Cato Recent Op-eds

Attack of the Pork Hawks by Doug Bandow

Mon, 13 Feb 2012 00:00:00 -0500

Conservative politicians want to cut spending — except for the military. Where that's concerned, they sound like liberals. In fact, conservatives have adopted several liberal ploys to justify today's bloated military budget.

First, big spenders on the right argue that Washington must continue doing everything that it has ever done abroad. House Armed Services Committee Chairman Howard "Buck" McKeon (R-Calif.), one of the leading pork hawks, has denounced the idea of doing "less with less."

Yet the Department of Defense spends most of its money to protect other nations, including those that are populous and prosperous. All together, the Europeans have a larger GDP and population than America and ten times the GDP and three times the population of Russia. South Korea has 40 times the GDP and twice the population of North Korea. Why is the U.S. taxpayer still paying for their protection, 67 years after World War II ended?

Even worse has been Washington's foray into militarized nation-building. The Balkans remains a mess nearly two decades after Washington intervened. The Iraq War weakened America and strengthened Iran. The U.S. has been trying to create a competent, honest, and democratic central government in Kabul for a decade. None of these missions advances U.S. security.

But that raises the second excuse that phony conservatives use to justify a bloated Pentagon. Like liberals spending on education, these right-wingers equate money with results. Thus bigger Pentagon budgets mean increased national security. Only it's not true: greater military spending is strategic waste on a grand scale.

While the world is dangerous, it is not particularly dangerous to America. The U.S. is surrounded by oceans east and west and friendly neighbors north and south. America is allied with every major industrialized state save Russia and China. Washington already has a thousand military installations around the world. The American navy is equivalent to that of next 13 navies combined, 11 of which belong to U.S. allies.

Washington spends as much as the rest of the world — and spends more, in real terms, than at any point during the Korean War, Vietnam War, or Cold War. America could spend less and still possess far larger and more capable forces than anyone else.

Such overcapacity actually encourages Washington to meddle in foreign conflicts that foolishly deplete our military capital. As a result, guys using AK-47s and improvised explosive devices tied down the world's greatest power for years in both Iraq and Afghanistan.

Terrorism remains a threat, but not an existential one like the old Soviet Russia. Moreover, Al-Qaeda has been wrecked by relatively inexpensive techniques short of conventional war: good intelligence, Special Forces strikes, international cooperation, financial sanctions. In contrast, the invasion of Iraq created an entirely new class of terrorists, some of whom have migrated to other conflicts, such as Libya and Syria.

The third idea spendthrift militarists have recycled from the liberals of yesteryear is using "baseline budgeting" to complain that Barack Obama has "cut" defense outlays. This is the same way Democrats once charged that Ronald Reagan drastically "cut" domestic spending — by reducing the rate of increase.

Total military outlays were $306 billion in 2001. Since then they have risen steadily, breaching the $700 billion barrier under Barack Obama in 2011. In real, inflation-adjusted terms, expenditures increased 74.5 percent over the last decade. In the Obama administration's first two years inflation-adjusted military spending rose 16.8 percent. Outlays last year, in real terms, were 23.5 percent above the Korean War peak in 1953, 22.5 percent above the Vietnam War peak in 1968, and 35.8 percent above the Reagan build-up peak in 1989.

Spending will stop racing ahead this year but not because of real cuts: the administration has only proposed reducing planned increases over the coming decade by $487 billion. As former House Majority Leader Richard Armey observed, these "cuts" are "only from the bloated CBO baseline. This means that [Obama] is merely reducing projected military spending, as opposed to cutting current spending."

If Congress does not trim overall spending by $1.2 trillion over the coming decade, the sequestration agreed to during last summer's debt ceiling debate is supposed to kick in, with the equivalent amount in cuts divided equally between domestic and military outlays. This prospect has caused much neoconservative wailing and gnashing of teeth.

In fact, say Veronique de Rugy of the Mercatus Center and Ben Friedman of the Cato Institute, non-war outlays would still increase, only "by about 10 percent today, as opposed to the 18 percent the administration wants." (War expenses are exempted.) Overall, they figure, as a result of sequestration military expenditures would grow by 18 percent rather than 20 percent from now through 2021.

The present rate of growth is too much even for some hawks. "Under sequestration, the Defense Department would still be spending more money in 2021 than it is spending today," adds Andrew McCarthy of the Foundation for Defense of Democracies. "Moreover, that spending increase — not cut, increase — comes atop a decade-long spending bonanza."

Yet some of the most prominent neoconservatives are scaremongers. Max Boot of the Council on Foreign Relations cites an estimate that the combined effect of all "cuts" would result in a 31 percent drop in real military spending. But even if this "worst case" came to pass, real outlays would be at 2007 levels, which were 39 percent higher than in 2001. Moreover, the reduction would come when the U.S. was no longer fighting wars in Iraq and Afghanistan. America would still lap the rest of the world in the global arms race.

The fourth tactic for conservatives addicted to military-industrial pixie dust is playing the "Washington Monument" game — threatening to kill the most important programs (in this case, weapon systems) first. Just as liberals, faced with demands for cuts to local budgets, will threaten schools, police, and fire departments first, pork hawks want to claim that DoD reductions must come out of indispensable programs. Again, that's not true: military cutbacks should start with force structure, especially army units.

With allies capable of defending themselves, the U.S. should not plan on fighting a major land war in Europe or Asia. And there should be no more nation-building. The U.S. should maintain superior air and naval forces, but in smaller numbers sufficient to prevent attack on America rather than to police the globe. Such a strategic readjustment does not mean the end of our ability to project force abroad: America would continue to act as an off-shore balancer capable of aiding friendly states against a hostile power seeking Eurasian hegemony. This would not only be more affordable but makes greater strategic sense than behaving as an in-region meddler determined to micromanage local conflicts.

Could the unexpected occur? Of course. Should the U.S. have a surge capacity in the event of an emergency? Certainly. Should Washington adjust its plans if international circumstances change? Definitely. But it makes no sense to maintain an oversized military for decades because someday a country like China might behave badly. When that time comes, a bloated Defense apparatus would be too slow and encumbered to act.

The fifth and last resort of Washington big-spenders is demagoguery. Advocates of a colossal military trash their opponents as "isolationists" who want to undermine America. Columnist Lurita Doan accused President Obama of seeking "to render our military neither well-armed nor well-planned." New Zealand blogger Trevor Loudon — neoconservatives are nothing if not globalist — charged that "hard-bitten Leninists and disciplined Marxists" were behind plans to reduce U.S. military outlays.

Just look at the hype. Reductions in military spending, we are told, would be "totally destructive" and "very dangerous to the survival of the country," would "destroy" the Pentagon, set America on a "perilous course," be "dangerous and irresponsible," leave America "in the greatest peril," "would decimate our military," threaten America's "national security interests," be "totally devastating," send "a very horrible message" to America's enemies, create the "threat of gutting national security," "break" the military, "invite aggression," cause "severe and irreversible impact," leave America "teetering on the precipice of disaster," cause "catastrophic damage," "put our national security on the chopping block," leave "a hollow force," "disarm the United States unilaterally," result in "American lives lost," fail "to provide for the safety and security of our country," and call "into question our nation's ability to remain a free people."

All of this from returning military outlays to 2007 levels.

The fundamental question is whether military spending should respond to the threat environment. Leading Republicans answer no: America must always and in every situation spend more.

