to have had the intended effects, perhaps because furtive drivers begin lowering their gaze to a phone held below dashboard level, making the risk worse.
Stoking public alarm. The feds insist that driver distraction is "linked" to 3,000 fatalities a year; even if you accept that number as accurate, most of the cases arise from distractions other than phones. But the number itself is suspect: the feds blame a crash on distraction if a cellphone is so much as "in the presence of the driver at the time of the crash." There's seldom any real effort to reconcile the supposed epidemic of phone distraction with the reality of accident statistics, which show per-mile highway fatalities continuing to fall to all-time lows.
Ignoring safety advantages. The near-ubiquity of cellphones in vehicles bolsters societal safety in all sorts of ways. For example, it improves the chance that other drivers will call a wreck in to 911 speedily enough for rescuers to make a difference, and it cuts crime rates by multiplying the number of "eyes on the street" in immediate touch with authorities. Disturbingly, LaHood seemed to suggest that he wants to ban cellphones even for commercial drivers, who pioneered mobile communication and have been using it reasonably safely for decades.
One man's obsession. In the past LaHood has spoken of mandating novel technologies which would disable drivers' cellphones when the car was engaged. (What could go wrong?) Last month he proposed as a model for his intended cellphone crackdown the war on drunken driving — an unsettling parallel, since the trend in DUI law for years has been toward penalties that can prove ruinous to persons of ordinary means, such as mandatory jail time and vehicle forfeiture. Does he really propose to wage such a war on everyone who places a 10-second "Honey, I'm running late" call?

Yet when asked whether enforcement would also be aimed at those who engage in other distracting activities while driving, he said "he was not as concerned about people who eat, apply makeup or perform other distracting activities in cars because 'not everyone does that.'"

Call it LaHood logic: reserving the harshest penalties for things everyone supposedly does. But of course the secretary knows that not "everyone" fiddles with their phone while driving. According to Washington radio station WTOP, he personally combats the problem while driving around the capital by honking his horn at drivers he sees holding devices to their ears.

Points out Mike Riggs at Reason magazine: "Which is more of a distraction while driving: holding a phone up to your ear, or having a stranger pull up behind/beside you and lay on the horn for no apparent reason?" Riggs also notes in a second Reason article that concern about driver distraction circa 1930 led to crusades in high places to ban the newly developed car radios, which, fortunately, was resisted by the motoring public.

If you ever needed a live, honking, out-of-control refutation of the notion that the federal government is the right place to develop local traffic laws, you'd have it in the person of Ray LaHood.

Walter Olson is senior fellow at the Cato Institute and has written frequently on FCPA.

Embracing Progress by Marian L. Tupy

Fri, 04 May 2012 00:00:00 -0400

“The battle to feed all of humanity is over. In the 1970s, hundreds of millions of people will starve to death in spite of any crash programs embarked upon now. At this late date nothing can prevent a substantial increase in the world death rate.” Thus began The Population Bomb, a 1968 book by Stanford University professor Paul Ehrlich. Since those now infamous words were written, world population has doubled from 3.5 billion to 7 billion, inflation-adjusted average annual income per person has risen from $3,147 to $5,997, and life expectancy at birth has increased from 59 years to 69 years.

The world’s daily caloric intake per person rose from an average of 2,610 in 1990 to 2,790 in 2006. That increase was not driven by horizontally challenged Westerners alone. In sub-Saharan Africa, the caloric intake increased from 2,290 to 2,420 in just 16 years. To put these figures in perspective, the U.S. Department of Agriculture recommends that adult men eat between 2,000 and 2,500 calories a day and women between 1,800 and 2,300 calories a day.

Often seen as hopeless, Africa has made other significant gains. In spite of wars, massive economic mismanagement and the ravages of AIDS, the continent’s population has more than trebled — from 280 million to 854 million — since 1968, and life expectancy has increased from 44 years to 54 years.

According to the latest World Bank research, global poverty is declining rapidly. In 1981, 70 percent of people in poor countries lived on less than $2 a day, while 42 percent survived on less than $1 a day. Today, 43 percent live on less than $2 a day, while 14 percent survive on less than $1. “Poverty reduction of this magnitude is unparalleled in history,” wrote Brookings Institution researchers Laurence Chandy and Geoffrey Gertz in a recent paper. “Never before have so many people been lifted out of poverty over such a brief period of time.”

It is not only material well-being that is improving. Groundbreaking research by professor Steven Pinker of Harvard University shows a propitious decline in physical violence. According to Mr. Pinker, “Violence has been in decline for thousands of years, and today we may be living in the most peaceable era in the existence of our species.” Indeed, studies have shown that hunter-gatherer societies experienced about 524 violent deaths per 100,000. The rate of violent deaths in the war-torn 20th century, by comparison, amounted to a mere 60 per 100,000. To quote British Prime Minister Harold Macmillan (1957), we “have never had it so good.”

Historical evidence makes a potent case for what writer Matt Ridley called “rational optimism.” Optimism, alas, is the last thing to look for in a new documentary produced by Martin Scorsese that opened in American cinemas on April 6. Called Surviving Progress, the movie rehashes many of the ideas that doomsayers like Mr. Ehrlich have been peddling for some time — including the dangers of overpopulation, overconsumption, destruction of natural resources, capitalist greed and cultural decline.

If the reception of previous apocalyptic flicks — from Soylent Green to An Inconvenient Truth — is anything to go by, Surviving Progress will be both critically acclaimed and seen by many. That raises an interesting question: Why are we as a species so willing to believe in doomsday scenarios that never quite materialize? In their new book, Abundance: The Future Is Better Than You Think, authors Peter H. Diamandis of the X-Prize and journalist Steven Kotler offer one plausible explanation.

Human beings are constantly bombarded with information. Because our brains have a limited computing power, they have to separate what is important — such as a lion running toward us — from what is mundane. Because survival is more important than all other considerations, most information enters our brains through the amygdala — a part of the brain that is “responsible for primal emotions like rage, hate and fear.” Information relating to those primal emotions gets our attention first because the amygdala “is always looking for something to fear.” Our species has evolved to prioritize bad news. Pessimists survived, while optimists got eaten by lions.

Newspapers have long since realized that pessimism sells. According to one analysis, about 90 percent of all articles in The Washington Post tended to be pessimistic in tone during the period studied. As the old saying among journalists goes, “If it bleeds, it leads.” Politicians, too, have realized that banging on about “crises” increases their power and can, at least in Al Gore’s case, lead to a Nobel Peace Prize.

Surviving Progress will be watched because the brains of the mammals who went to the moon and discovered the secrets of the atom evolved by running away from wild animals. That does not detract from human accomplishment. If anything, it makes human progress even more amazing.

Marian Tupy is a policy analyst at the Cato Institute's Center for Global Liberty and Prosperity in Washington, D.C.

Cost Shifting Does Not Justify Obamacare by Jeffrey A. Singer

Fri, 04 May 2012 00:00:00 -0400

A major justification by President Obama for the individual mandate in the Affordable Care Act, which requires everyone to buy health insurance, is that every time an uninsured patient receives care in an emergency room, doctors and hospitals shift the cost to those of us who have insurance. But the impact of such cost shifting is vastly overblown and government, through the legislation, makes the problem worse, not better.

As a general surgeon in private practice for over 30 years, I have lost track of how many times I have performed emergency surgery on uninsured patients who never paid their bills. For me, just like for most doctors and hospitals, the only opportunity to recover our losses comes when it is time to renegotiate insurance contracts, because we typically sign contracts with insurance companies that bind us to fee schedules. The medical bills submitted to the insurance companies reflect “list prices.” Then the insurance companies readjust the charges to conform to their contracts. (Anyone who has ever been mailed an “Explanation of Benefits” report after submitting a claim to a health plan has seen how this process works.)

Even then, shifting losses from uninsured patients onto the insurance companies of my other patients is hard for me to do, for the same reason a grocer that routinely sustains losses due to breakage or theft cannot make up for those losses by raising prices: competition from the grocer down the block keeps a check on cost shifting.

Nevertheless, when people don’t pay their medical bills, somebody has to bear that cost. But who?

A study from the National Bureau of Economic Research found that in many cases, it’s other uninsured patients. Many uninsured patients who do pay their bills wind up paying the “list prices” for the services they received. The list price is well above what any provider expects to receive from an insurance company. Physicians collect more from those uninsured patients than they would from insured patients. That extra money often covers the cost of uninsured patients who don’t pay. A study from the University of Southern California in 2008 found a similar phenomenon in California hospitals.

Some of the cost of uncompensated care no doubt gets shifted to patients with private insurance. But the effect is small. Analysts at the Urban Institute concluded that uncompensated care accounts for 2.8% of all health care spending, and that cost shifting due to the uninsured raised private insurance premiums 1.7% “at most.” The non-partisan Congressional Budget Office agrees: “Overall, the impact of cost shifting on payment rates and premiums for private insurance seems likely to be relatively small.”

Any government-directed “solution” is likely to make the problem worse. Much of the current uncompensated care problem is due to a 1986 law called EMTALA (the Emergency Medical Treatment and Labor Act). This law bans hospitals from transferring patients to facilities set up to provide care to the indigent. In the process, it encourages people not to purchase health insurance and to use emergency rooms for primary care. People know that hospital emergency rooms must treat them, and cannot transfer them, even if they have no intention of ever paying for their care. So, for many, the urgency to purchase health insurance becomes less acute.

Congress predicated a federal takeover of health care on the idea that the public must be rescued from cost shifting due to the uninsured—a crisis that adds roughly 2% to everyone’s health insurance premiums. For this, Congress is forcing everyone to purchase and pay more for health insurance? For this, Congress created an unelected board that will ration care? For this, Congress raised taxes by half a trillion dollars? That’s like treating a roach problem with explosives.

As a physician, I worry about the harm that President Obama’s health care law will rain down on patients in the name of saving two percent on your health insurance.

Jeffrey Singer practices general surgery in Phoenix, Arizona, writes for Arizona Medicine, the journal of the Arizona Medical Association, is an adjunct scholar at the Cato Institute, and is treasurer of the U.S. Health Freedom Coalition.

Mitt Romney Completely Misreads the Hopes And Dreams of Youth Voters by Patrick J. Michaels

Thu, 03 May 2012 00:00:00 -0400

If his Miami speech on January 27 serves as any guide, Mitt Romney may be missing a great opportunity to connect with the youth (18-29) vote. Here's what he said:

Our young people have a great deal of concern. They're a very humanitarian people. They're concerned about issues like global warming and things of that nature, and they're concerned about humanity

Judging from the most recent Survey of Young Americans from Harvard’s Institute of Politics (IOP), Romney’s got it about 100% wrong. By and large today’s young Americans are self-interested, isolationist, want handouts, and they rank global warming last among domestic issues. Sounds like the general public to me!

Harvard’s methodology is a bit obtuse but yields interesting results. It samples twenty issues in one-on-one comparisons. For example, it asks a subsample of its 3,000+ respondents, “which do you think is more important, combating the impacts of climate change or addressing social security”; then climate change versus reducing the federal deficit, etc. (result: climate lost both comparisons handily).

I have rearranged their data in a different fashion that allows one to rank their 20 issues in order of descending importance.

Readers may have seen a very incomplete version of this by Charles Blow in last Saturday’s New York Times. Probably to save space, only “domestic” issues were shown, but another matrix, with the remaining “international” ones is available at their online site.

The only place that I have been able to find the raw matrix is at the IOP site, and it lumps domestic and international in the same chart. This gives a slightly different impression with regard to climate change.

Anyway, I gave each issue one point each time it “beat” a competitor issue head-on, regardless of whether the margin was statistically significant (almost all were, thanks to the large sample size).

Here we go; I also indicate which were listed as “Domestic” or “International” in the Times’ presentation

1. Jobs and unemployment DOM

2. Ensuring affordable access to health care DOM

4. Addressing Social Security (tie) DOM

4. Creating a world-class education system (tie) DOM

4. Lowering the tax burden for all Americans (tie) DOM

4. Becoming energy independent (tie) DOM

7. Reducing the federal deficit DOM

9. Protecting individual liberties from government (tie) DOM

9. Preventing the spread of terrorism (tie) INT

10. Withdrawing from Afghanistan (tie) INT

10. Preventing Iran from acquiring a nuclear weapon (tie) INT

12. Addressing income inequality DOM

13. Developing a comprehensive immigration policy DOM

14. Reducing the role of big money in U.S. elections DOM

(There is a large drop-off in support beneath this level)

16. Promoting peaceful resolution to Israel-Palestine (tie) INT

16. Promoting stable democracy in the Middle East/North Africa (tie) INT

16. Combating the impacts of climate change (tie) DOM

18. Countering China’s rising influence INT

19. Solving the European debt crisis INT

20. Re-integrating North Korea into the world community INT

So what’s “humanitarian” here? “Affordable” health care sounds like “I want someone else to pay my doctor fees” The surveyed group certainly has a conflict of interest about a “world-class education”, given that many of the respondents were in some type of college or university. Lowering my taxes? No. The mirage of energy independence? Reducing the deficit? Getting the snoopy government out of my life? No, no, no.

And what about the dinosaur media’s mantra that it is the “young people” who are most concerned about climate change? Of all the issues designated “domestic”, it’s at rock bottom. But is it really a domestic issue? After all, any effective climate change mitigation program is going to have a substantial international component. So let’s call it both.

In that case, it comes in ahead of three other international issues, including a humanitarian one—“Solving” (whatever that means) the European debt mess. I think our students are writing the headline: Youth to Euros: Drop Dead.

Mr. Romney would do well to revisit his January assessment of young voters in light of the Harvard survey. Let Obama appeal to their penumbra of altruism. Instead, campaign for this demographic by promoting economic development, jobs, social security reform (read: investment in things other than our insolvent government), and reforming higher education by concentrating on teaching and research instead of the armies of administrators that are now employed to deal with the federal leviathan. And stay away from climate change, the Far East, and bailing out the Euros.

Patrick J. Michaels is a Senior Fellow in Environmental Studies at the Cato Institute.

North Korea: The Gulag State by Doug Bandow

Thu, 03 May 2012 00:00:00 -0400

North Korea is, to put it mildly, a "problem." The so-called Democratic People's Republic of Korea devotes much of its time to threatening other nations. Pyongyang spends money that it doesn't have on nuclear weapons, missiles, and bizarrely choreographed and synchronized propaganda ceremonies. It has pioneered a system of monarchical communism, passing power from one idiot son to another.

Worse, at least for the North Korean People, the DPRK has created a genuine gulag state, with a smaller but still murderous "gulag archipelago," as Aleksandr Solzhenitsyn famously called Joseph Stalin's creation. The most important political challenge facing Washington remains the North's nuclear program. But the ultimate objective is to relax Pyongyang's grip over the suffering population.

That the DPRK is repressive is hardly news. However, it is difficult for anyone in the West to imagine the full extent of repression in the North.

The Committee for Human Rights in North Korea recently issued the second edition of David Hawk's The Hidden Gulag: The Lives and Voices of "Those Who Are Sent to the Mountains." The study is grimly enlightening, relying on satellite imagery and personal testimony, ever more abundant now that there are more than 23,000 North Korean escapees now living in the South. The publication is a critical attempt, observes Roberta Cohen, who chairs the Committee, to breach "the conspiracy of silence surrounding the camps."

The DPRK was a Cold War creation, established after Japan's surrender in World War II left the Korean peninsula divided between hostile U.S. and Soviet client states. Moscow tapped Kim Il-sung to run the Soviet zone, which became formally independent in 1948. Kim learned well from Stalin, out-maneuvering internal opponents to win supreme power and creating a system of pervasive social control to terrorize the population. Kim's horrifying twist to Stalin's style was to punish three generations of a family for the "crimes" of any member. Children, parents, and grandparents routinely ended up in the North Korean gulag.

The entire North Korean system is built on repression. Explains Hawk, a long-time human rights researcher, "these severe human rights violations occur in an environment of large-scale denial of human rights and fundamental freedoms." Nowhere else on earth — though perhaps Eritrea comes close — does the state so completely control its people.

Everyone is at risk of brutal punishment. For instance, wrong-doing includes being on the losing side of a political battle or, notes Hawk, "skipping too many of the compulsory ideological education classes all North Koreans are required to attend, defacing or failing to take adequate care of photographic images of Kim Il-sung, complaining about conditions, expressing criticism of regime policies, or leaving the country without permission."