Pork hawks routinely denounce the post-Cold War drawdown, a 27.8 percent drop in real outlays from peak to trough that was erased in just six years. The Soviet Union had disintegrated. The Warsaw Pact had dissolved. Maoism had disappeared from China. Colin Powell observed that he was running out of enemies — down to Kim Il-sung and Fidel Castro. Still the pork hawks wailed. And some go farther. Max Boot decries every previous drawdown, including after the Revolutionary War.

Congressman J. Randy Forbes (R-Va.) complains that spending reductions would result in an America "that can go fewer places and do fewer things." But what if going to most of those "places" and doing most of those "things" does not advance U.S. interests? Secretary of Defense Leon Panetta has testified that military cutbacks might require reducing "our presence perhaps in Latin America, our presence in Africa." So?

There are bad actors in the world, but they need not automatically be America's problem. Gen. Robert H. Scales (ret.) argues that "We cannot pick our enemies; our enemies will pick us." Actually, in recent years Washington has done most of the picking and attacking: Haiti, Bosnia, Serbia, Iraq, Libya.

Max Boot similarly asserts: "Certainly there has not been — nor is there likely to be — a decreased demand for the armed forces. They are constantly having new missions thrown their way, from defending our nation's computer networks to deposing a dictator in Libya and providing relief to Japanese tsunami survivors." None of these tasks justifies maintaining a titanic military in a constitutional republic facing a troubled future of deficits, debts, and unfunded liabilities.

Even those who say military outlays can never be cut must ultimately decide how much is enough. Half of the world's outlays? Three-quarters? Four-fifths? Even if Washington could afford to spend ever more, the rest of the world might not go along with America's plan. If the U.S. spends more to contain China, China is sure to ramp up its outlays to deter us. After all, Americans would not stand idly by if another country placed bases in Mexico and Canada, used its fleets to patrol the Gulf of Mexico and both coasts, and casually talked of war to contain American ambitions. China will act no differently.

America is more secure today than at any point since before World War II. Military outlays should be reduced accordingly.

That will require scaling back Washington's international objectives. But the U.S. should stop garrisoning the globe, subsidizing rich friends, and reconstructing poor enemies. Instead, it's about time Washington focused on defending America and its people.

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

The Real Trouble with the Birth-Control Mandate by John H. Cochrane

Thu, 09 Feb 2012 00:00:00 -0500

When the administration affirmed last month that church-affiliated employers must buy health insurance that covers birth control, the outcry was instant. Critics complained that certain institutions should be exempt as a matter of religious freedom. Although the ruling was meant to be final, presidential advisers said this week that the administration might look for a compromise.

Critics are missing the larger point. Why should the Department of Health and Human Services (HHS) decree that any of us must pay for “insurance” that covers contraceptives?

I put “insurance” in quotes for a reason. Insurance is supposed to mean a contract, by which a company pays for large, unanticipated expenses in return for a premium: expenses like your house burning down, your car getting stolen or a big medical bill.

Insurance is a bad idea for small, regular and predictable expenses. There are good reasons that your car insurance company doesn’t add $100 per year to your premium and then cover oil changes, and that your health insurance doesn’t charge $50 more per year and cover toothpaste. You’d have to fill out mountains of paperwork, the oil-change and toothpaste markets would become much less competitive, and you’d end up spending more.

How did we get to this point? It all leads back to the elephant in the room: the tax deductibility of employer-provided group insurance.

If your employer pays you $100 less in salary and buys $100 of group insurance for you, you don’t pay taxes on that amount. Hence, the more insurance costs and covers, the less in taxes you seem to pay. (Even that savings is an illusion: The government still needs money and raises overall tax rates to make up the difference.)

To add insult to injury, this tax deduction does not apply to portable, guaranteed-renewable individual insurance. You don’t get the tax break if your employer gives you the $100 and you buy a policy—a policy that will stay with you if you get sick, leave employment or get divorced. The pre-existing conditions crisis is largely a creature of tax law. You don’t lose your car insurance when you change jobs.

Why did HHS add this birth-control insurance mandate—along with “well-woman visits, breast-feeding support and domestic-violence screening,” and “all without charging a co-payment, co-insurance or a deductible”—to its implementation of a provision of the new health-care reform law? “Because it promotes maternal and child health by allowing women to space their pregnancies,” says the HHS advisory panel. Because these “historic new guidelines” will make sure “women have access to a full range of recommended preventive services,” says the original HHS announcement. To “increase access to important preventive services,” echoes White House Press Secretary Jay Carney.

John H. Cochrane is a professor of finance at the University of Chicago Booth School of Business and an adjunct scholar of the Cato Institute.

Is There a Libertarian Case for Rick Santorum? by John Samples

Wed, 08 Feb 2012 00:00:00 -0500

Rick Santorum had a somewhat super Tuesday on February 7th. He won all three Republican presidential primaries, thereby reviving a campaign that had failed to follow up on his victory in Iowa. Santorum could become the sole alternative to Romney for the Republican nomination. If that happens, he could become the GOP nominee in 2012. Should libertarians vote for him?

Here’s my (broad) definition of a libertarian. A libertarian cares about individual liberty and thus limited government. Those concerns lead to further commitments to free markets in economics, moral pluralism in culture, and realism and restraint in foreign policy. Government provides a legal order in which individuals pursue their vision of the good life. Politics is more about living together at peace than about making people virtuous.

By his own account, Santorum is anti-libertarian, describing the philosophy as “radical individualism” and a source of cultural decay. He opposes moral pluralism in favor of a society and government that recognizes and acts on Christian virtues. Santorum speaks of free markets, but his cultural commitments are bound to require limits on economic liberty. He also indulges in an economic populism that implies protectionist policies that favor the manufacturing sector. Like many Republicans these days, Santorum also seeks salvation for the Middle East through American military power.

So will libertarians support Obama in the fall? Not necessarily. They will be able to vote for former New Mexico governor Gary Johnson, the likely candidate of the Libertarian Party. He offers an easy way around choosing between the president and Rick Santorum.

Maybe not. Let’s stipulate that Johnson cannot win. If libertarians vote for him, and not their second choice (either Obama or Santorum), they might cause the election of their third choice (Obama or Santorum). Hence we come to the question of the lesser evil.

Is Obama a correct second choice for libertarians? The president is similar to the former senator in one way: both see government as pursuing a moral crusade on behalf of some value. Like generations of progressives, Obama wishes to remake American society in pursuit of “social justice,” not Christian morality. As Friedrich Hayek understood, Obama’s search for “social justice” necessarily abridges economic liberty. Obama’s Libya mission shows that his administration shares George W. Bush’s disdain for realism in foreign policy.

As they say in sports, it’s enough to make you wish they both could lose. But they can’t.

Here’s my libertarian case for Rick Santorum’s nomination (though not his election). Since the early 1990s, Christian conservatives have formed an ever larger portion of the GOP. In Santorum, they would have what they have long sought: a candidate embodying their commitments to a politics of faith. Neoconservatives would also have a candidate committed to transforming the world through foreign policy and military action. The Obama-Santorum race would be more than just a struggle for power between two men. It would be a referendum on ideas and policies that have dominated the GOP for more than decade.