Wrong-thinking encompasses everything from being a Christian to being an orthodox Marxist who opposed monarchical communism. Wrong-class means having been a landlord or "privileged bourgeoisie" under the Japanese.

Wrong-knowledge "includes the situation of North Korean students or diplomats who had been studying or posted in Eastern Europe in the late 1980s during the collapse of socialism, and who were recalled to the DPRK only to be immediately dispatched to labor camps to prevent their knowledge of the collapse of state socialism in North Korea's allies from spreading to the North Korean population." Finally, wrong-association includes having a close family member who falls in one of the forgoing forbidden categories.

As in Stalin's Russia, in prison purged members of the elite mix with social outcasts and regime opponents. Moreover, explains Hawk, the camp system "became a convenient dumping-ground for other individuals or groups that do not fit in," including unrepatriated South Korean POWs in the Korean War and South Koreans fighting with U.S. soldiers in Vietnam who were captured and then turned over to the North.

There is no pretense of legal process. The Nazis flaunted the facade of legality: the July 1944 plotters against Adolf Hitler were tried before the notorious Roland Freisler before being functionally murdered. Joseph Stalin enjoyed staging show trials on the most fantastic charges. However, the Kim family dictatorship does not bother with such procedural facades.

Hawk explains: "The presumed offender is simply picked up, taken to an interrogation facility and frequently tortured to 'confess' before being deported to the political penal-labor colony. The family members are also picked up and deported to the kwan-li-so." The regime wastes no time detailing the alleged crimes, though questions from interrogators might suggest the general offense. All inmates are held incommunicado, in contrast to the Soviet system, which allowed most inmates at least occasional visits and parcels.

No surprise, inmates are systematically brutalized. Notes the author, "The most salient feature of the day-to-day prison labor camp life is the combination of below-subsistence food rations and extreme hard labor." The semi-starved "prisoners are driven by hunger to eat, if they can get it (and avoid being caught) anything remotely edible: plants, grass, bark, rats, snakes, the food-stuffs of the labor camp animals." This, plus the prevalence of informants, encourages inmate-on-inmate violence. Even child inmates, incarcerated for the actions or thoughts of parents or grandparents, enjoy no respite. Those interviewed by Hawk were frequently beaten.

Prisoners are slaves for the regime, managing crops, raising animals, mining and logging, engaging in wood-work, and making textiles. Such enterprises provide some economic benefits for the regime, but are notoriously inefficient. An even more important purpose of the system likely is punishment.

Working conditions are harsh and the death rate is very high, though unreported. However, surviving is a dubious benefit. Hawk observes that "The prisoners are covered in dirt from the infrequency of bathing privileges, and marked by physical deformities: hunched backs, from years of bent-over agricultural work in the absence of sufficient protein and calcium in the diet; and missing toes and fingers, from frostbite; and missing hands, or arms or legs, from work accidents."

Although Pyongyang steadfastly denies any human rights violations, Kim Il-sung publicly justified imprisonment of "class enemies" as "a legitimate measure to protect the country's democracy from its hostile and impure elements who have abused democratic order and attempted to destroy our socialist system."

Not surprisingly, the ever-vigilant Kim dynasty has found many, many "hostile and impure elements" requiring attention. Reports Hawk: "The kwan-li-so political penal forced-labor facilities consist of a series of sprawling encampments measuring many miles long and many wide. They are located in the mountains and valleys, mostly, in the northern provinces of North Korea. There are between 5,000 and 50,000 prisoners perkwan-li-so, totaling some 150,000 to 200,000 prisoners throughout North Korea."

Apparently six are now in operation, down from a dozen. The closures do not reflect regime liberalization: some were shut because they were thought to be too close to the border with China, while Kim Il-sung decided to build a country villa near another one.

As in the Soviet system, successive political waves filled the labor camps. After the Soviets occupied the North, Kim Il-sung targeted regime opponents, which included everyone from Japanese collaborationists to Christian independence activists. After the Korean War Kim purged his internal rivals, including "Korean communist leaders who had been affiliated with the Chinese communist party and army" — which, of course, had saved his rule from defeat after American forces broke his invasion of the South.

In these efforts Kim took after Stalin. Reports Hawk: "These purges involved executing the leaders, initially after Stalinist-type show trials, and sending their networks of supporters in the party, the army, and the bureaucracy to the camps." Kim's later campaign to create a suffocating personality cult led to purges among the elite. Then the effort to anoint his son, Kim Jong-il, as his successor led to smaller-scale purges in the 1970s and 1980s. Little effective opposition to either Kim was apparent in later years. Thus, Hawk notes, "More recent deportations include those who complained about or sought to escape from the economic, social and political failures of the regime."

Hawk buttresses his analysis with individual accounts. For instance, Shin Dong-hyuk was born to two "model" prisoners and spent 23 years in the camps; his father was incarcerated because two of the latter's brothers had defected. Shin was tortured and forced to watch the execution of his mother and brother after they attempted to escape the prison.

Kim Yong ended up in the camps because his father and brother were accused of spying for the U.S. Yang Chol-hwan spent a decade in the kwan-li-so; he was incarcerated at age nine because his grandfather, a Japanese of Korean descent who emigrated to the North, was accused of treason. Only his mother, from an important political family, escaped prison after divorcing her husband.

Kim Young-sun was imprisoned for eight years because her husband apparently committed an unknown offense, which led to his disappearance, and apparently out of fear that she would talk about her knowledge of Kim Jong-il's wife, who had been a classmate and fellow dancer. A decade later one of her sons was executed after attempting to flee North Korea.

Foreign nationals also were at risk. Venezuelan communist Ali Lamada and Frenchman Jacques Sedillot were recruited as translators, only to be accused of being spies and imprisoned. Japanese Shibata Kozo married a Korean living in Japan and moved to North Korea, later to be accused of being a spy and imprisoned; his wife and children also were sent to the camps.

The stories go on with a depressing uniformity. The nominal offenses vary, but the punishments invariably are arbitrary and brutal. The regime equally fears individuality and humanity.

Alas, the kwan-li-so are not the only fixtures in the North Korean gulag. Also common are kyo-hwa-so, which are more like prisons. They contain those guilty of criminal as well as political offenses and do not include family members. Most are subject to some form of judicial process and receive a fixed sentence. Moreover, explains Hawk: "Incarceration is not incommunicado. The families of the imprisoned persons know where their relative is being detained."

Nevertheless, conditions are harsh, and do not begin in the kyo-hwa-so. Notes Hawk: "the brutalizations and inhuman treatment endured in the kyo-hwa-so prisons are preceded by months and months of pre-trial, pre-sentence brutality at one or more of the local police detention facilities." He includes multiple testimonies about time spent in these facilities as well.

What makes the tale of North Korean repression even more shocking is China's complicity. Hawk devotes an entire section to the maltreatment of those forcibly repatriated by Beijing. He explains: "Following interrogation and detention, which frequently includes beatings and systematic torture, many of the forcibly repatriated Koreans are assigned, often without judicial process, to short-term forced labor." In more serious cases, especially those with political overtones, people "are sent to the longer-term, felony level, forced-labor penitentiary-like kyo-hwa-so prisons, or 're-revolutionizing areas' of the kwan-li-so political penal labor colonies." Here, too, Hawk adds anecdote to analysis, allowing the victims of Pyongyang's and Beijing's inhumane collaboration speak to us.

Repatriation includes other atrocities. Torture is pervasive throughout the system. The North Koreans also routinely employ forced abortion and infanticide, especially in the kwan-li-so — except among "model" prisoners essentially mated by the camp authorities. Particularly outrageous, however, is "the forced abortions and infanticide against and inflicted on women forcibly repatriated from China because of the racial and policy components of these atrocities. The women impregnated by Chinese men were routinely punished and their babies killed, accompanied by racial slurs and refusal to accept children who were part Han Chinese," writes Hawk.

When one thinks of the term "crime against humanity," one should think of the DPRK. Any engagement with Pyongyang should include discussion of its virulent assault on human rights. However, Washington's (and the world's) influence will remain limited.

The Kim regime exists only because of pervasive repression; those benefiting from Pyongyang's totalitarian control are not going to yield power simple because they are asked to do so. Greater respect for human liberty and dignity will require a transformation from within — perhaps accelerated by action from Beijing, if the latter comes to believe that the DPRK would be a more stable and valuable ally if its conduct was less egregious.

Some day monarchical communism will disappear from North Korea. We can only hope that day comes quickly. Tomorrow would not be soon enough.

Doug Bandow is a senior fellow at the Cato Institute and former special assistant to President Ronald Reagan.

U.S. Could Learn from Mexico's Flat Tax Experience by Roberto Salinas León

Wed, 02 May 2012 00:00:00 -0400

With the 2012 tax season finally over, Americans recognize the absurd complexity of the U.S. tax system more than ever.

Now's an ideal opportunity to consider in earnest precisely how policymakers could go about reforming the tax code to make filing one's taxes less of an annual torture.

There is certainly political will for such a move. A recent Rasmussen poll found that 61% of likely U.S. voters support the idea of getting rid of the existing income tax system and replacing it with something simpler.

One of the most popular reform ideas is the flat tax — a single, uniform rate applied to all income, without exemptions, deductions or special favors. The flat-tax approach could apply to individual income taxes as well as to taxes on businesses.

The flax tax is a bold and vital idea, which has caught on in many emerging markets.

Done right, it could revitalize the American economy.

But my home country of Mexico serves as a cautionary tale for what can go wrong when policymakers try to exploit the flat tax as just another instrument to further revenue collection.

In Mexico, the unhappy experience centered on business taxes. In January 2008, thanks in large part to the leadership of President Felipe Calderon, Mexico installed a national 16.5% flat tax — officially known as the IETU — on all corporate earnings. It was eventually adjusted upward to 17.5%, which is the current rate.

The problems plaguing the Mexican tax code that inspired the IETU effort are similar to those plaguing the American system. Mexico's code was riddled with an absurd number of deductions and carve-outs for special interests.

Tax code complexity generates massive compliance costs that leave businesses with less money and labor to put toward genuinely productive activities.

In Mexico, code compliance expenses involve a transaction cost of almost 2% of gross domestic product.

The prevalence of these transaction costs are a big reason behind the drag on productivity growth, which also explains Mexico's constant underperformance in economic growth — a mere 2.6% average annual growth rate in the past two decades — despite the major strides taken in areas like global trade integration, fiscal discipline and monetary stability.

Code Complexities

In the U.S., citizens spend over 6 billion hours a year filling out tax forms.

Research from the Laffer Center shows that for every dollar collected by the IRS, taxpayers incur an additional 30 cents in compliance costs, totaling $431 billion every year.

In Mexico as in America, large corporations have the resources and the perverse incentive to exploit complexities in the tax code to reduce their taxes.

In Mexico, while the official corporate marginal tax rate was 30%, many businesses routinely finagled their burden down to as low as 6% "effective" tax rate.

To get a sense of the size of that same problem in America, consider that General Electric paid precisely 0% in taxes on net income in 2009 and 2010.

Done right, the IETU would have transformed the Mexican economy, radically simplifying tax compliance and in the process getting rid of mountains of existing loopholes.

But something went wrong between conception and implementation.

By the time President Calderon obtained congressional approval, and signed the bill into law, it looked wildly different from the ambitious concept of the flat tax envisioned at the start of the administration.

Tax Tinkerers

Policymakers, obsessed only with tax revenues, started tinkering — then they tinkered and tinkered some more, to the point that the final law has made the country's tax code far worse.

Instead of a simple, straightforward rate on earnings, businesses got handed yet another bundle of complexities in calculating and complying with tax obligations.

Indeed, the worst mutation by far was that instead of replacing the old, broken corporate income tax system, the IETU was introduced as an alternative to compete with it.

Every year, businesses have to tally up how much they owe under both the old corporate rate (with countless of deductions) and the flat tax alternative — then are supposed to pay the higher amount.

Shockingly, instead of using a simple idea to simplify economic life, the government managed to increase compliance costs.

Businesses have to hire double the lawyers and accountants every tax season, leaving even less time and money for productive activities, and making it all the more likely that they might decide to avoid paying taxes entirely.

Tax evasion today represents almost 40% of all (nonoil) tax revenues collected!

The IETU (some of my friends refer to it as the YETI, i.e., a real abomination) was conceived as a way of streamlining the tax code in order to spur business growth, especially in small and midsize concerns, and make Mexico more accommodating to investment.

But politicians morphed it into a brazen money grab.

The law that Calderon signed is nothing like what flat tax advocates were originally hoping for.

The law is now under congressional review. Not surprisingly, the consensus has grown to simply get rid of it. In the process, the very idea of a flat tax has unwittingly gotten a bad rap.

American policymakers need to avoid our mistakes. The U.S. tax code needs to be simplified. There could soon be the political will for installing a national, uniform flat rate.

When legislators go about writing that rate into law, though, they must keep it pure and simple — and fight against any special-interest scheming to re-create the costly and inefficient rules of the past.

Roberto Salinas-León is executive director of policy analysis in Mexico City and an adjunct scholar at the Cato Institute.

Inflation Isn't the Point of Monetary Easing by Timothy B. Lee

Wed, 02 May 2012 00:00:00 -0400

Matt O’Brien has been doing some great coverage of monetary policy recently. He and I agree that the Fed ought to be pursuing a more expansionary monetary policy. However, I think his specific argument for monetary easing isn’t quite right:

Why is steadily rising NGDP so important? It’s about debt. Most contracts assume that NGDP will rise about five-percent a year. If NGDP (and incomes) doesn’t go up that quickly, it becomes harder and harder for people to pay back their debts. That’s what made the Great Recession so great. NGDP growth actually went negative for the first time in half a century.

“NGDP” here is nominal GDP. If you add up the value of all goods and services sold, in non-inflation-adjusted (“nominal”) dollars, that’s NGDP. A growing number of economists and pundits have been arguing that the Federal Reserve should make the growth of NGDP, rather than the inflation rate, its benchmark for whether monetary policy is too tight or too loose. And right now, this rule tells us that monetary policy has been way too tight since 2008 and should be eased. So far, O’Brien and I are on the same page. But his argument above—that the point of monetary easing is to increase the inflation rate—gets things almost exactly backwards.

Unfortunately, it’s hard to explain why without a bit of math. Economists use the “equation of exchange,” MV=PQ, to help them think about monetary policy. The left-hand side of the equation, MV is another way to describe NGDP, the total value of goods and services in the economy. M is the money supply, the number of dollars in circulation. V is the “velocity” of money, the number of times each dollar is spent in a year. By definition, if you multiply the number of dollars by the number of times each dollar is spent you get the value of all goods purchased in a year.

PQ is another way of expressing the same quantity. Q is the quantity of “stuff” produced in a year, and P is the average price of that stuff. If you multiply the quantity of stuff times the average price of that stuff, you get the total value of all output in the economy. MV, PQ, and NGDP are three different ways of describing the same quantity.

OK, so what does this have to do with monetary policy? In late 2008, the Federal Reserve screwed up and allowed the left-hand side of the equation, MV, to decline sharply. (Milton Friedman argues this was also the cause of the Great Depression.) Logically, this meant that the right-hand side of the equation, PQ, also needed to decline. And there are only two ways this can happen. One is for P to fall—deflation. The other is for Q to decline—a recession.

In the 2008-09 contraction, prices only fell by a couple of percentage points, while NGDP fell by much more than that. Math tells us the rest of the decline had to be absorbed Q declining. In other words, because prices didn’t fall fast enough, we got layoffs instead.

So the argument for monetary easing is straightforward: by expanding the money supply (M), the Fed can increase MV, which will necessarily increase PQ. Once again, there are only two ways PQ can change: either P will increase—that is, we’ll get inflation—or Q will increase—we’ll get a larger economy.

In practice, we’d get a mixture of the two, just as we got both deflation and unemployment in 2008-9. But which one you get more of depends on the state of the economy. If the economy is already humming along nicely, there’s not much room for Q to increase; the economy is already producing about as much stuff as it’s capable of producing. So monetary stimulus will mostly lead to an increase in P: inflation. But if the economy is in a recession, with lots of idle workers and factories sitting around, then monetary stimulus will cause an increase in Q, the size of the economy. Firms will see their revenues increase, and that will cause them to hire more workers and increase production.