One recent poll has the former senator running even with Obama, but most polls have shown a decided gap of about eight points between the incumbent and Santorum. Right now the latter is not well-known to most voters. As Santorum becomes better known, he might close the gap with Obama. More likely, I think he would drive more secular and independent voters away from the GOP ticket. A ten-point Republican loss in a year when economic weakness suggested a close race would be a political disaster not just for the candidate and his party but also for the ideas they embody. Rick Santorum could be the George McGovern of his party.

Such a disaster might open the door for a different kind of GOP along lines indicated earlier, a party of free markets, moral pluralism, and realism in foreign affairs. Ron Paul has taken some steps this year toward creating such a party. He has attracted votes and inspired activism. His son or another candidate might take up the cause in 2016 and build on Paul’s achievements. Fanciful thinking? Perhaps, but it may take an electoral disaster to free the GOP from the ideas and forces that Rick Santorum represents.

John Samples is director of the Center for Representative Government at the Cato Institute and the author of The Struggle to Limit Government.

The Limits of Monetary Policy Call for Moral, Sound Money by James A. Dorn

Wed, 08 Feb 2012 00:00:00 -0500

The American public does not like the fact that Fed chairman Ben Bernanke has vastly expanded the size and scope of the nation's central bank and bailed out Wall Street while Main Street suffered. Congressman Ron Paul (R-TX), chairman of the Subcommittee on Domestic Monetary Policy, has even argued for a return to the gold standard and ultimately the end of central banking in favor of free-market money.

Although the Federal Reserve is assumed be independent, the reality is that it is subject to strong political pressure, just like any other government agency. In an election year, with high unemployment and a sluggish economy, there will be more voices calling for stimulus than for constraint. Another round of quantitative easing — that is, the purchase of government bonds and mortgage-backed securities (MBS) — is likely, with the objective of reducing longer-term interest rates to induce spending and growth.

That strategy has not worked thus far. Moreover, expanding the Federal Reserve's already bloated balance sheet could further undermine its credibility in terms of safeguarding the future value of the dollar. The Fed faces a very dangerous tradeoff: risk higher inflation by expanding the monetary base (currency plus bank reserves) in a vain attempt to lower unemployment.

The Federal Reserve's dual mandate is to achieve both price stability and full employment. However, history has shown that when the Fed fails to achieve price stability, the result can be stagflation, as in 1970s — not real economic growth and full employment.

After expanding its balance sheet from less than $1 trillion before 2008 to nearly $3 trillion today, the Fed has had little impact on the rate of unemployment but has greatly altered the allocation of credit and distorted the yield curve. It is ironic that while Congress criticizes China for manipulating its exchange rate, little is said about the Federal Reserve's manipulation of interest rates and asset prices.

It is unnatural to have interest rates close to zero and to distort the yield curve by pegging longer-run bond prices at artificially high levels and suppressing yields. Keeping rates low to finance government debt is not a recipe for long-run growth or for credible U.S. monetary or fiscal policy. Purchasing MBS to fuel the housing market merely delays the readjustment of relative prices that needs to occur before the U.S housing market can return to normal.

Rather than engaging in pure monetary policy to ensure long-run price stability and prevent erratic changes in nominal GDP, the U.S. central bank has engaged in fiscal policy by allocating credit to favored groups and thus politicized monetary policy.

Moving forward, it is likely the Fed under chairman Bernanke will continue to bow to political pressures to stimulate the economy, allocate credit, and distort relative prices. The dismal situation in the eurozone, the long-term deficits in the United States, and the lack of pro-growth tax reform and other structural changes mean the Fed will be held responsible for performing miracles. But there are limits to what monetary policy can accomplish.

Theory and practice both tell us that printing money cannot generate economic growth or lower the natural rate of unemployment, but it can cause inflation. An excess supply of money can also distort relative prices and misdirect investment. The Federal Reserve helped create the bubble in the housing market by keeping interest rates too low for too long and is now creating another bubble in the bond market. Pegging the federal funds rate close to zero for another three years and twisting the yield curve to lower longer-term rates will continue to misprice credit, penalize saving, and encourage risk.

If the Fed engages in a third round of quantitative easing (QE3), designed to lower rates on longer-term securities, and monetizes additional government debt, inflationary expectations are likely to rise. Uncertainty about the future value of the dollar would increase. Moreover, if Congress does not make headway in significantly reducing its addiction to spending and debt, there could be a general downgrade of U.S. public debt. Inflating away the real burden of the debt is not a viable option. Creditors would demand higher nominal interest rates and the costs of servicing the debt would skyrocket.

Some asset prices need to come down. That readjustment is not deflation. It is the lowering of some prices relative to others in order to let markets clear. The Fed should be more concerned with maintaining a sound currency than with propping up housing prices and the prices of longer-term government securities, including agency debt.

Asking the Federal Reserve to stimulate the economy and lower unemployment is asking too much. Monetary policy can wreak havoc on an economy when it is erratic. But when it limits itself to safeguarding the long-run value of money, it can grease the wheels of commerce and allow markets to perform their magic.

No policymaker or economist knows the optimal amount of money in a dynamic market economy. Forecasting is a crude science, at best. No one at the Federal Reserve foresaw the financial crisis using their fancy stochastic dynamic general equilibrium models. Humility, not hubris, is appropriate when it comes to recognizing the limits of monetary policy.

The sluggish U.S. economy is not due to a deficiency of money, but to structural problems that have not been addressed. Those include chronic fiscal deficits due to overconsumption by the federal government, high marginal tax rates on capital, costly regulations imposed on the private sector, escalating health care costs, uncertainty about future fiscal and monetary policy, and huge unfunded liabilities in Medicare and Social Security.

Rules vs. Discretion

Ben Bernanke has called for greater transparency and better communication in formulating Fed policy. He has also noted that "monetary policy cannot be a panacea." Yet, he has led the charge to greatly expand the Fed's balance sheet and has let the monetary base rise to unprecedented levels. The Fed is highly leveraged and faces the risk of significant losses on its portfolio of MBS and longer-term government securities once interest rates rise, as they must. But the Fed has not told us when it will begin to normalize its balance sheet, and the expectation is that it will further expand its asset acquisition and influence the allocation of credit.

Indeed, some prominent economists are recommending that the Fed expand its balance sheet by another $2 trillion dollars and keep rates low for another 3 to 5 years. If inflation accelerates, then that is the price one has to pay for lower unemployment and higher growth. This Phillips curve (tradeoff) mentality has been proven wrong by decades of research and experience, yet the Fed continues to be under its spell.

Perhaps it is because the Fed must comply with the dual mandate and pay attention to both price stability and full employment. Congress expects the Fed to use expansionary monetary policy to lower unemployment and stimulate growth — even though the truth is that monetary policy cannot overcome structural problems to generate real growth. Many in Congress also want the Fed to monetize government debt to accommodate deficit spending, designed to win votes. Instead of a dual mandate, the Fed now appears to have adopted a triple mandate.

In this environment the Fed wants discretion, not binding rules. But discretion in a regime of pure fiat money can easily go awry. Central bankers simply do not have the knowledge necessary to fine-tune the economy or to determine the optimal quantity of money. Unlike the classical gold standard, there is no market feedback mechanism to bring the quantity of money in line with the demand for money while maintaining long-run price stability.

In the absence of convertibility into specie, there must be a monetary rule to anchor the nominal value of paper currency. As the world's primary reserve currency, the dollar's domestic purchasing power cannot be allowed to continuously drift downward, as it has since President Nixon closed the gold window in August 1971.

Various rules have been proposed, including a price-level rule (zero inflation), an inflation target rule (2 percent inflation), a nominal GDP target, and a Taylor rule designed to control the growth of nominal income by controlling the monetary base. All those rules would add some certainty to the current discretionary government fiat money regime.

The Future of Money

The existing fiat money regime with discretionary central banking may be coming to an end. The Federal Reserve and other central banks are coming under increasing scrutiny. Congress may require an audit of the Fed and constrain its powers, especially if the Republicans take over the presidency and both houses of Congress next November. Lawrence B. Lindsey, a former member of the Board of Governors of the Federal Reserve System, is open to the idea of free-market currencies, and there is a growing movement to incorporate gold into the global monetary system.

Until a transparent monetary rule that limits the power of the Federal Reserve to its constitutional duty of safeguarding the value of the dollar is enacted, or there is a return to convertibility into specie, which James Madison — the chief architect of the Constitution — called "the only adequate guarantee for the uniform and stable value of a paper currency," the world will face monetary uncertainty.

The challenge will be to engage on fundamental reform and return to sound money under a rule of law that safeguards persons and property, including the property right a person has in the future value of money. A rules-based regime would require less forecasting and generate more discipline than the current regime. As such, markets would be left to allocate credit more efficiently, and price stability would foster financial stability.

What we need is moral money: money that retains its value and can be trusted. The discretionary government fiat money regime has miserably failed on that score. We can do better. A good starting point is to recognize the limits of monetary policy.

James A. Dorn is vice president for academic affairs at the Cato Institute in Washington and editor of the Cato Journal.

Highway Robbery by Republicans by Michael D. Tanner

Wed, 08 Feb 2012 00:00:00 -0500

Anyone still wondering why there is a disconnect between grassroots limited-government conservatives and the Washington establishment need look no farther than the latest highway bill currently making its way through Congress with support from Republican leaders in both houses.

The Senate version, SB 1813, would cost $109 billion over two years. The House bill, HR 7, which runs to 847 pages of pork and special-interest projects, raises the price tag to $260 billion, but extends it over five years, making it a couple billion cheaper on a year-by-year basis.

In theory, of course, the highway bill is supposed to be paid for out of the Highway Trust Fund. But according to the Congressional Budget Office, the Trust Fund, which is funded by the federal gas tax, will collect only $187 billion over the next five years, meaning that the House bill spends $73 billion more than it takes in. To fill this gap, the House would rely first on some $20 billion in unspent money currently in the Trust Fund. But this is just the same type of Washington bookkeeping we’ve seen with other “trust funds” such as Social Security. That money is not “unspent.” In reality it was spent long ago, and what the Trust Fund actually holds is simply government bonds that will have to be redeemed out of general revenues. Beyond these funds, the House bill includes a number of other revenue-raising mechanisms, such as royalty payments from allowing drilling in the Arctic National Wildlife Refuge and offshore areas. But those provisions will never survive the Senate, leaving a shortfall that will result in either greater budget deficits or higher gas taxes.

Left unasked is why the federal government should be involved in funding highway projects at all. The interstate highway system was at least ostensibly justified on national-security grounds, but it has been completed for more than two decades. Today’s highway bills are more about the type of local road construction and maintenance that is properly the province of state and local governments. The highway bill does little more than shift money around from one state to another, with an added layer of bureaucratic central planning. The result is that some states are big winners, while others foot the bill. Considering all previous highway bills, Alaska has received more than $5.38 for every dollar its citizens paid in gasoline taxes, while Texas received back just 80 cents. Other big winners have been Hawaii, Montana, Rhode Island, South Dakota, and the District of Columbia. Losers, who paid more in taxes than they received in highway funds, include Indiana, Michigan, and North and South Carolina.

And with Washington setting priorities, lawmakers get their pet projects funded — even in the absence of explicit earmarks — while true local concerns frequently go unfunded. In fact, much of the spending under the “highway bill” does not even involve roads or highways. Both the House and Senate bills divert at least 20 percent of the funds to mass-transit projects. And, while the House has stripped out many extraneous projects, the Senate bill requires that at least 10 percent of funds go to the usual mishmash of bicycle trails, hiking trails, and “traffic calming techniques.” It also sets up “safety and education for pedestrians and bicyclists” and programs to “encourage walking and bicycling to school.” Whatever the merits of such programs, how did they become the responsibility of the federal government?

Moreover, the strings that can accompany federal highway funding can actually make road building more expensive. Federal road standards are often higher than state standards, driving up the cost of projects. Federally funded projects also require payment of much higher union-scale wages (under the Davis-Bacon Act). These regulations can drove up road building costs by as much as 30 percent under previous highway bills, and often preempt local zoning laws and building plans. Federal administrative costs and paperwork can add another 5 percent to road-building costs.

A much better approach would be to revive the Reagan-era idea of abolishing the federal highway trust fund and eliminating the federal gasoline tax, returning a source of revenue to the states in order to design and fund their own transportation priorities.

Under other circumstances, this would be an opportunity for the Republican presidential candidates to cement their small-government credentials by speaking out against this boondoggle. But, unfortunately, this is yet another area where both Rick Santorum and Newt Gingrich have baggage. Santorum voted for both the 1998 and 2005 highway bills, which were even more costly and pork-laden than this one. (The latter, in fact, contained funding for the infamous “Bridge to Nowhere.”) And, as speaker, Gingrich was influential in pushing through the 1998 bill. Romney is more of a blank slate, never having had to take a position on earlier bills, although as governor he was, of course, happy to accept federal highway funds for his state. So far, though, he has been silent about this year’s bill.

The Republican leadership hopes that slipping in sweeteners such as a renewed push for the Keystone Pipeline will mollify restive conservatives. They miss the point. The upcoming vote over the highway bill is about much more than one bill. It is a question about whether the Republican congressional establishment got the message of 2010, or whether it will simply continue with business as usual.

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.

Why Does President Obama Dislike Freedom of Conscience? by Doug Bandow

Mon, 06 Feb 2012 00:00:00 -0500

Authoritarian liberalism has taken over Obama administration policy. People must be forced to accept anything and everything in the name of tolerance. The only valid belief is no belief. Acting on one’s faith must be punished.

Such is the impact of the new Department of Health and Human Services ruling on birth control (as well as abortifacients, or “morning after” pills, and sterilization procedures). Even religious organizations must provide policies offering full coverage with no shared payment. Never mind if the people involved believe that contraception is morally wrong.

ObamaCare, which vastly expands federal control over American health care, suffers manifold flaws. One of the most obvious is further taking insurance out of “health insurance.”

Insurance is supposed to counter the risk of unlikely but potentially catastrophic events, such as having an accident or contracting cancer. Using birth control, a voluntary, routine and inexpensive decision, obviously is not such an occurrence. “Insuring” against something over which one has full control makes no sense.

Mandating coverage of these and other voluntary choices—such as using Viagra, for instance—effectively turns “insurance” into prepayment of discretionary medical expenses, raising costs. Premiums must rise enough to cover the extra procedure, inflated by the increased demand due to the zero marginal price, as well as the administrative expense of reimbursing people for every birth control pill (or other procedure/product) purchased. Imagine if auto “insurance” covered routine maintenance and even gasoline fill-ups. Yet this perversion of “health insurance” already is far advanced, and has contributed to the dramatic rise in health care costs in recent years.