Now, even if the economy is severely depressed, at least some of the monetary stimulus will occur as an increase in P rather than Q. But that’s a side effect of the stimulus, not its purpose. So it’s important for central bankers to make clear they’re willing to accept some inflation as the cost of economic expansion. But inflation is neither the goal nor a means to the goal.

I think this is a particularly important point because many people have a viscerally negative view of inflation. I think the harms of inflation in the low single digits is often over-stated, but convincing inflation hawks that inflation is a good thing is going to be a really hard sell. Fortunately, supporters of monetary easing don’t need to convince the world that inflation is good! We just need to convince them that a bit of extra inflation is a price worth paying for getting people back to work. But we can’t do that if we describe inflation as the point of monetary easing rather than as a (possibly unwelcome) side effect.

Timothy B. Lee is an adjunct scholar at the Cato Institute. He covers tech policy for Ars Technica and blogs at Forbes.com.

This Is Happening in America? by Nat Hentoff

Wed, 02 May 2012 00:00:00 -0400

From my diary of students' awakening to the president's grave menace to their constitutional liberties: Recently, on Skype, I was discussing my memoir, Boston Boy (Paul Dry Books, 1986), with a class at Suffolk University in Boston. It's about growing up in a Boston ghetto during the Great Depression, when Boston was the most anti-Semitic city in the country.

While answering questions from these lively students, I wanted to find out how many of them knew about the National Defense Authorization Act (NDAA) for Fiscal Year 2012. Barack Obama signed this law, giving the president — for the first time in American history — the power to imprison indefinitely an American citizen "suspected" of "association" (without evidence) with terrorists. This fate comes without charge or trial.

What did these students think about that?

There was silence. Not a word. They seemed to be glued to their chairs.

Later, an explanation came from the history professor, Robert Allison, who had assigned the book to them. (Among his books: The Boston Tea Party, The Boston Massacre, and American Eras: The Revolutionary Era (1754-1783).)

"You sure put the fear of God in them," he told me. That was strange because I'm a nonbeliever — except in the Constitution.

Describing the students' state of fear, he told me that one of them startlingly asked: "Is what he said happening in America?"

Added another: "Is anybody doing anything about it?"

Unfortunately, I haven't heard of anyone in the Obama Justice Department resigning in patriotic protest against the NDAA. (Nor, as far as I know, did anyone in the George W. Bush Justice Department resign, denouncing the Patriot Act, under which the systemic contemporary disintegration of our constitutional liberties began.)

Instead, writes Tom Engelhardt, it seems the Obama administration has been building upon this seemingly vast "national security labyrinth" ("Yottabytes, You, and the Infinitely Expansive National Security State," Tom Engelhardt, commondreams.org, April 3).

On March 22, reports Engelhardt, Attorney General Eric Holder, our chief law officer, along with Director of National Intelligence James Clapper Jr., agreed to "new guidelines allowing the National Counterterrorism Center (NCTC)... to hold on to information about Americans in no way known to be connected to terrorism — about you and me, that is — for up to five years." Its previous limit was 180 days.

So, you or I would be a "person of interest" to the FBI and other intelligence agencies for five years. And nothing would prevent us innocents from staying in suspects' databases for many years beyond.

Is this America? Or China?

Engelhardt also points out that these new guidelines targeting We the People "hardly made a ripple" throughout the media.

Remember that when President Obama arrived in the Oval Office, he solemnly pledged his administration would be the most transparent in American history.

Next summer, during my annual lecture-interchanges with law students at Charlottesville, Va.'s Rutherford Institute — headed by John Whitehead, one of the nation's strongest defenders of civil liberties — I'll review the NDAA for them, reminding them of Winston Churchill's warning:

"The power of the executive to cast a man into prison without formulating any charge known to the law, and particularly to deny him the judgment of his peers (at trial) is in the highest degree odious, and is the foundation of all totalitarian government whether Nazi or Communist" (Future of Freedom Foundation, fff.org, April 27).

Is it the foundation of our government run by Barack Obama and Eric Holder?

And while talking to these bright law students, I'll hypothesize that some of them might wind up in the Justice Department of a president whose view of national security would lead him or her to adopt and enforce the very tyranny that is described by Winston Churchill and is contained in the NDAA.

If any of these law students in Virginia are hired by the Justice Department, would they follow these presidential orders, as is now customary?

Now, a contrasting, cheerful note amid all this tarring of our American values:

The City Council of Northampton, Mass., has unanimously passed a resolution rejecting the NDAA as unconstitutional and demanding "a restoration of due process and the right to trial" ("Northampton 'opts out' of federal law," Heidi Voigt, wwlp.com, Feb 17).

Sure, this is a symbolic statement meant to awaken other cities. But it is worth remembering that, after the Patriot Act was shoved through Congress in the fall of 2001, this City Council unanimously voted on May 2, 2002, to make Northampton America's first city to denounce the un-American law, organizing a modern-day version of the Committees of Correspondence.

The result was the still very active Bill of Rights Defense Committee (BORDC). Committee member Emma Roderick proudly declares that, after Northampton's resolution passed, "433 cities and towns ended up passing (similar) resolutions," rousing citizens across the country, even liberating some minds across party lines in Congress. (wwlp.com, Feb 17).

This resistance to arrant tyranny first became part of our heritage when Samuel Adams and the Sons of Liberty formed the original Committees of Correspondence, a unifying source of news of British tyranny throughout the colonies that became a precipitating cause of the American Revolution.

Where are the Sons of Liberty, the Committees of Correspondence and the insistently courageous city councils now, when they are crucially needed to bring back the Bill of Rights that protect every American against government tyranny worse than King George III's?

Where are the citizens demanding that these doorways to liberty be opened? None of the current polls listing the most demanding issues in the 2012 elections have any mention of enabling us to be free citizens again.

From now on, I'll be asking this of any students I speak with: What are we waiting for?

Nat Hentoff is a senior fellow at the Cato Institute.

Because Angels Don't Govern Us by Michael D. Tanner

Wed, 02 May 2012 00:00:00 -0400

Now that the first round of spin has passed, we can take a second look at the lessons to be learned from the recent GSA and Secret Service scandals.

First, it really is a bit unfair to blame them on President Obama. The president is not directly involved in the day-to-day management of these agencies. Nor should he be. Moreover, misbehavior by government employees predates the Obama administration by quite a bit. In 460b.c., for example, the Greek Delian League put nine government administrators to death for misusing public funds.

However, none of that lets President Obama entirely off the hook.

Too many on both the left and the right believe that government intervention in the economy or in the lives of individual citizens is necessary because only government can see the larger picture and act in a disinterested way for the benefit of the greater good. Businesses can be corrupt or self-seeking, and individuals may be myopic or make choices that others see as either morally or economically wrong. No doubt this view is correct, at least in some cases. In one way or another, we are all imperfect.

President Obama believes that government is different.

Given our flaws as individuals, the Obama administration believes that government should run our health-care system. Left to our own devices, we might fail to buy health insurance or buy insurance that doesn’t include the right package of benefits. Government needs to subsidize “green energy,” because we might decide to buy fuel-inefficient cars. Government needs to oversee the banking industry and housing markets, because banks made loans to people who couldn’t afford to pay them back.

People are prejudiced and selfish. Government is altruistic and “fair.” Markets fail, but not government. As President Obama sees it, government can make us better and lead us to the promised land.

But, as the GSA and Secret Service scandals should remind us, government is made up not of philosopher-economist-saints but of men and women like the rest of us — afflicted by failures, corruption, short-sightedness, and self-interest. The difference is that government gives those imperfect individuals the power to impose their views and desires on the rest of us.

The Founding Fathers understood this. They knew that some government is necessary to protect our rights to “life, liberty, and the pursuit of happiness.” For this reason, they noted in the Declaration of Independence, “governments are instituted among men.” But they also understood that government needs to be carefully limited in its scope and power.

As James Madison wrote in Federalist 51:

If men were angels, no government would be necessary. If angels were to govern men, neither external nor internal controls on government would be necessary. In framing a government which is to be administered by men over men, the great difficulty lies in this: you must first enable the government to control the governed; and in the next place oblige it to control itself.

Indeed, the damage that government can do is far greater than the damage that can be done by business or individuals, because ultimately the state holds a monopoly on the use of force. If I make a mistake, it affects my life and perhaps the lives of my family and a few others. If a business makes a mistake, it can affect thousands more. But if government makes a mistake, it can affect everyone. That is what makes the growing reach of government so dangerous.

That means that, necessary though some restraint on the freedom of individuals and businesses may be, it is even more important to have internal and external controls on the power of government.

The Obama administration’s failure, therefore, is not that it neglected to micromanage the GSA’s expenses or that it couldn’t keep Secret Service agents out of brothels. It is that it wants the practical equivalent of GSA employees and Secret Service agents to run our lives. The Obama administration persists in believing that government is wiser than and morally superior to the average American.

That is a real scandal.

Michael Tanner is a senior fellow at the Cato Institute and author of Leviathan on the Right: How Big-Government Conservatism Brought Down the Republican Revolution.

Separation of Art And State by David Boaz

Tue, 01 May 2012 00:00:00 -0400

What do art, music, and religion have in common? They all have the power to touch us in the depths of our souls. As one theater director said, "Art has power. It has the power to sustain, to heal, to humanize... to change something in you. It's a frightening power, and also a beautiful power... And it's essential to a civilized society."

Which is precisely why art, music, and religion should be kept separate from the state.

Government involves the organization of coercion. In a free society coercion should be reserved only for such essential functions of government as protecting rights and punishing criminals. People should not be forced to contribute money to artistic endeavors that they may not approve, nor should artists be forced to trim their sails to meet government standards.

Government funding of anything involves government control. That insight, of course, is part of our folk wisdom: "He who pays the piper calls the tune."

Defenders of arts funding seem blithely unaware of this danger when they praise the role of the national endowments as an imprimatur or seal of approval on artists and arts groups.

We don’t need any more fights over “Piss Christ” or the National Portrait Gallery’s “Hide/Seek” exhibition on sexual difference in portraiture or the Enola Gay exhibit at the National Air and Space Museum. And we can thank our lucky stars that Kentucky’s Creation Museum is private, or we’d have a major political battle over that.

Meanwhile, we should note that the NEA’s budget is about 0.2 percent of the total amount spent on the nonprofit arts in the United States. The rapidly growing crowdfunding platform Kickstarter expects to direct more funding to the arts in its third year of operation than the NEA does.

The American Founders knew that the solution to the Wars of Religion was the separation of church and state. Because art is just as spiritual, just as meaningful, just as powerful as religion, it is time to grant art the same independence and respect that religion has: the separation of art and state.

David Boaz is the executive vice president of the Cato Institute and has played a key role in the development of the Cato Institute and the libertarian movement.

The Reason Obama Is Pushing for More Federal Education Spending by Neal McCluskey

Tue, 01 May 2012 00:00:00 -0400

Watch President Obama rail about the rich and brandish his Buffett Rule and it’s hard not to see class warfare. Look at the spending the president proclaims is most important, however — especially on education — and you might conclude that he isn’t prosecuting a class war. He’s just giving up on reality.

First of all, it’s tough to argue that the wealthy don’t pay their fair share in taxes. According to the nonpartisan Tax Foundation, the oft-maligned “one percent” earn 17 percent of the nation’s adjusted gross income, yet pay 37 percent of federal taxes. The top five percent garner 32 percent of all income yet furnish 59 percent of taxes. The rich are paying more than their fair share.

Another tough argument is that the spending priorities the president is determined to protect are really so critical at all. In the business world, few would pass an honest cost-benefit analysis. A perfect case in point is education.

As Mr. Obama insisted in a speech at Florida Atlantic University recently, it is “investments... in things like education and research and health care... that lead to strong and durable economic growth.”

Here’s where one wonders whether the president is a class warrior, or someone who’s just given up on grappling with reality. As reflexively good as “investing” in education sounds, the overwhelming evidence shows that federal education spending is a colossal waste.

Begin with Head Start, the federal government’s signature, $8.1 billion pre-kindergarten program. According to the most recent federal assessment it’s an investment black hole, producing no lasting gains.

Then there’s elementary and secondary education, which has seen inflation-adjusted federal largesse leap from $33 billion in 1970 to $115 billion in 2010. Meanwhile, scores for 17-year-olds on the National Assessment of Educational Progress — the so-called “nation’s report card” — have been wearing cement shoes, climbing not at all.

Finally there’s higher education, where surely more federal dough is needed. After all, prices are hurtling toward the moon and no can be expected to pay without help.

The problem is, federal investment has been a leading cause of, not cure for, rampant inflation.

Schools simply couldn’t keep raising prices if students couldn’t pay them, but for decades Washington has ensured that they could pay ever more.

Between 1970 and 2010, according to the College Board, inflation-adjusted federal aid took off right along with college prices, launching from $18 billion in 1970 to $169 billion in 2010.

Of course, enrollment increased markedly in that time. But that’s largely been bad news, with lots of people lacking either the ability or desire to do college work enrolling, taking on debt, but never finishing.

According to the latest federal figures, 43 percent of first-time, full-time college students in four-year programs don’t graduate within six years, and most of those will never finish. Worse, 72 percent of students in two-year programs don’t complete them within three years. Add to that the one-third of bachelor’s holders who are in jobs that don’t require the degree, and massive over-consumption — not underinvestment — is clearly our biggest college problem.

Given the horrendous federal education track record — not to mention the nearly $16 trillion national debt — there’s no reasonable way to conclude that yet more federal outlays are needed.

But let’s be fair: President Obama almost certainly knows that. He’s a smart guy, and this information is pretty easy to find.

The fact is the president is being very realistic about this — politically realistic.

Throw all the tax and education reality you want at him, as long as voters believe the rich are getting away with taxation murder, or more money for education necessarily means better education, and the president would be politically crazy not to do what he’s doing.

Polling suggests he’s on target. A recent survey of swing-state voters commissioned by the College Board found that 67 percent think that education is “extremely important,” placing it just behind “jobs and the economy” and “government spending.” Most also feel education needs greater funding, including student aid. And it doesn’t hurt that focusing on aid curries favor with both Occupy Wall Street types and middle-class voters staring down tuition bills.

So is the president engaging in class warfare? Seems so. Is he ignoring the waste of federal education policy? Absolutely. Has he given up on reality? No way — it’s just that it’s political reality that matters.

Neal McCluskey is associate director of the Cato Institute's Center for Educational Freedom and author of Feds in the Classroom: How Big Government Corrupts, Cripples, and Compromises American Education.

Is Rubio Running for Veep, or Globocop? by Gene Healy

Tue, 01 May 2012 00:00:00 -0400

Americans are burdened by a crushing debt load and an administration that can't keep its hands to itself at home or abroad. And so here comes Sen. Marco Rubio, R-Fla., a leading contender for the GOP veep slot, to insist that "what happens all over the world is [America's] business."

In his much-hyped foreign policy speech at the Brookings Institution Wednesday, Rubio declared that "every aspect of lives is directly impacted by global events. The security of our cities is connected to the security of small hamlets in Afghanistan." ("If true, we're all going to die," cracked the American Conservative's Michael Brendan Dougherty).

The excitable young senator called for up to two more wars in the Middle East (Syria and Iran), "enlargement of NATO" to more post-Soviet Republics ("Putin might talk tough, but he knows he is weak"), combatting AIDS in Africa and foreign aid for "agricultural initiatives" to establish "a healthier global community." Why choose between "guns and butter" when you can have both?

Rubio endorsed the foreign policy vision of Brookings' Robert Kagan, who insists that "if American power declines, this world order will decline with it." He unleashed a parade of horribles, including attacks on American allies, insecure trade routes and a rollback of democratic gains. As it happens, President Obama is a huge Kagan fan as well. As Rubio noted Wednesday, "on foreign policy, if you go far enough to the right, you wind up on the left."

But Kagan's vision is deeply flawed: our bloated defense budgets and outdated Cold War alliances mainly serve as foreign aid. They subsidize social spending by allies who are wealthy enough to defend themselves. Moreover, a militarized "forward strategy of freedom" isn't a necessary condition for further expansion of liberal institutions worldwide. Indeed, it's as likely to hinder as it is to help.