An insurance plan might decide that the cost of covering birth control (or sterilization or abortifacients) is balanced by lower expenses for unwanted pregnancies. That’s undoubtedly one reason an estimated nine of ten plans voluntarily cover contraception. But coverage should be an economic, not a political, decision left to insurers and insured.

Louise Melling, deputy legal director of the American Civil Liberties Union, termed the issue a matter of “women’s rights.” Planned Parenthood exulted that the rule would save women $15 to $50 a month. Nancy Keenan, president of the pro-abortion group NARAL, proclaimed that “All women should have access to contraceptive coverage, regardless of where they work.”

But what makes contraception, sterilization, and abortifacients more important than life-saving treatment for cancer and other deadly diseases, which receive less complete coverage? And contraception still will not be free, since women will be paying increased premiums—for something a number of them would not freely choose.

Most important, access is not the issue since birth control is legal everywhere. Instead, the administration diktat simply forces everyone who does not use birth control (or uses birth control less than average) to pay for everyone else. Advocates of the contraception/sterilization/abortifacient mandate just want to subsidize their favored “treatments.” To them it doesn’t matter if men or even women don’t want to pay or be paid for this “benefit.”

The requirement would be bad policy even if it was just another of the 2000 different mandates already imposed by the federal and state governments. But the rule violates the core religious beliefs of millions of Americans.

Those who get insurance on their own or through secular employers will be forced to pay for a product or procedure for themselves and others which they view as sinful. Religious organizations will be forced either to provide the same coverage or drop health insurance entirely, leaving their employees uncovered while paying a sizable penalty to the federal government. Indeed, numerous Catholic bishops have said that the Church will not comply with the rule. And Catholic Charities dropped spousal coverage when the District of Columbia mandated coverage for gay partners. People already sacrificing the most to help others will suffer as a result.

It doesn’t matter what others think of the religious teachings involved. Many Catholics and some fundamentalist Protestants believe birth control to be wrong, and to underwrite contraception for others would make them accomplices to sin. Even worse are abortifacients, viewed by many people as the equivalent of abortion, which is opposed by even more Christians (as well as members of other faiths) as immoral killing.

While the Obama administration did not attempt to force churches to cover birth control—believers should be grateful for small favors!—it refused to grant any exemption for other religious organizations, which employ between one and two million people. Thomas Messner of the Heritage Foundation pointed to “a wide range of objecting institutions, including religious charities, hospitals, colleges, nursing homes, and universities.”

Technically the rule only mandates coverage by organizations which serve people of other faiths, but what Catholic hospital, for instance, is going to refuse to treat Protestants, Jews, and Muslims? What Christian college will bar non-Christians? If believers band together to educate children, treat the sick, or aid the poor, the Obama administration insists that they must violate their other religious beliefs.

All the administration is willing to offer is a year delay, to August 2013. HHS Secretary Kathleen Sebelius proclaimed that “This proposal strikes the appropriate balance between respecting religious freedom and increasing access to important preventive services.”

But the rule represents no balance at all. Religious believers must sacrifice their faith. They just get a temporary stay of execution. Complained Archbishop Timothy M. Dolan, president of the U.S. Conference of Catholic Bishops: “In effect, the president is saying we have a year to figure out how to violate our consciences.” Even the Washington Post editorialized that the administration failed to “make an adequate accommodation for those deeply held views. Having recognized the principle of a religious exemption, the administration should have expanded it.”

Yet in the Twilight Zone on the American Left it is Christians who are attempting to impose their views. Religious liberty, declared the ACLU’s Melling, “does not give religious groups the right to impose their beliefs on others.” Not wanting to pay for someone else’s decision to engage in what one views as immoral behavior now is defined as imposing one’s beliefs. George Orwell, call your office!

What do the administration’s religious supporters think of this direct attack on religious faith? Although the rule is supported by some churches which typically view politics as the only real transcendent, a number of believers on the Left are unhappy. For instance, the Washington Post’s E.J. Dionne accused the administration of tossing “his progressive Catholic allies under the bus.”

The president has spoken eloquently about the relationship of religion and politics, proclaiming his desire to “honor the conscience of those who disagree with abortion.” But the rule demonstrates extraordinary insensitivity, if not outright hostility, to faith. Indeed, Washington Times columnist Jeffrey Kuhner argued that the “administration has declared war on the Catholic Church and religious liberty.” That may be giving administration officials too much credit for malice aforethought, but more than a few people do wish religious believers ill.

The American Spectator’s Jim Antle pointed out that “You don’t have to look very far to find comments suggesting that this rule is a good way to stick it to churches whose social teachings are deemed too reactionary.” Some people would like to see the government put religious groups out of business, or at least stop them from doing anything other than holding an occasional private worship service.

The administration’s attack on religion vividly demonstrates the underlying danger of the ever-expanding federal welfare state. As government takes over ever more private responsibilities, it imposes the beliefs of those who have seized control of the state. In practice today that usually means a secularist and paternalist orientation. Indeed, for decades authoritarian liberals have been working assiduously, despite the efforts of the Religious Right, to turn the national government into “an instrument of culture war,” as New York Times columnist Ross Douthat put it. He worries that the current fight is “an intimation of a darker American future, in which our voluntary communities wither away and government becomes the only word we have for the things we do together.”

Such an apocalyptic vision might be an exaggeration, but for decades government has been consciously constricting the private, voluntary sphere of life. Educational and social services of all sorts once were provided by private and especially religious institutions. Government has increasingly pushed them aside.

First, people are less likely to give their own resources when government is seen as “taking care” of the problem. Second, just as Gresham’s law tells us that bad money pushes out good, government welfare pushes out private charity. After all, why seek private aid tied to personal reform if government offers an easier payout?

Third, many private organizations are non-governmental in name only, receiving most of their resources from government. With money naturally come restrictions, which typically weigh most heavily on religious organizations with a faith to spread. Through Bill Clinton’s AmeriCorps and George W. Bush’s faith-based initiative the government even pays volunteers to work for private charities and directly funds religious groups.

Now the Obama administration is using its broader regulatory power to suppress the very religious values which make faith-based organizations unique. Freedom of conscience is a bedrock liberty, inherent to the human person created in the image of God, not a privilege based on the whim of the state. Yet under the administration rule even if you don’t take Caesar’s coin you will find it hard to avoid his idolatrous demands.

Facing a potentially difficult reelection, the president could decide to expand the exemption before November. Congress also could legislate an exemption, as proposed by Senators Marco Rubio (R-FL) and Roy Blunt (R-MO) and Rep. Jeff Fortenberry (R-NE).

But such steps merely would treat symptoms. The purpose of ObamaCare is to shift health care decisions to Washington. In this case, religious believers are merely collateral damage. Washington should not be writing health insurance policies for Americans, whatever their faith. ObamaCare should be repealed for this reason alone.

However, the threat posed by Washington to Americans’ liberties goes far beyond medicine. The contraception rule should act as a clarion call for religious believers to resist the continued expansion of state power even for supposedly beneficent purposes. The regulation is a direct attack on religious faith with no serious, let alone compelling, justification.

President Obama once said that freedom of conscience is important. Yet his administration has decided that forcing people to subsidize the choice to have sex is more important than protecting the right to act on one’s deepest religious beliefs. Authoritarian liberalism is the new governing philosophy in Washington.