At the outset of President Obama's Libyan adventure, Harvard's Stephen M. Walt warned at ForeignPolicy.com that "we are likely to be disappointed by the outcome" — not because Gadhafi had a formidable military, but because democratization by gunpoint is a fool's errand.

Walt cited studies showing that military intervention by free countries "has only rarely played a role in democratization since 1945." Indeed, "when foreign interveners oust an existing ruler and impose a wholly new government (which is what we are trying to do in Libya), the likelihood of civil war more than triples."

Rubio's main complaint with our "kinetic military action" in Libya? It wasn't "kinetic" enough: "Many loyal supporters back home were highly critical of my decision to call for a more active U.S. role in Libya," he complained at Brookings.

True, Senator Rubio didn't say anything far off from what Governor Romney has offered in his campaign trail statements on foreign policy. But since Romney is (a) smart; (b) risk-averse; and (c) doesn't actually believe anything, it was always possible to hope he'd be sensible.

Alas, Rubio looks like a true neoconservative believer. And if you're looking for a veep who insists that George W. Bush "did a fantastic job as president" and wants to double down on the profligate interventionism of the last decade, Rubio's your man.

He closed the speech by quoting Tony Blair's 2003 address to the U.S. Congress. Paying the price and bearing the burden of defending others worldwide is "hard on America," Blair acknowledged, and somewhere "out in Nevada or Ohio or these places I've never been to," (but "always wanted to go"!) there's "a guy" asking 'why me, and why us, and why America?'"

It's a good question. Another good question is, "why Rubio?"

Gene Healy is a vice president at the Cato Institute and the author of The Cult of the Presidency: America's Dangerous Devotion to Executive Power.

Geithner's Willful Negligence by Richard W. Rahn

Mon, 30 Apr 2012 00:00:00 -0400

What would you think of a secretary of the Treasury who failed to do serious cost-benefit analysis about regulations that could cost millions of Americans their jobs and cause innocent people to be subject to political abuse or worse and yet have almost no benefit to the United States?

Over the past several years, Treasury Secretary Timothy F. Geithner was warned by many private economists and members of Congress of the adverse consequences of a proposed rule that would force U.S. banks to be uncompensated tax collectors for foreign governments. On April 17, Mr. Geithner issued the rule anyway.

Rep. Bill Posey, Florida Republican, responded by saying: “The administration’s decision overturns a hundred-year-old policy that has welcomed tens of billions of dollars from foreigners, putting their money to work in America. In doing so, the administration has thumbed its nose at the entire Florida delegation [both Democrats and Republicans] who wrote the president on March 2, 2011, asking him to withdraw the ill-advised proposal, which would ‘cause irreparable harm to the U.S. economy’ and ‘negatively affect the solvency of financial institutions’ in the state of Florida. They are basically telling foreigners that their money is no longer welcome in the United States.”

Mr. Posey added, “Deeply troubling is the administration’s refusal to conduct a simple economic impact study to analyze the loss these deposits will have on the U.S. economy.” Sen. Marco Rubio, Florida Republican, also blasted this job-destroying regulation and noted that the money being driven away “is used for loans to help entrepreneurs create jobs as they start new businesses or expand existing ones.”

To put it simply, the Obama Treasury Department and Internal Revenue Service (IRS) are forcing U.S. banks to report to foreign governments that often are corrupt or worse on lawful deposits their citizens hold in U.S. banks, thus putting those citizens’ lives at risk. As the former governor of Oklahoma and now president of the American Bankers Association, Frank Keating, wrote: “While the IRS minimizes potential security issues, nonresident aliens are unlikely to feel reassured by promises that their information won’t fall into the wrong hands. These pledges could be met with apprehension when countries with questionable human rights records remain on the recipient list. This rule gives nonresident aliens every incentive to pick up and move their deposits elsewhere.”

It only gets worse. The Treasury/IRS has finalized another rule set to go into effect on Jan. 1, 2013, called the Foreign Account Tax Compliance Act. It puts a huge paperwork, cost and legal liability burden on foreign financial institutions and U.S. banks that also operate abroad. It is having the predictable consequence of making it very difficult, if not impossible, for Americans living abroad to have a local bank account (which, in many places, is almost a necessity). There is more than $10 trillion in foreign-portfolio (stocks and bonds) investment in the U.S. This is not counting direct investment by foreign corporations and others. Much of this $10 trillion-plus is managed by foreign financial institutions. Now many of them are saying they are going to leave the U.S. market because of these regulations, which means the potential loss of several million U.S. jobs.

As Mr. Keating has said, “These costly information reporting regimes are not used by the banks themselves; instead, these are required forthesole benefit of the IRS. In some cases, it is difficult to understand how the IRS will even use these new reporting rules.” The real scandal is that the Treasury/IRS never did a real cost-benefit analysis before finalizing these rules. The reason they didn’t is obvious. Neither rule could have been justified on economic or human rights grounds — it is all about power for a few in Washington and their foreign bureaucrat cronies. The failure to do what any responsible person would do — by looking at the real and potential resulting harm — constitutes willful negligence. If Mr. Geithner or IRS Commissioner Douglas H. Shulman were in the private sector, they clearly could be indicted and probably convicted because of both the monetary damage and risk to individual lives these rules promulgated by them are causing and will cause.

Mr. Geithner, in particular, seems to have no shame or sense of responsibility. Last week, the trustees’ report on Social Security and Medicare was issued, showing that not only are both programs unsustainable but they are approaching insolvency at an even faster rate than previously thought. So does Mr. Geithner come up with a plan to salvage the situation? No, he blasts House Budget Committee Chairman Paul Ryan for having the courage — unlike himself — to put forth a plan to deal with an arithmetic reality.

Looking at the actions and words of Mr. Geithner, you can conclude that he is consciously trying to destroy the U.S. economy, he lacks a sufficient number of brain cells and nerve connections for the job, or his ego and desire to pander to his boss and well-known economic illiterates has caused him to be willfully negligent over and over again. The latter is probably closest to the truth.

Richard W. Rahn is a senior fellow at the Cato Institute and chairman of the Institute for Global Economic Growth.

Trustees' Projections Mask Social Security Shortfall by Jagadeesh Gokhale

Mon, 30 Apr 2012 00:00:00 -0400

The Social Security Trustees’ new report reveals serious deterioration in the program’s financial outlook. This decline could have been known much earlier — instead of being gradually revealed to us — if the trustees had used correct projection methods.

Social Security officials have long been misdiagnosing the program’s financial condition. Whether this reflects poor judgment, incompetence or deliberate misdirection seems impossible to determine.

This year’s trustees’ report shows that Social Security’s 75-year actuarial deficit increased from 2.22 percent of payrolls to 2.67 percent — among the largest increases of the past two decades. Out of the total increase of 0.45 percentage points, 0.21 percentage points (or 47 percent) resulted from changes to economic assumptions. Why? It looks as though the program’s actuaries are not particularly good at economics — and don’t adequately build it into their financial projections.

Consider this example in the report:

This year, the trustees changed one of the ultimate economic assumptions — the annual rate of change in average hours worked for the future. Reasons for the change in the ultimate average hours worked include first, the need to establish consistency with the projections of an aging workforce; and second, the belief that increasing productivity is likely to result in workers’ desire to enjoy productivity gains in the form of more leisure (2012 Annual Report of the Social Security Trustees, Chapter IV.B7).

The first reason is something that I have argued for. It’s now finally being implemented but in a piecemeal manner.

The second reason — the trustees’ newfound belief that workers would enjoy more leisure in the future — is stunning. Did new information since last year convince the trustees of the need for such a major change? It suggests that Social Security’s financial projections are not informed by any disciplined application of proper projection methods.

Though there has been progress in updating the trustees’ projection methods, the pace of this progress remains glacial. The trustees have not explained why they shied away from using all available information in making their demographic projections. And all the key demographic changes are still not incorporated into deriving their economic assumptions.

Crucially, just projecting historical trends of economic variables into the future is insufficient to capture the full economic implications of projected demographic changes. This is a key methodological shortcoming that the recent report of Social Security’s Technical Panel on Assumptions and Methods overlooked.

The term “demographic change” of course includes the continuing retirement of the large baby boomer cohort. However, there are many other important, if less visible, demographic changes likely to persist and influence our economy’s evolution in terms of labor-force participation, earnings, inequality, productivity growth, payroll taxes and Social Security benefits.

The most important of these are overall changes in family structures, marital trends, fertility, economic dependency relationships, educational attainment and workforce composition. All are evolving steadily but differently among different population groups.

These important “micro” demographic changes, however, are ones that Social Security’s officials have ignored when making the program’s financial projections. It’s no wonder that the largest of the “technical adjustments” to the projections are now emerging among their economic components.

Had the Social Security officials used appropriate assumptions and methods in building financial projections, we might have seen more than mere lip service by lawmakers of both parties regarding program reforms. This has created big problems, because analysis of the relatively simple mechanics of the program’s finances reveals that the longer we delay implementing reforms, the costlier they will be.

The program’s total unfunded obligations — $20.5 trillion according to the report — grow at an interest rate that is larger, on average, than the productivity-plus-population-growth formula that determines growth of the payroll tax base. Calculations based on micro-data sources of demographics and economic behavior suggest that the program’s long-term financial shortfall is about 50 percent larger than the trustees are letting on.

However, this difference will be revealed only gradually as official projections play catch-up with actual realizations. That can only mean costly delays to urgently needed Social Security reforms.

At What Cost EU Membership? by Marian L. Tupy

Sun, 29 Apr 2012 00:00:00 -0400

These are difficult times for the European Union, yet with the exception of the cantankerous prime minister of Hungary, few central and eastern European leaders are willing to talk about national interests in the context of the European project.

That is partly for geopolitical reasons, such as the fear of a resurgent Russia, and for sentimental reasons, such as the pride in belonging to a group of advanced democratic nations. The economic factors, however, are more complex. Leaders in the region should not ignore the rising costs of their EU membership.

EU politicians in Brussels often speak of the "huge" benefits of belonging to the bloc. There have been, mostly from trade liberalization, which helped rebuild war-torn Europe and remains the most salient feature of European integration. However, as future negotiations on trade liberalization decrease tariffs world-wide, and transport and communication become even cheaper, the benefits of the European free-trade area will diminish.

Moreover, participation in the European free-trade area is not cost-free—as Estonia found out when it had to raise its tariffs to join the EU. French economist Patrick Messerlin has estimated that European trade protectionism vis-á-vis non-EU countries costs Europe between 5 and 7% of annual GDP. Cheap imports, politicians often forget, are as important as exports. They increase standards of living by lowering prices and providing consumers with additional choices.

The alternative to the European customs union is not economic isolation. All EU member states are also members of the World Trade Organization. They are thus bound by the EU's WTO commitments. Should a country decide to leave the EU, in the worst-case scenario it would be subject to the same EU tariffs as other non-EU countries—a trade-weighted average applied tariff of 10.1% and 2.7% on agricultural and non-agricultural goods respectively. More likely, a former member would be able to negotiate a bilateral agreement with the EU, as Switzerland has; join the European Economic Area, like Norway; or liberalize unilaterally.

While free trade among European countries was an important step forward, the process of economic liberalization has stalled in the last decade, even before the 2008 financial crisis. For instance, roughly 60% of the service market has not been liberalized. In 2006 the EU watered down its attempt to deregulate services—who can forget the French fear of cheap Polish plumbers—in a move that was particularly damaging to new EU members, where wages are lower than in western Europe.

Then there is the EU's Common Agricultural Policy (CAP), really just a network of farm subsidies and production quotas, which France demanded as the "price" for creating a common market more than 50 years ago. From the beginning, the CAP has been expensive, wasteful and corrupting; it now sucks up about half the EU's total common budget. Its system of geographical disbursement also discriminates against central and eastern European farmers: A typical Latvian farmer, for example, receives a subsidy of €90 per hectare per year. A Greek farmer receives €650.

As for the costs of EU regulation, the European Commission's own estimate puts the figure at about €600 billion per year. Stringent environmental, health and safety regulations are particularly damaging to central and eastern Europe. Bulgaria is the poorest EU country with an average per-capita income of €4,800 per year, or one-fifth the EU average. Electricity prices eat away a large part of monthly incomes. Yet the EU insists that 16% of Bulgarian electricity will have to come from much more expensive renewable sources, such as solar panels and windmills, by 2020.

The regressive nature of some EU regulation was again on display earlier this year, when an EU directive aimed at increasing the comfort of hens resulted in a drastic decline in central and eastern European egg production, and a 100% increase in the price of eggs in the Czech Republic. But as long as the chickens are happy.

Finally, there is the apparently open-ended commitment of central and eastern euro-zone members to help rescue the common currency. So far, Slovakia's total commitment to the European bailout fund amounts to €13 billion in financial transfers and loan guarantees. That is more than the annual tax receipts of the Slovak government. It is worth mentioning that per-capita income in Greece, which has already received two bailouts, was €20,100 in 2010. In Slovakia, it was €12,100.

A typical refrain from Brussels is that central and eastern countries have prospered since joining the EU in part because its "cohesion fund" has redistributed so much money to east from west. Slovakia, for example, was entitled to some €11.6 billion between 2007 and 2013. By the start of 2012, however, it had only used about 30% of that money—some of it tied to projects of dubious value.

What happens when we subtract the explicit costs of EU membership, including the contributions of central and eastern countries to the EU budget, from the EU's largesse, including cohesion funds and agricultural subsidies? The net "gain" for Slovakia comes to an average of €77 per person per year between 2004 and 2010. It was €102 in Poland, €115 in Hungary, €66 in the Czech Republic, €200 in Estonia, €163 in Latvia and €224 in Lithuania. Those figures do not take into account the implicit costs of EU membership arising from trade protectionism and regulation (at least €2,552 per person in each country, using the Commission's and Mr. Messerlin's figures), not to mention bailouts.

This is not a scientific cost-benefit analysis of the EU membership. Nor is it a call for central and eastern European countries to leave the EU. Rather, it is a plea for realism and honesty. The EU is neither as successful nor as beneficial as the political elites in Brussels claim. In order to prosper within the EU, the leaders of central and eastern European countries must become less idealistic and more assertive. It is their duty to the people who elected them.

Marian Tupy is a policy analyst at the Cato Institute's Center for Global Liberty and Prosperity in Washington, D.C.

Obama's Plan to Seize Control of Our Economy And Our Lives by Jim Powell

Sun, 29 Apr 2012 00:00:00 -0400

President Obama has made clear that he’s determined to continue pushing his “progressive” agenda, regardless of constitutional limitations on his power. He aims to have his way by issuing more and more executive orders.

The most ominous sign of possible things to come appeared on March 16, 2012, when President Obama signed executive order 13603 about “National Defense Resources Preparedness.”

This 10-page document is a blueprint for a federal takeover of the economy that would dwarf the looming Obamacare takeover of the health insurance business. Specifically, Obama’s plan involves seizing control of:

* “All commodities and products that are capable of being ingested by either human beings or animals”

* “All forms of energy”

* “All forms of civil transportation”

* “All usable water from all sources”

* “Health resources — drugs, biological products, medical devices, materials, facilities, health supplies, services and equipment”

* Forced labor ( or “induction” as the executive order delicately refers to military conscription)

Moreover, federal officials would “issue regulations to prioritize and allocate resources.”

Each government bureaucracy “shall act as necessary and appropriate.”

To be sure, much of this language has appeared in national security executive orders that previous presidents have issued periodically since the beginning of the Cold War.

But more than previous national security executive orders, Obama’s 13603 seems to describe a potentially totalitarian regime obsessed with control over everything. Obama’s executive order makes no effort to justify the destruction of liberty, no effort to explain how amassing totalitarian control would enable government to deal effectively with cyber sabotage, suicide bombings, chemical warfare, nuclear missiles or other possible threats. It’s quite likely there would be greater difficulty responding to threats, since totalitarian regimes suffer from economic chaos, colossal waste, massive corruption and bureaucratic infighting that are inevitable consequences of extreme centralization. Such problems plagued fascist Italy, Nazi Germany, the Soviet Union, communist China and other regimes. Totalitarian control would probably trigger resistance movements and underground networks like those that developed in Western Europe during the Nazi occupation. Totalitarian control could provoke more political turmoil than there was in the Vietnam War era of the 1960s. There would probably be a serious brain drain as talented people with critical skills escaped to freedom wherever that might be. Canada?

There’s nothing in executive order 13603 about upholding the Constitution or protecting civil liberties.

Obama’s executive order seems to assume that the next war will be like World War II or World War I, where vast armies of unskilled conscripts went at each other. But current trends suggest that future conflicts are more likely to involve smaller numbers of military personnel — highly-trained professionals, perhaps thousands of miles away from a battlefield, who remotely-control drones, pilotless combat helicopters, unmanned ground vehicles, unmanned ships, mobile security robots and related military technologies.

Even if Obama’s 13603 were no different than previous national security executive orders, it’s more worrisome because it was issued by the president who rammed Obamacare and runaway spending bills through Congress, who racked up $5 trillion of debt and surrounded himself with hardcore “progressives” hostile to the private sector and America as we have known it.

In what circumstances, one might ask, would a president try to carry out this audacious plan?

Executive order 13603 says with ominous ambiguity: during “the full spectrum of emergencies.”

Well, the United States is already in a state of national emergency declared by President George W. Bush on September 14, 2001 and extended last year by President Obama.

To better understand the potentially explosive impact of his plan, let’s take a tour through the dark world of executive orders, a type of presidential power that most people know little, if anything, about.

Many presidents have pushed to expand their power beyond constitutional limits, particularly during crises. Issuing executive orders is the easiest way to do it. A president doesn’t have to propose an executive order, debate the issues, endure hearings or solicit votes. An executive order can be issued in a few minutes — behind closed doors and away from bright lights.

An executive order may be about all sorts of things large and small.

Paul Begala, who was an advisor to President Bill Clinton, reportedly remarked, “Stroke of the pen, law of the land, kinda cool.”

What about the Constitution? It describes presidential power broadly. There isn’t anything in the Constitution that authorizes an executive order or limits what a president can do with it.

Executive orders arise from “implied constitutional and statutory authority,” the Congressional Research Service reported. “If issued under a valid claim of authority and published in the Federal Register, executive orders may have the force and effect of law.”

The Supreme Court tried to establish some limitations. It asserted the principle that an executive order (1) “must stem either from an act of Congress or from the Constitution itself” and (2) “an executive order must not be “incompatible with the express or implied will of Congress.”

But many executive orders are in a twilight zone of dubious constitutional legitimacy if not open defiance of the Constitution, especially when they amount to lawmaking without congressional approval.

Very few of the thousands of executive orders have ever been challenged legally.

Members of Congress don’t always seem to know much about them. At one point, for example, they were shocked to discover that there were executive orders providing the president with enormous standby powers that could be implemented on a moment’s notice.

Sometimes a president issued executive orders to bypass Congress when his party didn’t control it. But Franklin Delano Roosevelt issued more executive orders than any other president, starting in his early years when he was most popular. Often executive orders seemed to have been issued because a president was in a hurry — and often there were unfortunate consequences. An executive order isn’t a reliable cure for any serious problem.

Executive orders go back to the beginning of our country, although they weren’t called that. Usually they were referred to as proclamations.

Until the early 20th century, executive orders were generally undocumented. They were addressed to a particular government agency which had the only copy. Nobody seemed to know how many executive orders there were. As late as the 1930s, there was an account, published in the New York Times, claiming that “there are no readily available means of ascertaining the true texts and history of the thousand or more executive orders issued since March 4, 1933.”

In 1907, the State Department began compiling and numbering executive orders going back to one that Abraham Lincoln issued on October 20, 1862. That became known as executive order 1. As I write, the most recent is Obama’s executive order 13603.

President George Washington’s first proclamation was on October 3, 1789. He said, “Both Houses of Congress have by their joint Committee requested me to recommend to the People of the United States a day of public thanksgiving.” So, this was authorized by Congress.

Washington’s Neutrality Proclamation wasn’t authorized by Congress. Issued on April 22, 1793, it declared that the United States would be neutral in the war between France and Great Britain, which had begun two months before. Members of Washington’s cabinet, including Secretary of State Thomas Jefferson, agreed that the United States was too fragile to become involved in another war.

Abraham Lincoln expanded presidential powers via proclamations and executive orders. He did this in the name of suppressing rebellion rather than waging war, since the Constitution gave Congress the power to declare war.

Lincoln famously suspended habeas corpus, the legal action that requires a prisoner to be set free if authorities don’t file charges promptly and proceed to a jury trial, so the accused can have an opportunity to prove innocence.

In April 1861, a Maryland militia officer named John Merryman was arrested and detained at Fort McHenry in Baltimore. He was said to have damaged Union facilities and trained Confederate soldiers. His lawyer obtained a writ of habeas corpus from Chief Justice Roger B. Tawney who directed George Cadwalader, the commander at Fort McHenry, to produce Merryman and explain the facts and the legal basis for detention. Cadwalader refused, saying that Lincoln had suspended habeas corpus. Tawney cited him for contempt, but a marshal couldn’t enter the fort to deliver the contempt citation. Tawney wrote what became known as the Ex Parte Merryman opinion, saying, in part, that “If the authority which the Constitution has confided to the judiciary department may upon any pretext be usurped by the military power, the people of the United States are no longer living under a government of laws.”

Lincoln went to Congress, offered an uncertain defense of his action and expressed the hope that Congress would “ratify” his action. Pulitzer Prize winning historian Mark E. Neely, Jr. noted that “the president seemed to agree that the legislative branch was the proper body to suspend the writ of habeas corpus.” On September 24, 1862, Lincoln issued a proclamation officially suspending habeas corpus, which meant that the government could detain people indefinitely. Lincoln “managed the home front, in part,” Neely wrote, “by means of military arrests of civilians — thousands and thousands of them.”

Lincoln had issued executive orders expanding the amount of Union territory subject to military control, particularly southern Illinois, Indiana and Ohio where “copperheads” were operating. In 1864, the Union army arrested Lambdin Milligan and four others in southern Indiana. They were charged with plotting to free Confederate prisoners-of-war. A military court sentenced the men to death, but they appealed for their constitutional right to habeas corpus. After the Civil War, in 1866, the Supreme Court noted that Indiana wasn’t under attack, and civilian courts were functioning, so Milligan and the others were entitled to a jury trial there. Justice David Davis wrote: “The Constitution of the United States is a law for rulers and people, equally in war and in peace, and covers with the shield of protection all classes of men, at all times, in all circumstances.”

Historian James G. Randall reflected, “No president has carried the power of presidential edict and executive order — independently of Congress — so far as [Lincoln] did. It would not be easy to state what Lincoln conceived to be the limit of his powers.”

Lincoln’s best-known executive order was the Emancipation Proclamation. He hoped to provoke a slave revolt in the Confederacy and make it easier for the Union to win the Civil War. Accordingly, on September 22, 1862, he issued a preliminary Emancipation Proclamation. It applied to any state that didn’t return to the Union by January 1, 1863. No states returned. At that point, Lincoln issued the historic Emancipation Proclamation. It applied to slaves in the Confederacy — territory that the Union didn’t control. It neither abolished slavery nor extended citizenship to former slaves, but it did make the abolition of slavery a war aim.

The peacetime expansion of federal power began with Theodore Roosevelt who issued 1,006 executive orders, more than any previous president. They performed a wide range of administrative functions, especially the disposition of government-owned land.

TR emphatically rejected the view that “what was necessary for the nation could not be done by the President unless he could find some specific authorization to do it... it was not only [the president’s] right but his duty to do anything that the needs of the nation demanded unless such action was forbidden by the Constitution or by the laws.”

TR also said: “I think [the presidency] should be a very powerful office, and I think the President should be a very strong man who uses without hesitation every power the position yields.” He continued, “I believe in a strong executive. I believe in power.”

According to biographer Henry Pringle, “It seldom occurred to Roosevelt that the duty of the executive was to carry out the mandates of the legislative. In so far as he was able, he reversed the theory. Congress, he felt, must obey the president.” He wanted the Supreme Court to obey him, too. Roosevelt acknowledged, “I did greatly broaden the use of executive power.”

At times, TR seemed drunk with power, as when he remarked: “I don’t think that any harm comes from the concentration of power in one man’s hands.”

Woodrow Wilson issued 1,791 executive orders. For instance, executive order 1810 (August 7, 1913) prohibited anyone from operating a flying machine or balloon across the Panama Canal Zone. Wilson issued executive order 1860 (November 11, 1913) to dictate interest rates for the Canal Zone — a surprising number of Wilson’s executive orders had to do with administering that little territory.

Most of Wilson’s executive orders were issued during World War I. For instance, on April 14, 1917, he issued executive order 2594 to establish the Committee on Public Information — war propaganda. On April 28th, he issued executive order 2604 for censorship of messages sent via the trans-Atlantic cables. Executive order 2679-A (August 10, 1917) established the Food Administration. Executive order 2697 (September 7, 1917) required that anyone wishing to export coins, bullion or currency must file an application in triplicate with the nearest Federal Reserve bank. Executive order 2736 (October 23, 1917) authorized Food Administrator Herbert Hoover to requisition food. Executive order 2953 (September 12, 1918) authorized the sale of property seized in accordance with the Trading with the Enemy Act.

Franklin D. Roosevelt issued 3,723 executive orders. In his Inaugural Address, he said: “I shall ask the Congress for the one remaining instrument to meet the [depression] crisis — broad executive power to wage a war against the emergency, as great as the power that would be given me if we were in fact invaded by a foreign foe.”

On March 6, 1933, FDR issued Proclamation 2029 that cited Wilson’s Trading with the Enemy Act to justify ordering banks closed for a National Bank Holiday.

FDR sent his Emergency Banking bill to the House of Representatives, and it was passed after only 38 minutes of debate — apparently without members reading it.

In 1933, FDR issued executive order 6102 that made it illegal for Americans to own gold bullion or gold certificates, even though historically gold provided the best protection against inflation and monetary crises. Violators faced the prospect of a fine up to $10,000 or up to 10 years in prison.

Since economic fascism was popular during the early 1930s, FDR issued executive orders to suspend antitrust laws and establish German-style cartels in dozens of industries, restricting total industry output, allocating market shares and fixing above-market wages and prices. Above-market wages discouraged employers from hiring, and above-market prices discouraged consumers from buying. Among these executive orders:

* 6204-A, for the rayon weaving industry

* 6205-C, for the silk manufacturing industry

* 6216, for the ship building and ship repairing industries

* 6242-B, for electrical manufacturing

* 6248, for the corset and brassiere industries

* 6250, for theaters

* 6253, for the fishing tackle industry

* 6254, for the iron and steel industries

* 6255, was for the forest products industry

* 6256, was for the petroleum industry

* 6543-A, for the drapery and upholstery industries

With executive orders, FDR multiplied the number of government bureaucracies. He established the Civilian Conservation Corps by issuing executive order 6101. The Public Works Administration followed with executive order 6174. Then came these executive orders:

* 6225, the Central Statistical Board

* 6340, the Commodity Credit Corporation

* 6420-B, the Civil Works Administration

* 6433-A, the National Emergency Council

* 6470, the Public Works Emergency Housing Corporation

* 6474, the Federal Alcohol Control Administration

* 6514, the Electric Home and Farm Authority

* 6581, the Export-Import Bank of Washington

* 6623, the Federal Employment Stabilization Office

* 6632, the National Recovery Review Board

* 6770, the Industrial Emergency Committee

* 6777, the National Resources Board

* 7027, the Resettlement Administration

* 7034, the Works Progress Administration

As one reflects on FDR’s New Deal executive orders, one thing seems clear: while some of the programs provided relief for desperate people, they failed to achieve a sustained revival of private sector job creation. Indeed, relief spending was the main reason government spending doubled and taxes tripled during the New Deal era (1933-1940). Where did the tax revenue come from? The biggest source of federal revenue was the federal excise tax on cigarettes, beer, soda, chewing gum and other cheap pleasures consumed disproportionately by poor and middle income people. This means the cost of relief programs for poor and middle income people was borne mainly by poor and middle income people. In May 1939, FDR’s Secretary of the Treasury Henry Morgenthau lamented, “We are spending more than we have ever spent before, and it does not work. After eight years of this administration, we have just as much unemployment as when he started.”

New Deal unemployment averaged 17 percent, and it didn’t go down significantly until the government began removing more than 10 million men from the civilian work force via military conscription for World War II.

In 1974, the Senate Committee on National Emergencies and Delegated Emergency Powers revealed that “Since March 9, 1933, the United States has been in a state of declared national emergency. There are now in effect four presidentially-proclaimed states of national emergency. In addition to the national emergency declared by President Roosevelt [during the Great Depression], there are also the national emergency proclaimed by President Truman on December 16, 1950, during the Korean conflict, and the states of national emergency declared by President Nixon on March 23, 1970 and August 15, 1971.

“These proclamations give force to 470 provisions of Federal law, delegating to the President extraordinary powers, ordinarily exercised by the Congress, which effect the lives of American citizens in a host of all-encompassing manners... The President may seize property, organize and control the means of production, seize commodities, assign military forces abroad, institute martial law, seize and control all transportation and communication, regulate the operation of private enterprise, restrict travel, and in a plethora of particular ways, control the lives of all Americans.”

As a result of these revelations, in 1976 Congress passed the National Emergencies Act. It limited a president’s declared emergency to two years, which may be extended.

A comment about two of Nixon’s major executive orders.

On August 15, 1971, he announced his New Economic Policy, which happened to be what Bolshevik firebrand Vladimir Lenin called one of his misadventures. Nixon issued executive order 11615 that declared: “to stabilize the economy, reduce inflation, and minimize unemployment, it is necessary to stabilize prices, rents, wages, and salaries.” These controls failed to stop inflation which hit double-digits during the 1970s, and they caused chronic shortages, rationing and business disruption — making it harder to create private sector jobs. By maintaining below-market prices, controls simultaneously encouraged producers to provide less, while encouraging consumers to demand more. Hence, the shortages.

Although this experience with price controls had been a flop, Nixon decided to try again. On June 13, 1973, he signed executive order 11723 that called for a freeze on prices, while he continued to control wages, salaries and rents.

Nixon’s executive orders made a bad situation worse. For instance, his price control administrator C. Jackson Grayson confessed: “lumber controls were beginning to lead to artificial middlemen, black markets and sawmill shutdowns. Companies trapped with low base-period profit margins were beginning to consider selling out those with higher base periods, sending their capital overseas, or reducing their efforts. Instances of false job upgrading — which were actually ‘raises’ in disguise — were reported. To keep away from profit-margin controls, companies were considering dropping products where costs, and thus prices, had increased. And shortages of certain products (like molasses and fertilizer) were appearing because artificially suppressed domestic prices had allowed higher world prices to pull domestic supplies abroad.”

In 1999, Bill Clinton waged war with executive orders. He issued executive order 13088 that declared the governments of the Federal Republic of Yugoslavia (Serbia and Montenegro) and the Republic of Serbia posed “an extraordinary threat to the national security and foreign policy of the United States.” Therefore, Clinton proclaimed a “national emergency.” He ordered the seizure of property belonging to the named governments in the United States, and he prohibited Americans from conducting commercial transactions with those governments. Clinton’s executive order 13119 declared that the region was a war zone. Executive order 13120 summoned military reserve units for active duty.

None of this was authorized by Congress. On the contrary, Congress voted down a resolution to declare war. Congress wouldn’t “authorize” the air war. Clinton ignored Congress and kept America in the war. When, on June 10, 1999, NATO announced it was over, Clinton ordered American soldiers to serve in the Kosovo Force. There are still some American soldiers in harm’s way.

Once again, we find ourselves in an open-ended national emergency, declared on September 14, 2001 and extended since then. President Obama notified Congress that he was extending it again. This means the president has still has standby powers from hundreds of statutes.

Okay, how can an executive order be revoked?

First, an executive order can be revoked by another executive order. Probably all presidents revoke some executive orders by their predecessors.

For example, Bill Clinton’s executive order 12919, issued on June 3, 1994, was about national security. It revoked all or part of more than a dozen executive orders issued between 1939 and 1991.

President Obama revoked executive orders 13258 (2002) and 13422 (2007), both of which were issued by George W. Bush and amended executive order 12866 (1993) which had been issued by Bill Clinton. These executive orders had to do with regulatory processes.

While executive orders seem irresistible to presidents because they can be issued quickly, they can be revoked quickly, too.

Second, an executive order can be revoked by legislation. A 1999 congressional hearing on executive orders, before the House Rules Committee, the Subcommittee on Legislative and Budget Process, indicated that every president since Grover Cleveland has had some of his executive orders modified or revoked by legislation.