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

Burma Comes in from the Cold by Doug Bandow

Mon, 06 Feb 2012 00:00:00 -0500

Once isolated by the West, Burma, also called Myanmar, has chosen to join the rest of the world. Although Burma’s future course is not guaranteed, the country’s prospects are growing brighter. The United States should reward the government in Naypyidaw for further expanding democratic reforms.

The military first seized control in Burma in 1962.The junta varied between bizarre (long-time dictator Ne Win was guided by astrology) and brutal (suppressing democracy protests equally ruthlessly in 1988 and 2007). Callous incompetence after Cyclone Nargis in 2008 resulted in mass suffering. In eastern and northern Burma, the regime literally warred against its own people, with numerous ethnic groups seeking autonomy.

Over the years the United States withdrew its ambassador and imposed a range of economic sanctions. However, Washington only inconvenienced regime elites, who grew rich from their political connections.

The government, known as the State Law and Order Restoration Council and later the State Peace and Development Council, occasionally relaxed its control, only to return to repression. The regime voided the election of 1990 after the poll was won by Aung San Suu Kyi’s National League for Democracy (NLD). The Nobel laureate and daughter of one of Burma’s national heroes, Suu Kyi spent fifteen of the next twenty-one years under house arrest.

In 2010, the regime remade itself but offered little hope of genuine change. Top generals retired while creating a nominally civilian government dominated by officers who shed their uniforms. The constitution preserved the military’s dominance; the parliamentary election was rigged.

Blinded by Transition

Now, everything is changing. Suu Kyi has registered to run in an upcoming parliamentary by-election and recently made her first campaign trip. The Shan Nationalities League for Democracy, which came in second after the NLD in 1990, also has officially registered. Four amnesties over the last year have released many political prisoners. Censorship has been relaxed. Labor laws have been revised. Civic life is expanding. Ceasefires have been negotiated with several ethnic groups.

NLD deputy leader U Tin Oo said: “Everything is happening with a speed we couldn’t even foresee.” President Obama observed that “After years of darkness, we’ve seen flickers of progress.” Secretary of State Hillary Clinton visited Naypyidaw in December. European officials also have made the trek.

Burma still has far to go to become a liberal democracy, however. Some opposition activists remain skeptical. Aung Naing Oo, a Thai-based analyst, argued that “Suu Kyi’s power “will be severely limited” even if she and other NLD members are elected to parliament.

In its latest report, Human Rights Watchwarned: “Burma’s human rights situation remained dire in 2011... Freedoms of expression, association, and assembly remain severely curtailed... Ethnic conflict escalated in 2011.” With “abundant evidence of continuing systematic repression,” said HRW, the changes are welcome but “did not address ongoing, serious human rights violations in the country, especially abuses related to the long-running civil armed conflicts in ethnic minority areas.”

Indeed, increased liberties remain at the sufferance of the government. Moreover, fighting recently flared between the Burmese army and Kachin Independence Army along the border with China. Even Trade Minister U Soe Thane admitted: “A lot of things we have done, but many more we have to do in the near future. The democratic process is not finished yet.”

The Reformers

Leading the reform campaign is Burmese president U Thein Sein, a former prime minister. Suu Kyi said: “I believe he sincerely wants reform” and “He is a man capable of taking risks if he thinks they are worthwhile.” Sein is widely seen as honest, an unusual characteristic for the Burmese government.

Can he transform the system? Sein was only a secondary figure in the old regime, and his power even now is thought to be constrained by top military men (both active duty and retired) behind the scenes. Whatever the reason, Sein has overturned many of the junta’s policies if not directly challenged the military’s prerogatives. He explained in a Washington Post interview that the military was not involved in “the executive body,” though “we cannot leave the military behind because we require the military’s participation in our country’s development.”

Burma’s increasing discomfort with China’s close embrace may have encouraged the military regime to change course. In the face of U.S. and European sanctions, Naypyidaw looked to China for economic investment and political support. Beijing in turn backed Burma, including by blocking United Nations action against the junta.

But there has been increasing popular talk, even within the military leadership, about a “Chinese invasion,” the Chinese “plundering” of Burma’s resources and Beijing’s attempt to turn Burma into a “satellite state.” Last fall, Sein cancelled a China-backed dam. The People’s Republic of China obviously senses the changing environment, having sent its ambassador to meet with Suu Kyi. Zhu Feng of Peking University argued: “It’s some sort of signal that Beijing would like to lend a hand and support the new dynamic, the new political transformation.”

Whatever the reason, real and significant changes have occurred. Suu Kyi has established regular contact with the regime, itself a revolutionary reversal. One Western diplomat opined that “President Thein Sein and his government have clearly decided they’d rather have her inside their tent than out.”

Nor is Suu Kyi alone. Cho Cho Kyaw Nyein, who spent time in Burma’s prisons, said he first “didn’t believe a word of what they were saying” but now “What has happened in these last few months is a miracle for us.” Another political activist who was jailed for eleven years, Kin Zaw Win, observed: “There are still hardliners in government, but I feel a tipping point has been reached.”

Crafting a Strategy

Sending Secretary Clinton to Naypyidaw was the Obama administration’s opening gambit. She recently announced that the United States would return its ambassador to Burma after the release of political prisoners, which she called a “substantial step forward for democratic reform.” While the United States is not yet willing to lift sanctions, that issue soon will move to the fore. In effect, Washington is following President Ronald Reagan’s famous “trust but verify” approach after Soviet Communist Party general secretary Mikhail Gorbachev started dismantling Moscow’s totalitarian system.

The most important issue is economic sanctions. Washington has banned new investment in and imports from Burma, limited financial services and the gem trade, and frozen the assets of regime leaders and supporters. These restrictions are losing their raison d’être. Last fall, even Suu Kyi began talking about reintegrating Burma into the world economy. She explained: “We’ll have to study the whole package, if you like, and decide which sanctions we think should be lifted immediately.”

The Burmese people need investment and trade more than official development assistance, which has a dismal record of promoting sustained economic growth. Private capital would better encourage broad-based development and job creation, so desperately needed by one of the world’s poorest nations. Trade and investment also would strengthen the Burmese private sector, not government (through which most official “assistance” flows), helping to disperse power in a system characterized for decades by the dangerous combination of political and economic power.

The steady pilgrimage of Western political figures to Naypyidaw led Freedom House president David J. Kramer to muse “that we are moving a little too quickly.” Some observers also have talked of a “Burma Burnout,” stretching the limited capacity of the government to meet rising expectations at home and abroad. And caution remains justified, given the distance still to travel.

But there is no plausible course other than engagement. Years of sanctions and isolation failed to loosen the generals’ grip. Moving forward offers the best chance for promoting positive change. Washington should continue to reward additional Burmese moves toward democracy with modest concessions. This will allow the United States to reverse course if hard-liners reassert themselves in Naypyidaw. But Washington should indicate its willingness to fully normalize economic relations if reforms proceed.

American officials should work with other states. Europe also is liberalizing its approach to Burma. Moreover, though Burma’s neighbors have demonstrated less concern about human rights, they also can reward Naypyidaw for its reforms. For instance, in 2014 Burma is to chair the Association of Southeast Asian Nations, ASEAN.

Despite building euphoria about Burma’s new course, it is important to retain realistic expectations. Even with the best of intentions, the Sein government faces a difficult task. Shifting from authoritarian socialism to democratic capitalism is no easy feat, as Russia and other former communist states discovered.