The Congressional Research Service cited a number of recent examples: “in 2006, Congress revoked part of an executive order from November 12, 1838, which reserved certain public land for lighthouse purposes. Congress has also explicitly revoked executive orders in their entirety, such as the Energy Policy Act of 2005, which revoked a December 13, 1912 executive order that created Naval Petroleum Reserve Number 2.” A executive order by President George H.W. Bush, to establish a human fetal tissue bank for research purposes, was revoked when Congress declared that ‘the provisions of Executive Order 12806 shall not have any legal effect.’”

In addition, Congress has denied funding needed to implement various executive orders.

If a president’s adversaries have a veto-proof majority in Congress, the threat of passing a law can deter a president from issuing a controversial executive order. For instance, Christopher J. Deering and Forrest Maltzman, at Washington University, pointed out: “In 1993 President Clinton swiftly backed away from an executive order prohibiting the military from excluding gays from service once it became clear that Congress was likely to overturn such an order by legislative action.”

In recent decades, however, Congress has acquiesced to the expansion of arbitrary presidential power. For example, Congress hasn’t used its power to declare war since the Japanese bombed Pearl Harbor more than seven decades ago, although the United States has been drawn into a number of wars during this period.

Congress adopted the War Powers Resolution (1973) in the aftermath of the undeclared Vietnam War. The law required that the president obtain Congressional authorization before entering a war and that he keep Congress informed about what was going on. Presidents have continued to enter undeclared, unauthorized wars.

Third, an executive order can be revoked by a federal appeals court or the Supreme Court.

However, courts as well as Congress commonly have acquiesced to expanded presidential power.

For instance, during World War II, FDR issued executive order 9102 (1942) that established the War Relocation Authority to forcibly move Japanese-Americans away from the Pacific Coast into “relocation camps” for the duration of World War II. This was upheld by the Supreme Court, 6-3, in Korematsu v. United States, 323 U.S. 214 (1944). Justice Hugo Black wrote the majority opinion. He asserted that protecting against potential Japanese espionage was more important than protecting Fred Korematsu’s individual rights.

In recent times, too, the Supreme Court generally has deferred to the president in cases involving executive orders. In 1979, Iranian revolutionaries seized 52 Americans working at the U.S. Embassy in Teheran and held them as hostages for more than a year. President Jimmy Carter issued an executive order that declared a national emergency and blocked Iranian assets in the U.S. Dames & Moore, a U.S. contractor owed more than $3 million for work performed in Iran, filed a lawsuit seeking payment. After Ronald Reagan was sworn in as president, he entered into an executive agreement with Iran, bypassing the Senate which had the constitutional power to ratify treaties. The executive agreement provided that hostages would be released if legal proceedings in U.S. courts against Iran were suspended. On February 24, 1981, Reagan signed executive order 12294 to suspend such legal proceedings.

Dames & Moore filed another lawsuit claiming that the president lacked the power to do that. In Dames & Moore v. Regan, 453 U.S. 654 (1981), the Supreme Court implicitly upheld the president’s authority to negotiate executive agreements and explicitly affirmed his power to issue an executive order that suspended court proceedings. Chief Justice William Rehnquist cited statutes “indicating congressional acceptance of a broad scope for executive action in circumstances such as those presented in this case... we can conclude that Congress acquiesced in the President’s action... [Since] Congress has acquiesced in the President’s action, it cannot be said that the President lacks the power to settle such claims.”

There seem to have been only two cases of an executive order being overturned by a court.

This happened with Harry Truman’s 1952 executive order 10340 that ordered the Secretary of Commerce to stop a steelworkers strike by seizing privately-owned steel mills. Truman insisted that a prolonged strike would impair the government’s ability to fight an undeclared “police action” as the Korean War has been called.

The steel mill seizures were contested in Youngstown Sheet & Tube v. Sawyer, 343 U.S. 579 (1952).

The U.S. Solicitor General claimed that Article II, Section 2 of the Constitution “constitutes a grant of all the executive powers of which the Government is capable.”

Supreme Court Justice Robert Jackson was incredulous. He said, “The example of such unlimited executive power that must have most impressed the forefathers was the prerogative exercised by King George III. The description of its evils in the Declaration of Independence leads me to doubt that they were creating their new Executive in his image. Continental European examples were no more appealing. And, if we seek instruction from our own times, we can match it only from the executive powers in those governments we disparagingly describe as totalitarian. I cannot accept the view that the clause is a grant in bulk of all conceivable executive power.”

In a 6-3 decision, the Supreme Court rejected every argument made on behalf of Truman’s seizure: “The Executive Order was not authorized by the Constitution or laws of the United States, and it cannot stand... There is no statute which expressly or impliedly authorizes the President to take possession of this property as he did here... In its consideration of the Taft-Hartley Act in 1947, Congress refused to authorize governmental seizures of property as a method of preventing work stoppages and settling labor disputes... Authority of the President to issue such an order in the circumstances of this case cannot be implied from the aggregate of his powers under Article II of the Constitution... The Order cannot properly be sustained as an exercise of the President’s military power as Commander in Chief of the Armed Forces... Nor can the Order be sustained because of the several provisions of Article II which grant executive power to the President... The power here sought to be exercised is the lawmaking power, which the Constitution vests in the Congress alone, in both good and bad times... the President’s power to see that laws are faithfully executed refutes the idea that he is to be a lawmaker.”

President Clinton’s 12954 was the other case of an executive order known to have been revoked by a court. Clinton banned the federal government from hiring contractors who replaced strikers. He argued that strikers can become violent when they’re replaced, so it would be better to appease strikers and support union workplace monopolies by banning replacements. Attorney Charles T. Kimmett, writing in the Yale Law Journal, defended the president’s position while acknowledging union violence. “When striking Greyhound workers were permanently replaced,” he wrote, “replacement bus drivers and bus riders became targets of sniper fire. Similarly, the Hormel Company’s decision to hire permanent striker replacements was accompanied by such violence that Minnesota’s governor called in the National Guard.”

The U.S. Court of Appeals for the D.C. Circuit revoked Clinton’s executive order in Chamber of Commerce v. Reich, 74 F.3d 1322 (D.C. Cir. 1996). This was an important case, because during the past seven decades, there have been more than a hundred executive orders regulating private employment, and legal challenges have been rare.

Clinton’s executive order 12954 conflicted with a 7-0 U.S. Supreme Court decision in NLRB v. Mackay Radio & Telegraph Company, 304 U.S. 333 (1938),. In part, that court decided “[The employer] is not bound to discharge those hired to fill the places of strikers.”

D.C. Circuit Judge Laurence Silberman said, “We think it untenable to conclude that there are no judicially enforceable limitations on presidential actions [enabling] the President to bypass scores of statutory limitations on governmental authority.”

As all this experience suggests, executive orders make it easy for presidents to consolidate more power and difficult for anyone to stop them. People acquiesce with the hope that a president will do good, but if he or she does harm — remember, there’s no reliable way of keeping bad or incompetent people out of power — then Americans will find themselves in a very bad place.

Hopefully, President Obama will never try to implement his executive order 13603 — the plan for seizing control of our economy and our lives. But the plan is ready-to-go, awaiting the right moment. One morning, Americans could wake up to the news that suddenly Obama is activating the plan because of cyber sabotage, a terrorist incident, a crisis in nuclear Pakistan, a war with Iran or some other state of emergency, perhaps the state of emergency he extended last year. Or perhaps the president might simply decide that to win the fall election he needs an “October surprise.”

Jim Powell, a senior fellow at the Cato Institute, is the author of FDR's Folly, Wilson's War, Bully Boy, The Triumph of Liberty and other books.

Let Student Loan Interest Rates Rise by Neal McCluskey

Fri, 27 Apr 2012 00:00:00 -0400

It seems simple: College is expensive and interest rates are at historic lows, so rates on federal student loans shouldn't suddenly double. But this isn't simple at all.

Despite constant talk about the huge value of education, and the need to get many more people into college, aid is driving massive overconsumption of higher education and squandering billions of student and taxpayer dollars.

The Associated Press just published a story brilliantly illustrating reality. Of graduates ages 25 and younger, the AP reports, roughly 50 percent are either unemployed or in jobs that don't require a degree. In addition, despite what we hear about the economy's imminent voracious appetite for highly educated workers, the U.S. Department of Labor estimates that just three of the 30 jobs expected to have the greatest growth by 2020 will require a bachelor's degree or higher. Finally, right now a third of bachelor's holders of all ages are in jobs which don't require their credentials.

And that's just bad news for people with degrees. Below the surface is the even more massive problem of people who enroll in college, often take on debt, but don't get the credentials they need to increase their earnings and comfortably pay back what they owe.

In four-year institutions, more than 40 percent of first-time, full-time students don't complete their programs within six years, and most of these students will never finish. At community colleges, almost 80 percent don't finish within three years.

Then there are those outlandish prices.

The basic problem is simple: Give everyone $100 to pay for higher education and colleges will raise their prices by $100, negating the value of the aid. And inflation-adjusted aid—most of it federal—has certainly gone up, ballooning from $4,602 per undergraduate in 1990-91 to $12,455 in 2010-11.

Of course there are more variables than aid in college pricing, but this basic, inflationary effect is almost certainly a major reason that real tuition and fees at four-year institutions have roughly doubled between the 1990-91 and 2011-12 academic years.

What all this tells us about Stafford interest rates is that they should be allowed to go from a measly 3.4 percent up to 6.8 percent. Most importantly, higher rates would encourage potential students to think a little harder about the decision they are about to make, and that is something that clearly needs to happen.

The China Pivot and the US 'Siege' Strategy by David Isenberg

Thu, 26 Apr 2012 00:00:00 -0400

On January 5, the Pentagon released a strategic review. The document itself was not particularly novel. The Pentagon regularly does strategy reviews, trying, like a modern version of the Oracle of Delphi, to divine the future and adjust its forces accordingly.

Since the end of the Cold War the Pentagon has had the Bottom Up Review, the Commission on the Roles and Missions of the US Armed Forces, and several Quadrennial Defense Reviews, to name but a few.

The latest document, "Sustaining US Global Leadership: Priorities for 21st Century Defense" describes the projected security environment and the key military missions for which the US military will prepare.

The review did attract some attention for its supposed new focus on Asia, also called the "pivot to Asia", which first appears in the document on page two, when it states:

US economic and security interests are inextricably linked to developments in the arc extending from the Western Pacific and East Asia into the Indian Ocean region and South Asia, creating a mix of evolving challenges and opportunities. Accordingly, while the US military will continue to contribute to security globally, we will of necessity rebalance toward the Asia-Pacific region.

The next paragraph said:

The maintenance of peace, stability, the free flow of commerce, and of US influence in this dynamic region will depend in part on an underlying balance of military capability and presence. Over the long term, China's emergence as a regional power will have the potential to affect the US economy and our security in a variety of ways. Our two countries have a strong stake in peace and stability in East Asia and an interest in building a cooperative bilateral relationship. However, the growth of China's military power must be accompanied by greater clarity of its strategic intentions in order to avoid causing friction in the region.

China is referred to only one more time in the eight-page document, in a paragraph on "Project Power Despite Anti-Access/Area Denial Challenges."

That is rather curious considering that for years most US military planners have been looking to China as the yardstick by which US military forces must be measured for its next major conflict.

Those looking for the etiology of the China pivot need to go back a few months earlier, to the article by Secretary of State Hillary Clinton, which appeared in the November 2011 issue of Foreign Affairs journal. She wrote:

As the war in Iraq winds down and America begins to withdraw its forces from Afghanistan, the United States stands at a pivot point. Over the last 10 years, we have allocated immense resources to those two theaters. In the next 10 years, we need to be smart and systematic about where we invest time and energy, so that we put ourselves in the best position to sustain our leadership, secure our interests, and advance our values. One of the most important tasks of American statecraft over the next decade will therefore be to lock in a substantially increased investment — diplomatic, economic, strategic, and otherwise — in the Asia-Pacific region.

Actually, Clinton was quite diplomatic. She wrote that, "Some in our country see China's progress as a threat to the United States; some in China worry that America seeks to constrain China's growth. We reject both those views. The fact is that a thriving America is good for China and a thriving China is good for America. We both have much more to gain from cooperation than from conflict."

A standard view of what many commentators see at the Chinese military threat was written by foreign affairs journalist Robert Kagan in the April issue of the Atlantic Magazine:

Advances in Chinese naval, air, space, missile, and cyber-warfare capabilities are reshaping the strategic landscape. China's acquisitions demonstrate that it does aspire to be a great military power. It is China's shop-till-you-drop acquisition of nuclear and advanced diesel-electric submarines that particularly worries Pentagon planners. Naval warfare is going undersea, as surface warships become more vulnerable to missiles and other anti-access technology.

China has been acquiring submarines at the rate of 4-to-1 vis-a-vis the United States since 2000, and 8-to-1 since 2005. Vietnam, Malaysia, Indonesia, and Singapore are all acquiring submarines to counter the Chinese buildup. US Defense Secretary Leon Panetta has vowed that defense cuts will not come at the expense of America's Pacific military assets.

Clinton has voiced an intention to pivot from the Middle East to the Pacific. President Barack Obama has announced the deployment of 2,500 marines to Australia. Australia, a country of only 23 million, will spend $279 billion over the next 20 years for new subs and fighter jets. These statements and developments are about one thing: countering China's military rise and the tectonic shifts associated with it.

While commentators of all ideologies agree that China, by virtue of its advances on the entire standard measures of power, from economic to military, merit putting it high up on the list of rising powers it is far from clear that it is a menacing power. Even Kagan conceded that:

The larger question is whether internal developments in China will impede its further military growth. Will an economic crisis stoke or defuse Chinese nationalism; increase or decrease defense budgets? No one knows. I have written often that China's military rise is normal — not illegitimate, like America's at the start of the 20th century.

But China and the Asia-Pacific region has long been an area of military concern for the United States. The US military has long divided the world into military fiefdoms, ie unified combatant commands, for military planning purposes, and the fiefdom encompassing the Asia-Pacific region is the US Pacific Command, headquartered in Hawaii. The state also headquarters the US Pacific Fleet and Pacific Air Forces.

Recently, the Honolulu Star-Advertiser reported that a higher profile in Asia and the Pacific is in the works for Fort Shafter in Honolulu and within the ranks of the army, with construction of a new 330,000-square-foot headquarters under way as well as an effort to upgrade the three-star command to four stars. The fort is the headquarters of the United States Army Pacific Command Aside from enhancing bureaucratic clout a renewed emphasis is also good for weapons manufacturers. The Zumwalt is a planned class of United States Navy destroyers, designed as multi-mission ships with a focus on land attack. The class is multi-role and designed for surface warfare, anti-aircraft, and naval fire support.

Previously, the navy tried to kill this enormous, expensive and technology-laden class of warship because of its cost but it is now viewed as an important part of the Obama administration's Asia-Pacific strategy

The production cost is roughly $3.8 billion apiece but if you include research and development, the cost grows to $7 billion each. Much of the weaponry the US military plans to acquire in the future is of a stand-off nature. Due to concerns over other countries anti-access/area-denial (A2/AD) capabilities the US military has expressed concern over Chinese progress in this area for years. It is a staple of the report on Chinese military power the Pentagon annually publishes.

To counter this, the Pentagon developed a concept called Air-Sea Battle (ASB) that assumes any war in the region is dominated by naval and air forces, and the domains of space and cyberspace.

It is consistent with the traditional US approach to war, which seeks to substitute technology for manpower and avoid protracted conflicts with a major land power; especially one with armies, navies, air forces, and nuclear weapons like China.

But ASB has downsides. Writing in the April issue of Armed Forces Journal Colonel Douglas McGregor (UA Army-Retired) writes:

To those convinced of China's dangerous and aggressive intentions, ASB offers a military solution that is attractive in two important ways. First, the majority of congressmen, four-stars and political appointees in the Defense Department are preoccupied with the threat of war with a capable opponent, an opponent like China with armies, air forces, air defenses, naval forces and nuclear weapons.

Leaders in a country that for 50 years has been the world's only true center of military, political and economic gravity, their predisposition is to police the globe with American military power even if most of the world doesn't want policing and US taxpayers cannot afford it. The strategic imperative to contain or counter Chinese military power is, to them, irresistible.