Both military and economic elites in Burma are likely to be wary of turning power over to those who have suffered under their rule for decades. Moreover, those who benefit from today’s crony-kleptocracy are likely to fight to preserve their economic privileges even if democratization continues smoothly.

And while Burmese officials want to balance Beijing’s influence, they will not become tools of the West. China will remain Burma’s neighbor even if Naypyidaw rebalances the bilateral relationship. President Sein and his colleagues may be evolving democrats, but that does not make them geopolitical fools.

The United States and other democratic states should emphasize the reform process rather than any particular end point. But the long-term objective is simple: the Burmese people need to take charge of their own destiny. For the first time in literally decades, Burma’s future looks positive, even bright. Hopefully the “flickers of progress” now evident in Burma soon will burst into robust flame.

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

Intellectual And Policy Corruption by Richard W. Rahn

Mon, 06 Feb 2012 00:00:00 -0500

Government corruption can take many forms. Last week, most of those forms could be seen in the actions of the Obama administration — everything from government officials taking simple bribes, to covering up wrongdoing, to using taxpayer money to pay off political supporters, to using government prosecutors to punish enemies, to failing to fulfill its fiduciary duty to citizens by not performing cost-benefit analyses before taking actions. Promulgating policies that knowingly hurt millions of people is far more serious than a government official requesting a cash bribe — as despicable as that may be. Pushing for tax increases without first getting rid of counterproductive or useless programs and cleaning up mismanagement is an example of policy corruption.

The results of the extensive moral, intellectual and policy corruption in the United States in recent years can be seen readily in the accompanying chart, which includes data from both right- and left-leaning organizations. According to the Heritage Foundation/Wall Street Journal measure of economic freedom, the United States has fallen from No. 6 to No. 10 since the end of the George W. Bush administration in 2009. The U.S. also has dropped rank in the ease of doing business, as measured by the World Bank, and in global competitiveness, as measured by the World Economic Forum.

The United States has dropped from No. 19 to No. 24 in Transparency International’s corruption index over the past three years. Reporters Without Borders‘ index shows an enormous drop in press freedom in the U.S. over the past three years, from a ranking of No. 20 to a dreadful No. 47.

As a result of policy corruption, specifically failing to make sure government spending and regulations meet reasonable cost-benefit tests, employment and income growth have lagged, with most Americans reporting lower after-inflation adjusted incomes than four years ago.

The Obama administration seems to have little regard for the rule of law. In hearings before Congress last week, Attorney General Eric H. Holder Jr. continued his cover-up in the Fast and Furious guns-to-drug-dealers’ scandal.

As you may recall, a couple of years ago, the Obama administration was giving grants to the Association of Community Organizations for Reform Now (ACORN). This organization was shown to be thoroughly corrupt, causing Congress to prohibit it from receiving grants. Now, the Justice Department is requiring the Bank of America, as part of its settlement for alleged “lending discrimination,” to make large contributions to leftist groups that are not connected to the suit, including groups that are little more than renamed ACORNs. Other banks also are being pressured to make similar “settlements.” These groups have close ties to Democrats.

At the same time, Justice is helping domestic wrongdoers who have ties to the Democratic Party and is attacking Wegelin, the oldest private bank in Switzerland, which has no U.S. presence and appears not to have violated Swiss law. The Justice Department indicted Wegelin last week, forcing a bank that has survived since 1741 to sell itself to a large German bank to protect its non-U.S. clients. Justice alleges that three of the bank’s account executives encouraged Americans who had accounts with UBS in Switzerland to move their accounts to Wegelin. If the department suspected that Americans were not paying taxes on the interest they received, it should have gone after the Americans rather than destroy a substantial bank that was complying with the laws of its country.

Americans who live abroad are already having great difficulty obtaining bank accounts in foreign countries because of regulatory overreach by the Internal Revenue Service and Treasury Department. Particularly after the Wegelin case, increasing numbers of foreign financial institutions will refuse to take any U.S. clients or invest in the United States because of the risk of inadvertently violating some U.S. laws and the costs of compliance.

Americans are justifiably enraged when occasionally a foreign government indicts U.S. citizens for violations of their laws even though the activity is legal and protected in the United States (such as selling bibles, criticizing foreign leaders, etc.). The U.S. government’s hypocrisy in attacking foreign financial institutions — which abide by their own country’s tax and privacy laws — is going to come back to bite Americans very hard. It will drive out of the country upward of $1 trillion in foreign investment and tens of millions of jobs as well as make life much more difficult and risky for U.S. citizens who travel internationally.

The IRS and Justice have not made cost-benefit analyses for most of these existing and proposed international tax regulations. The regulations often violate the basic right of privacy. It is intellectual corruption when catching a few tax cheats is deemed more important than creating growth, opportunity and jobs for millions of people. You can identify some of the most intellectually corrupt in Congress, the media and the administration. They are the ones who are most vocal in railing against tax cheats yet fall strangely silent when the IRS cheats taxpayers by forcing them pay taxes on imaginary capital gains and interest because of government-caused inflation.

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

Never Let Law Profs Near the Oval Office by Gene Healy

Mon, 06 Feb 2012 00:00:00 -0500

"Surely as a former constitutional law professor, President Obama must know..." — that's a fairly common refrain whenever Obama commits another constitutional atrocity.

I've said as much myself — but as a recovering law student, I should know better. Constitutional law professors should be kept as far away from nuclear weapons as possible.

The skill-sets they bring to the presidency just gives them the sophistry and brazenness necessary to invent new and creative ways of violating the constitutional oath of office.

Obama is the fourth former con law prof to serve as president, joining William Howard Taft (University of Cincinnati Law School), Woodrow Wilson (Princeton and New York Law School), and Bill Clinton, (University of Arkansas Law School).

Taft did comparatively little damage, but the rest hardly inspire confidence that familiarity with constitutional scholarship encourages fidelity to the national charter.

Wilson was a constitutional horror show, who imposed racial segregation in federal employment and waged war on free speech, imprisoning Americans opposed to World War I.

Clinton, who once lost a pile of his law students' final exams (he offered everyone a B+ in exchange) brought a cavalier, "dog ate my homework" approach to his constitutional responsibilities.

In 1999, he ignored three congressional votes denying him authority to wage war in Kosovo, and became the first president to wage an illegal war beyond the War Powers Resolution's 60-day time limit.

Last summer, as the bombs pounded Libya, the University of Chicago's Obama became the second.

"I've studied the Constitution as a student, I've taught it as a teacher," Obama proclaimed shortly after his inauguration, "we must never, ever, turn our back on its enduring principles for expedience's sake."

Not long after, in the Citizens United case, his administration argued that campaign finance laws gave the feds the power to ban books.

Still, some held out hope that this former law professor would be "our first civil libertarian president," as the New Republic's Jeffrey Rosen put it. In January 2009, Rosen argued that, as a constitutional scholar, Obama was "likely to articulate constitutional positions and then conform his presidential actions to them rather than take positions and then rely on lawyers to justify them."

Of course, that's precisely the opposite of how Obama has behaved, cherry-picking among his legal advisers until he got one to tell him his actions were legal. In Libya, Harold Koh, Obama's servile State Department legal adviser, provided the necessary cover.

The War Powers Resolution, requiring the president to terminate unauthorized U.S. engagement in "hostilities" after 60 days didn't apply in the absence of "U.S. casualties or a serious threat thereof."