Second, when it comes to warfare, high-tech/remote/standoff solutions encourage the illusion of certainty, light casualties in action and operational success in the thoroughly unpredictable environment of extraordinary brutality and barbarism that is real war. ASB provides a new way for many in the armed forces and congress to look for solutions that avoid this ugly reality.

In short, it is a concept for the joint employment of precision-guided missiles and munitions against future target sets on the assumption that the capability and capacity to destroy thousands of targets with great precision will be sufficient to drive future opponents toward acceptable termination. Ground forces were not included because it would take too long for them to deploy and make a meaningful contribution at the outset of the precision-strike campaign.

This is both an optimistic and potentially catastrophic illusion, according to Macgregor. He notes that US war games rarely assume a protracted military campaign that might last months or years. The impact of such war games on the thinking and behavior of American national political and military leaders should not be underestimated.

He warns that, "the unspoken assumption implicit in Air-Sea Battle is that a precision-strike campaign against China would not drag on without result. This is not the first time the English-speaking peoples of North America, Britain and Australia have perceived the world beyond their borders in ways that flattered their self-image of unconstrained economic growth and sea-based global military power."

Anybody who doubts the truth of that has only to recall what the US public was told prior to the invasions of Afghanistan and Iraq.

One might dismiss Macgregor, on the grounds that as a retired army officer, he objects to a future war plan that largely excludes ground forces. Yet, given China's overall size and demonstrated historical ability to survive external attack it would be dangerous to ignore his warning.

He points out that without integrated US expeditionary and allied ground forces, ASB risks becoming the 21st-century equivalent of medieval siege warfare. Put more bluntly, he views relying primarily on ASB as a sucker's strategy:

Given China's size and depth, its authoritarian culture and supporting institutions of internal security, American air and naval strike forces are likely to run out of precision-guided munitions long before they run out of targets to attack or achieve conditions favorable for acceptable termination.

Without a realistic plan that integrates US and allied ground forces from regional states like Vietnam, South Korea, Japan and even Russia, and powerful ground forces capable of holding China's regime survivability and internal national cohesion at risk from multiple directions, the probability of achieving conflict termination on terms that favor US and allied interests is low to nonexistent.

Macgregor also believes that those who believe a conflict between a rising China and other nations is inevitable, as devotees of the realist approach to international relations contend, ignores significant counter-availing forces:

Lastly, military planning for a potential conflict with China must also be viewed in the context of contemporary Chinese society, whose problems include ones not terribly different than those of past dynasties reaching back centuries.

The mobilizing power of Chinese or "Han" nationalism to support aggressive external war is less than many Western analysts think, thanks to ethnic irredentism, regional secessionist tendencies and severely uneven economic development, particularly between the eastern coastal areas and China's interior.

Today, these historic problems are compounded by China's dependence on an export-driven economy, widespread corruption in the public and private sectors, dangerous levels of pollution in its most densely populated areas, and a growing housing bubble that, like all bubbles, must eventually burst. A military confrontation with the US is the last thing on the central government's mind.

David Isenberg is an adjunct scholar with the Cato Institute, a US Navy veteran, and the author of the book, Shadow Force: Private Security Contractors in Iraq.

How the Swiss 'Debt Brake' Tamed Government by Daniel J. Mitchell

Thu, 26 Apr 2012 00:00:00 -0400

Americans looking for a way to tame government profligacy should look to Switzerland. In 2001, 85% of its voters approved an initiative that effectively requires its central government spending to grow no faster than trendline revenue.

The reform, called a "debt brake" in Switzerland, has been very successful. Before the law went into effect in 2003, government spending was expanding by an average of 4.3% per year. Since then it's increased by only 2.6% annually.

The Swiss debt brake does not require a balanced budget in the traditional sense. Tax receipts, as we know from the American experience, tend to increase rapidly when the economy is doing well and fall off when the economy stumbles. To smooth out the ups and downs, Switzerland's debt brake limits spending growth to average revenue increases over a multiyear period (as calculated by the Swiss Federal Department of Finance).

This feature appeals to Keynesians, who like deficit spending when the economy stumbles and tax revenues dip. But it appeals to proponents of good fiscal policy, because politicians aren't able to boost spending when the economy is doing well and the Treasury is flush with cash.

Equally important, it is very difficult for politicians to increase the spending cap by raising taxes. Maximum rates for most national taxes in Switzerland are constitutionally set (such as by an 11.5% income tax, an 8% value-added tax and an 8.5% corporate tax). The rates can only be changed by a double-majority referendum, which means a majority of voters in a majority of cantons would have to agree.

Needless to say, that's not very likely. History shows the Swiss are more likely to approve tax cuts than tax increases.

Switzerland's spending cap has helped the country avoid the fiscal crisis affecting so many other European nations. Annual central government spending today is less than 20% of gross domestic product, and total spending by all levels of government is about 34% of GDP. That's a decline from 36% when the debt brake took effect.

This may not sound impressive, but it's remarkable considering how the burden of government has jumped in most other developed nations. In the U.S., total government spending has jumped to 41% of GDP from 36% during the same time period, according to the Organization for Economic Cooperation and Development.

The spending cap has been an effective debt brake. Between 2005 and 2010, when debt levels in the average euro-zone nation jumped to 85% of GDP from 70%, Switzerland's overall government debt declined to 40% of GDP from 53%. Debt is now down to 36.5% of GDP.

The Swiss system isn't perfect. Some social insurance programs are not covered by the spending cap, so outlays presumably will increase in this area as the population ages — though Switzerland is still in good shape since a large share of its health and pension expenses are handled by the private sector.

The United States, by contrast, is a mess. Big spending increases under Presidents Bush and Obama have doubled federal spending in the past 11 years, to an estimated $3.8 trillion in fiscal year 2012 from $1.86 trillion in 2001. The long-run outlook is even more troubling since there is no mechanism to restrain the growth of outlays.

But that may change. Rep. Kevin Brady (R., Texas), vice chairman of the Joint Economic Committee, has introduced legislation that is akin to the Swiss debt brake. Called the Maximizing America's Prosperity Act, his bill would impose direct spending caps, but tied to "potential GDP." Potential GDP is a projection of trendline economic output, assuming full employment and no inflation, and would be calculated by the Congressional Budget Office.

Since potential GDP is a reasonably stable variable (like average revenue growth in the Swiss system), this approach creates a sustainable glide path for spending restraint.

Of course, politicians don't want any type of constraint on their ability to buy votes with other people's money. But people everywhere are starting to realize that business-as-usual is no longer acceptable.

Daniel Mitchell is a senior fellow at the Cato Institute.

Prosecute Wal-Mart, But Get Rid of Anti-Bribery Law by Jeffrey A. Miron

Thu, 26 Apr 2012 00:00:00 -0400

Did Wal-Mart's Mexican subsidiary pay bribes, in 2005 and earlier, to the Mexican officials who grant permits for stores like Wal-Mart? And did Wal-Mart cover up these actions for several years, after an internal investigation discovered the bribes, before finally reporting the internal investigation to the Department of Justice and the SEC last December?

The answer, according to recent news accounts, is yes. This could mean that Wal-Mart violated the Foreign Corrupt Practices Act, adopted in 1977, which forbids U.S. companies from paying bribes to foreign officials.

If Wal-Mart violated the law, U.S. officials should prosecute. No one should be above the law, whether the law is sensible or not.

Yet the public and policymakers should also consider whether the Federal Corrupt Practices Act is good policy. And despite good intentions — particularly, the goal of reducing corruption — it is not.

The act is difficult to enforce on a consistent basis, since companies that wish to pay bribes can circumvent the law in numerous ways, mainly with minimal risk of exposure. So, most violations go undetected. The act therefore hurts companies that break the law clumsily and get caught, thereby creating a competitive advantage for companies that break the law cleverly and get away with it.

The most likely outcome is therefore that the Federal Corrupt Practices Act has minimal impact on bribes but enriches the least honest companies. And if the act deters bribes by U.S. companies operating abroad, that is even worse.

The reason is that the threat of prosecution under the act discourages U.S. companies from doing business abroad in the first place. This holds especially with respect to poor countries where corruption — pay to play — is endemic. Thus foreign investment, along with the higher wages and increased competition this investment promotes, is less likely to occur in these countries, condemning their citizens to ongoing poverty.

The act is also harmful, especially when it reduces bribes, because much bribery is an attempt to get around laws that make little sense in the first place. Such laws include barriers to entry, union protections that make firing or plant closures all but impossible, and excessive environmental, health and safety regulation.

These policies have good intentions, but they are frequently so onerous that their main effect is to discourage economic growth, which is critical for alleviating poverty. These policies are a key cause of corruption; it is impossible to do business in some countries without paying bribes that limit the impact of costly regulations.

The Wal-Mart example is a perfect illustration of this dynamic. Mexico has a messy permitting process for allowing companies like Wal-Mart to open new stores. This permitting barrier is bad for Mexicans because it reduces the number of new Wal-Marts or slows their opening. Mexicans therefore pay higher prices for the wide array of inexpensive goods sold by Wal-Mart.

If these negatives were not enough, the act harms U.S. companies relative to those from other countries that do not face something like the Federal Corrupt Practices Act. Other countries have adopted similar laws in recent years, but enforcement is often weak.

Corruption is a huge problem in many countries, especially the developing world. Much of the corruption, however, arises from excessive government that hurts economic productivity and creates the incentive to pay bribes. The best solution is to scale back these aspects of government. Since that is not always possible, however, it is better to allow companies from the United States and other rich countries to pay the bribes that diminish the negative impact of excessive government.

Jeffrey Miron is senior lecturer and director of undergraduate studies at Harvard University and Senior Fellow at the Cato Institute. Miron is the author of Libertarianism, from A to Z and a member of Expert Insight.

President Barzani's Visit And Washington's Hedging Strategy by Ted Galen Carpenter

Wed, 25 Apr 2012 00:00:00 -0400

There were several subtle but significant aspects of the visit to the United States by Masoud Barzani, the head of the Kurdistan Regional Government, in early April. One notable feature was the high-profile nature of his meetings in Washington. Not only did President Barzani have major sessions with both U.S. Vice President Joseph Biden and Deputy Secretary of State William Burns, but Secretary of State Hillary Clinton and even President Obama took time for brief meetings with him.

It is relatively uncommon for a political figure, even a prominent one, who is not the leader of an independent country to be granted extensive time with the deputy secretary of state. It is even more unusual to have access to the vice president. And it is truly extraordinary to have a session with either the secretary of state or the president, much less both officials.

That Obama administration leaders would treat President Barzani as they would an important head of state suggests that Washington is very uneasy about developments in Iraq and the surrounding region. The official U.S. policy still emphasizes support for a united Iraq with a strong central government in Baghdad, and administration officials urged Barzani to “re-engage” with Baghdad. But the administration’s other actions during his visit point to the emergence of a “hedging” strategy.

It is hardly a secret within the U.S. foreign policy community that Washington is increasingly disenchanted with Prime Minister Nouri al-Maliki. Not only are there worries about the Maliki government’s growing authoritarian tendencies, but U.S. officials are extremely disturbed by that government’s cozy relations with Tehran. Baghdad’s vocal opposition to stronger sanctions against Iran, and the blunt statement from Iraq’s foreign minister opposing any outside support for Syrian opposition forces seeking to overthrow the regime of Iran’s ally, Bashar al-Assad, came as a bitter disappointment to the Obama administration.

Given those developments, the red-carpet treatment afforded to President Barzani served two purposes. First, it conveyed to Baghdad that the United States has options other than continued loyalty to the Maliki government. Second, it conveyed to the KRG that the Obama administration is not only willing but eager to expand relations with Arbil—even if some of those cooperative measures might come at Baghdad’s expense.

There appear to be several reasons for Washington’s growing fondness for the KRG. One is a long-standing factor. Throughout the U.S. military presence in Iraq following the 2003 invasion, the Kurdish population was the one faction that was consistently and enthusiastically pro-American.

Other factors are somewhat more recent. U.S. governmental and business leaders increasingly recognize that Iraqi Kurdistan offers some very appealing opportunities for American firms. It was significant that the launching of the new U.S.-Kurdistan Business Council was timed to coincide with President Barzani’s visit. Indeed, he delivered the keynote address at the first USKBC event. The Obama administration, still battling the worst economic recession in the United States in more than 30 years, is eager to pursue new economic opportunities overseas. And Iraqi Kurdistan is one of the more impressive arenas for trade and investment in the entire Middle East.

But it is not just economics that underlie Washington’s renewed interest in the Kurdish region. Security interests and concerns are also heavily involved. It was probably no coincidence that just two weeks after President Barzani’s visit, General James Jones, President Obama’s former national security adviser, became the initial head of the USKBC.

Washington might prefer to have a united Iraq and deal primarily with Baghdad, but the Maliki government’s uncooperative behavior is causing U.S. policy makers to rethink matters. Administration leaders appear to be developing a “Plan B,” in which political and security relations with Arbil could become far more important and prominent than in the past. President Barzani’s visit may have been the first major step in that process.

Ted Galen Carpenter, a senior fellow at the Cato Institute, is the author of eight books on international affairs, including Smart Power: Toward a Prudent Foreign Policy for America.

Arizona Immigration Law Is Awful, But It's Constitutional by Alex Nowrasteh

Wed, 25 Apr 2012 00:00:00 -0400

The Arizona immigration law is terrible public policy, which hurts economic growth and infringes upon individual liberty, but it is probably constitutional.

The Supreme Court case is simply about the boring and rather technical legal question of preemption; the Justices will not consider the most damaging portions of the Arizona immigration law. The two economic penalties enhanced by Arizona’s immigration law apply to everyone regardless of race and are unfortunately constitutional according to last year’s Chamber of Commerce v. Whiting decision. They are the mandatory E-Verify provision and the so-called business death penalty that first became law thanks to the 2007 Legal Arizona Workers Act, popularly know as the “employer sanctions law.”

First, Arizona’s immigration law enhances a mandatory E-Verify provision that requires all Arizonans to ask the federal government for permission prior to hiring. E-Verify is mostly ineffective at detecting unauthorized workers and falsely labels about 1% of legal Americans as unauthorized workers. Solving that government error can take months and sometimes require a Privacy Act Request that takes 104 days. Consequently, E-Verify is not being used for roughly 30 percent of new hires in Arizona, moving some of that state’s workforce into the informal economy.

Second, the Arizona law strengthens the so-called business death penalty. It’s a two-strike policy where second-time business offenders that hire an unauthorized worker have all of their business licenses revoked, essentially killing the business. This provision also makes investors and entrepreneurs avoid Arizona or move elsewhere.

Jason LeVecke changed plans to expand his dozens of fast food restaurants out of Arizona after the employer sanctions law was passed. Restaurant entrepreneur Richard Melman from Chicago halted plans to open an Asian restaurant in Scottsdale after the business death penalty and E-Verify. Expanding a business is risky with government regulations that could shut the process down. As Melman said, “Why take a chance?”

Roughly 100,000 unauthorized immigrants and their businesses, labor, and purchasing power left the state partly because of the law. Punishing businesses, making it difficult to hire workers, and forcing consumers from the state creates a regulatory environment at odds with economic recovery. Arizona’s dismal economic performance since 2008 is partly a reflection of that.

Arizonans want to hire, rent to, and sell products to peaceful immigrants regardless of their immigration status. Millions of Arizonans vote for that daily with their purchasing power. Restrictive federal immigration laws make Arizona’s current law possible. Restricting the immigration of peaceful and healthy people and using enforcement strategies like Arizona’s may be constitutional but they are bad public policy.

Alex Nowrasteh is the immigration policy analyst at the Cato Institute's Center for Global Liberty and Prosperity.

Yankee Business Go Home: FCPA Moralism Sends a Punitive Message by Walter Olson

Wed, 25 Apr 2012 00:00:00 -0400

Are you deeply shocked to learn that getting the permits to build up a huge chain of Mexican superstores almost overnight might require paying off many local officials? You can hardly be as shocked as The New York Times, which over the weekend broke a front-page investigation of how WalMex, Wal-Mart's Mexican subsidiary, cleared the way for its legendarily successful expansion by funneling $24 million in payments through local fix-it guys called gestores — widely used by businesses in that country to facilitate business dealings with governments — and that much of that money wound up in the hands of local officials.

Making matters worse, when it learned of the payments, parent corporation Wal-Mart of Bentonville, Ark., seems to have stifled an internal investigation in hopes the whole thing would stay under the rug. Now, under the famously tough Foreign Corrupt Practices Act (FCPA), the company's legal exposure for the cover-up may go far beyond fines premised on the bribes themselves.

It's a big story. The controversy is likely to weaken the largest U.S. retailer for some time and perhaps slow its expansion — and the expansion of other big U.S. companies also subject to the FCPA — into developing-country markets where local corruption is routine. (In Mexico, the official "mordida" — literally, "bite" — extracted for permission to do business is something of a national institution.)

But the WalMex story is also more complicated as a legal matter than you might guess from the tone of the Times piece. Consider the law's handling of "facilitating payments." FCPA's legislative authors took pains to distinguish between relatively big, national-level examples of corruption in areas like public contracting, of the sort that might rattle American foreign policy relations, and "grease payments" or baksheesh whose effect is to induce minor officials to give faster approval to requests that they are eventually supposed to approve anyway, such as the token of favor to a customs official who will not clear a perishable shipment otherwise. The law bans the former but has been understood to leave the latter lawful, even if at times such payments are reprehensible. Part of the federal government's more aggressive approach in enforcing FCPA in recent years has been its push to apply liability to more permit-speeding and mordida-type situations.

Wal-Mart's expansion south of the border has been widely hailed as one of the great American business success stories of the past decade, immensely beneficial to everyday Mexican consumers and to the overall modernization of that country's economy, and not incidentally a boon to Americans on many levels, including the pension and mutual funds that invest heavily in the Arkansas company's stock (and which were among the losers when the revelations destroyed $12 billion of its market value on Monday). But WalMex's very success could now imperil the company's interests, if the Department of Justice chooses to invoke something called the Alternative Fines Act, which provides that companies can be made to pay to the U.S. Treasury double the benefits obtained by specified law-breaking. After all, the benefits of WalMex's rapid growth have been gigantic. Had it high-mindedly told the gestores and their friends to buzz off and refused to authorize a single peso's expenditure that might wind up enriching a local official, the firm might now be puttering about with a tiny market share and insignificant presence in the world's 13th-largest economy. Instead it's a major asset to our economy and to Mexico's. So maybe Bentonville should be made to pay twice its value — at least such is the act's logic.

Why the fines should be paid to the U.S. Treasury — which was surely not the victim of the Mexican bribe-paying, if victims there were — is another story. Were the law's aim really to coax regulated parties into disclosure and remediation, you'd expect more use of devices like amnesties and grace periods geared toward bringing past messes out from under the rug, as happens widely in the field of tax compliance.

Instead, it's almost as if Washington wants to set up the nation's most successful international businesses to fail.

Walter Olson is senior fellow at the Cato Institute and has written frequently on FCPA.

Citizens Resist King Obama by Nat Hentoff

Wed, 25 Apr 2012 00:00:00 -0400

With instant news coming at us continuously on cable and online, there may well be Americans who are unaware of the strong reaction to Barack Obama’s signing of the National Defense Authorization Act (NDAA) for Fiscal Year 2012. The law impelled Kenneth Roth, the executive director of the respected Human Rights Watch, to declare:

“President Obama will go down in history as the president who enshrined indefinite detention (imprisonment) without trial in U.S. law” (“U.S.: Refusal to Veto Detainee Bill a Historic Tragedy for Rights,” hrw.org, Dec. 15, 2011).

This includes U.S. citizens.

Just as ignited is Judge Andrew Napolitano, the senior judicial analyst at Fox News, who, irrespective of his ultimate employer, is TV’s most compellingly informed protector of the Constitution. He warns:

“Essentially, this legislation would enable the president to divert from the criminal justice system, and thus to divert from the protections of the Constitution, any person he pleases” (“Can Congress Steal Your Constitutional Freedoms?” townhall.com, Dec. 1, 2011).

As if he were our king.

Sounds like typical election year bombast, doesn’t it? But as I reported last week, the president, without going to court, can cage a U.S. citizen only “suspected of association” with our terrorist enemies (“Congress, Obama Codify Indefinite Detention,” Sheldon Richman, The Future of Freedom Foundation, fff.org, Dec. 27, 2011).

The Tenth Amendment Center adds: “The indefinite military detention of any person in the United States without charge or trial violates the Fifth and Sixth Amendments of the Constitution of the United States (and) Article III of the Constitution of the United States” (“NDAA: Liberty Preservation Act,” tenthamendmentcenter.com).

How many students are learning any of this in the civics classes that are left in our public schools?

Among the growing number of resisters to Obama’s new, radical authority to scrap our liberties, Republican Brian Nieves is sponsoring a bill in the Missouri State Senate that would establish the Missouri Liberty Preservation Act, which says:

“The state of Missouri will be prohibited from participating or providing material support for the implementation of sections 1021 or 1022 (which have been summarized in this column) of the National Defense Authorization Act for Fiscal Year 2012” (senate.mo.gov).

Resistance to what I would call an un-American law is also active in the Missouri House, where Republican State Rep. Paul Curtman has introduced his version of the anti-NDAA law. What may irritate President Obama, who counts on a strong majority of Democrats in Congress to support his monarchical wishes, is this report from Rep. Curtman:

“My fellow veterans in particular are very aware of the dangers posed by the NDAA, but this issue is obviously crossing (political) boundaries” (“Resistance to NDAA kidnapping in Missouri growing,” Bryce Shonka, blog.tenthamendmentcenter.com, April 6).

And dig this, President Obama, from Rep. Curtman, a Republican:

“Every one of the dozen or so Democrats I’ve showed this to say they’ll vote for it. That is a huge change from what I’m used to.”

Let’s see if this Tom Paine-like bipartisan courage of citizens in the Missouri House spreads to other state legislatures.

The Tenth Amendment Center suggests that those Missourians “who agree... have a critical opportunity to sound the alarm among their friends, family and neighbors.”

And, anticipating how difficult it has become for Democrats and Republicans to agree on anything, even if their nation’s Constitution is in danger, the Tenth Amendment Center urgently adds:

“Now is the time to raise awareness of the Missouri Liberty Preservation Act and to make it known that in this case, a bill introduced by Republicans may be worth the support of Democrats and Republicans alike.”

Gee, what a revolutionary idea these days!

Meanwhile, presumptive GOP presidential candidate Mitt Romney remains silent as his fellow Republicans around the country insist on protecting our elemental due process of law as the very basis of our permanent national security. Jeremy B. White reports in the International Business Times: “State Republican lawmakers have sponsored legislation condemning the NDAA in Washington and Virginia” (“Republicans Join Fight Against Indefinite Detention in NDAA,” ibtimes.com, March 30, 2012).

I suggest that all Americans who oppose Obama’s denuding the citizenry of its heritage of self-government spread the ACLU’s incisive exposure of what the NDAA is doing to this and future generations:

“The law does not require even an allegation that a detained person caused any harm or threat of harm to the United States or to any U.S. interest. Mere allegation of membership in, or support of, an alleged terrorist group could be the basis for indefinite detention.

“Under the American justice system, we don’t just lock people up indefinitely based on suspicion” (“Talking Points: 2012 National Defense Authorization Act (NDAA),” aclu.org, Feb. 22).

Next week: With a growing bipartisan base, other reasons to organize to keep America safe from its executive branch. Our citizens’ artillery? The First Amendment underlines our rights to “peaceably... assemble, and to petition the government for a redress of grievances.”

Then, it’s our “freedom of speech, or of the press” that gives us the means to rescue ourselves from the National Defense Authorization Act.

Remember: “Men (and women) are truly free only when they do not have to ask themselves whether they are free” (“The Bill of Rights: Its Origin and Meaning,” Irving Brant, New American Library, 1967).

Do you feel free now, knowing that our president can lock away Americans based on a mist of suspicion?

Nat Hentoff is a senior fellow at the Cato Institute.

Write a Check, Mr. President by Doug Bandow

Wed, 25 Apr 2012 00:00:00 -0400

Americans have finished paying their taxes, according to Tax Freedom Day, which fell on April 17. But some of them should be paying a lot more, says President Barack Obama.

He wants rich people to pay a higher tax rate than their secretaries. Hence his support for the so-called Buffett Rule. However, it turns out the president pays a lower rate on his income than does his secretary. He should write an extra check to Uncle Sam.

The president has been on the campaign stump talking up the Buffett Rule, which would require anyone making more than a million dollars a year to pay at least 30 percent in taxes. The measure didn't get out of the Senate, but that might make it an even better political issue for President Obama. At least it would if he — rich by any normal definition, though he didn't make more than a million dollars last year — wasn't violating the very rule he was promoting.

The proposal doesn't make much sense as public policy. The top one percent of Americans actually pays an effective tax rate of 29.5 percent. The disparity of which the president complains reflects the difference in tax rates for earned income and investment income. Much of the latter is generated by investing the former, which already has been taxed. There's no right or wrong tax rate in principle for either kind of income.

Moreover, the federal government already imposes the so-called Alternative Minimum Tax, which is supposed to set a minimum rate for the rich to override the effect of tax preferences. The AMT was created in 1969 after the revelation that 21 millionaires had not paid any income tax two years before.

However, the AMT is not indexed for inflation and increasingly covers the middle class. In 2008, 27 percent of those who paid the AMT made less than $200,000 a year. Every year Congress passes a temporary "patch" to override the AMT, since otherwise it would hit millions more Americans. More sensible would be congressional action to "fix" the AMT, whatever that means, than to add a new super-AMT under the guise of the Buffett Rule on top of the existing broken AMT.

Nor would the Buffett Rule collect much cash. The top one percent of taxpayers already pays 38 percent of total income taxes collected. The top five percent pays 59 percent. The top quarter pays 86 percent.

Turning the Buffett Rule into law would raise an average $4.7 billion a year. That sounds like a lot of money, but the deficit this year is expected to run $1.2 trillion. If enacted, the president's budget would add about $3.4 trillion in red ink over the next decade to a collective deficit already predicted to run at least $3 trillion. The official national debt is more than $15 trillion. The real unfunded liability for Social Security and Medicare likely exceeds $100 trillion. The president's proposal might assuage a bit of envy, but it wouldn't do much to improve federal finances. For this reason even Barack Obama admitted that the Buffett Rule was a "gimmick."

Worse, though, the president appears to believe in the political equivalent of cheap grace. The Obamas are rich, or rich enough — currently in the top .5 to one percent of earners. Moreover, they have been making well over a million dollars annually from their books; $844,585 was their worst year since 2004.

Yet the president is failing to meet what he claims to be a fundamental moral duty. Rather than do the right thing, he's handing the issue off to government. "Under the president's own tax proposals," declared White House press secretary Jay Carney, "he would pay more in taxes while ensuring we cut taxes for the middle-class and those trying to get into it." However, President Obama knows Congress won't act. He is calling for higher taxes while he and his wife are pocketing their outrageously high earnings.

Treasury Secretary Timothy Geithner — who before his appointment had a little problem paying taxes that were legally due — claimed that "Just because Republicans oppose this does not mean it's not the right thing to do and not the right thing to push for." But surely that doesn't mean the president should not do the right thing on his own if Republican opposition kills his proposal.

Last year the Obamas grossed $844,585. Their adjusted gross income was $789,674. Their itemized deductions ran $278,498. Their total tax due was $162,074. That's less than 20 percent on gross and barely more than 20 percent on adjusted gross. In contrast, say administration officials, his secretary, Anita Breckenridge, paid a higher rate on her income of $95,000.

The president's aides put the best face on things. "The president's secretary pays a slightly higher rate this year than the president on her substantially lower income, which is exactly why we need to reform our tax code and ask the wealthiest to pay their fair share," said White House spokeswoman Amy Brundage.

Instead of waiting for Congress to act, however, the president should pay the $73,628 necessary to make the 30 percent level on the Obamas' AGI, or, better yet, the $91,302 to make the 30 percent level on their gross income. The easiest way would be to simply write a check for that amount — while not taking a deduction for the "gift." But it would be more creative for the Obamas to enhance their tax liability. Since the law obviously doesn't charge them enough, they should come up with better numbers.

It's hard for the president to bump up his salary without a W-2 to match. But he has plenty of other opportunities to inflate his income. For instance, the Obamas declared just $3 (!) in dividend income. This is an easy one. Make it $10,003 or $20,003. The IRS wouldn't mind. It certainly wouldn't work to disprove that a (relatively) rich family collected that much in dividends.

The Obamas also could toss in a few grand in alimony. True, neither Barack nor Michelle Obama has a former spouse. But, again, that shouldn't bother America's cash-strapped Treasury.

Claiming to receive Social Security or unemployment insurance might be a bit awkward. However, the president could add some amount for annuities. A big number, since no additional form or documentation is required.

Inflating earnings is just one way for the Obamas to hike their tax liability. They also could do more to pay their fair share by reducing claimed deductions and credits. For instance, they list $5,911 for half of the self-employment tax paid and $49,000 for a retirement (SEP) contribution. Social Security is effectively bankrupt and the Obamas won't have any trouble making money after the president leaves office. They should have left off these deductions. A matter of social justice and all that.

The real money-maker, however, would be to stop claiming itemized deductions. The Obamas subtracted a sizable $278,498. Sure, doing so might be legal. But is it moral? Think of all the vital revenue they are denying Uncle Sam!

The Obamas could make sure that they paid their fair share — and simultaneously demonstrate that they are in tune with "real" people, who don't enjoy lavish, tax-preferred write-offs — by taking the standard deduction, which would be $11,600 for the couple. Knocking $266,898 off their write-offs would let the Obamas pass the "Buffett Rule." Problem solved!

But if that wasn't enough, they also could forget the $5,841 in foreign tax credits claimed. Heck, why shouldn't the Obamas simultaneously support Uncle Sam and a foreign government or two? States overseas need love (and money) too. It's a matter of fairness worldwide.

The Bidens should do the same. Vice President Joe Biden declared: "We're not supposed to have a system with one set of rules for the wealthy and one set of rules for everyone else." Yet they made a nice $379,035 last year. (Since the Bidens made no income adjustments, their gross income is the same as their adjusted gross income.) That's not uber-rich, but I wouldn't turn down the extra cash.

On those earnings they paid $87,663 in federal taxes. Granted, they aren't making a million, and they are paying a slightly higher rate than the Obamas — about 23 percent. However, they also fall substantially short of the magic 30 percent. Whatever happened to paying a higher rate than your secretary?

The Bidens should follow the same strategy as the Obamas. Write a check for $26,048 to get over the 30 percent threshold. Or toss in some extra income. The Bidens list no dividends, for instance. What an exciting opportunity for creative accounting! Then there are those empty lines for annuities and alimony on their tax return.

Moreover, the Bidens claimed $60,628 in itemized deductions. Simply listing the standard $11,600 would run up their tax liability. Think of how much money the federal government would "save."

Yet when this idea was broached with the White House, Jay Carney said "Well, we disagree." He dismissed the proposal: "Another real classy charge is the idea that, well, wealthy Americans who feel like paying their fair share, feel like paying taxes at a rate that middle-class Americans do — if they don't, they have the option of doing it themselves by writing a check." Well, rich Americans like the Obamas and Bidens do have that option. If the government won't make them pay more and they view doing so as a moral duty, then why not ask them to contribute voluntarily?

Argued Carney: "Think what that says to middle-class American families who are trying to get by, who are paying their taxes and paying at a rate higher than Warren Buffett." Actually, it would say to them that rich people like Buffett and the president who don't believe they are paying enough are willing to put their money where there mouths are. Step up, do your duty, and write a check.

America's tax system is a mess. Taxes should be used to raise revenue, not manipulate behavior. Rates should be lower; filing should be simpler.

We can argue about what constitutes "fairness" and how much the "rich" should pay. But those arguing for the "Buffett Rule" have an obligation to walk the talk. It's bad enough for a really rich guy like Warren Buffett to claim he should be paying more — and do nothing. It's far worse when someone, like the president, tries to take political advantage of the issue and then does nothing.

If President Obama hopes to win votes by posing as a defender of the middle class, he should make sure that he pays a higher tax rate than the middle class. Write the check, Mr. President!

Doug Bandow is a senior fellow at the Cato Institute and former special assistant to President Ronald Reagan.