Sure, we were bombing Libya, but we weren't engaged in "hostilities," you see. As Orwell once put it, "you have to belong to the intelligentsia to believe things like that. No ordinary man could be such a fool."

More recently, in order to ram through several appointments, Obama summarily declared that the Senate was in recess, despite the fact that the Senate's own rules said it was in session.

It's almost enough to make you miss George W. Bush's ham-fisted "I'm the decider" approach to constitutional law. "I'll do what I want" is a less insulting legal argument than "I'm not doing what you think I'm doing."

My Cato Institute colleague Walter Olson, author of "Schools for Misrule: Legal Academia and an Over-lawyered America", explains that "legal academia rewards cleverness in coming up with strained arguments for ideologically favored (or just expedient) positions; marginalizes as eccentric thinkers who favor original understanding as a guide" to the Constitution and often reduces law to "politics by other means."

Unfortunately, that training has served Obama well.

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.

A Lack of Accountability: The Real Obscenity at the SEC by Mark A. Calabria

Mon, 06 Feb 2012 00:00:00 -0500

Thanks mainly to the efforts of the Inspector General at the Securities and Exchange Commission (SEC), we know that the agency's staff was nothing less than asleep at the wheel as imbalances and frauds built up in our financial system. Worse, we also know several employees spent a considerable portion of their work day visiting pornographic websites, rather than monitoring the capital markets. The most obscene part, however, is that years after these discoveries have been made, the employees in question have yet to lose their jobs. Yes, some left the agency voluntarily, while others remain on paid administrative leave (sounds like a vacation to me). But none have been fired.

In an extreme instance, dealing with a SEC employee who ignored the warning signs of Bernie Madoff's Ponzi scheme, both the SEC's human resources department and an outside legal consultant recommended that the employee in question be terminated. SEC Chair Mary Schapiro's response? No, as such "would harm the agency's work." I'd think having incompetent employees would harm the agency's work.

Sadly, Madoff was not the only fraud ignored by the SEC. Allan Stanford ran a $7 billion Ponzi scheme. His 20,000 clients are still, years later, waiting to see how much they will recover. That delay did not stop the head of the SEC enforcement office in Dallas, which has oversight of Stanford, from leaving the SEC to represent Stanford. After a DOJ investigation, the SEC has reluctantly decided to bar said lawyer from appearing before the agency for a whole six months. So, apparently it's not just current SEC employees that get a pass, but also former employees as well.

Were these just isolated incidents one might be tempted to overlook them. Even the viewing of pornography by SEC employees was more widespread than commonly believed. Between the years of 2005 and 2010, as the worst of the housing bubble was building, 33 SEC employees or contractors were found to have viewed pornography using taxpayer funded laptops and office computers. Many of these were highly paid employees. Seventeen of 33 made between $100,000 and $220,000 annually. A Senior Counsel (lawyer) in the SEC's Enforcement Division was found with 775 pornographic images on his government computer. And contrary to the stereotypes, it wasn't all men.

A female accountant received nearly 1,800 access denials for pornographic websites using her SEC laptop in only a two-week period and had nearly 600 pornographic images on her laptop. Perhaps worst of all was a DC-based attorney, who admitted accessing pornography and downloading images to his SEC computer during work hours so often that he sometimes spent eight hours a day accessing pornography. He downloaded so much to his government computer that he filled the hard drive and needed to move images to CDs or DVDs that he accumulated in boxes in his office. And yes, all while getting a six figure paycheck from the taxpayer.

In the private sector any of these actions would be grounds for dismissal. One would be fired on the spot, with security escorting you from the building. In fact, a private sector employer wouldn't even have the option of deciding if your benefits to the company were worth the time wasted on Internet porn. Such activity would generally be interpreted as creating a hostile work environment; with the result that any company that didn't fire the employee in question would expose itself to litigation by other employees.

The government "solves" the problem of hostile work environment by letting the accused employee stay at home on indefinite paid level. So yes the agency's other employees are spared the harassment, but at great expense to the taxpayer. In addition, a federal employee is "entitled" to at least 30 days written notice of any effort to terminate said employee. On top of that the employee gets another seven days minimum to submit documents and evidence in support of keeping their job. I am all in favor of appropriate due process, but the current procedures for firing incompetent federal employees allow the process to drag out indefinitely with one required bureaucratic obstacle after another. Having spent a year managing a federal office, where we did attempt to terminate at least one employee who regularly missed work, I can say you almost have to hire someone whose sole job is to do the firing.

This is just another example, in a long list, of why relying on the relatively weak incentives of government regulatory oversight is inferior to relying on the strong incentives contained in market participants having their own wealth on the line. But then for such incentives to be effective, we need to end bailouts and have real market discipline. Sadly we are currently stuck in the worst of both worlds: incompetent and unaccountable regulators coupled with a neutering of market discipline by these very same regulators. If we continue along this path we will guarantee another financial crisis and future self-enrichment by government bureaucrats.

Mark Calabria is Director of Financial Regulation Studies at the Cato Institute.

Economic Freedom Must Accompany Democracy in Egypt by Marian L. Tupy

Fri, 03 Feb 2012 00:00:00 -0500

The latest outbreak of violence in Egypt is a reminder of that country’s halting transition from dictatorship to democracy. The process of democratization in the Arab world that begun with the self-immolation of Tunisian street vendor Mohamed Bouazizi just over a year ago will likely continue, but the experience of ex-communist countries shows that economic growth and opportunity are at least as important as political freedom. Mr. Bouazizi, after all, was not protesting for a right to vote, but for a right to earn a living unmolested by the government.

The extraordinary events taking place in Arab countries — from the fall of Hosni Mubarak in Egypt and Muammar Gaddafi in Libya to the civil uprisings in Syria and Yemen — make it easy to forget that the Arab Spring started with a suicide of a Tunisian street vendor harassed and humiliated by government officials. Like millions of young Arab men and women, the 26-year-old failed to find formal employment. He started selling produce on the street instead. There he was preyed upon by corrupt policemen and abusive bureaucrats who repeatedly harassed him and confiscated his wares. Without the means to support his family, a frustrated Mr. Bouazizi set himself alight in front of the governor’s office. Reportedly, his last words were “how do you expect me to make a living?”

Egypt’s parliamentary elections were a direct result of the protests that spread through the Arab world following Mr. Bouazizi’s death. But restoring dignity to the Egyptian people requires more than allowing them to vote; history shows that freedom to exploit economic opportunities offered by an open and growing economy is just as important.

After the Berlin Wall fell, for example, ex-communist countries embarked on an uneven path toward economic freedom. Economic liberalization in Central Europe and the Baltics tended to be faster and deeper than that in the rest of the former Soviet bloc. On average, the rapid reformers received more foreign investment, grew more rapidly, and had lower inflation rates as well as lower poverty rates and more equal income distributions.

Crucially, the rapid reformers developed stronger democratic institutions. In fact, all of them became liberal democracies. In contrast, some of the countries that underwent only partial economic liberalization, like Ukraine and Russia, failed to develop into full-fledged democracies. Decision-making in those countries was “captured” by a small number of wealthy oligarchs.

The military junta that has run Egypt since Mr. Mubarak’s downfall has so far delivered neither political stability nor economic reforms. In the World Bank’s Doing Business report, Egypt fell from 94th place in 2010 to 110th place in 2011. Growth has declined from 5.1 percent to 1 percent. The overall unemployment rate rose from 9 percent to almost 12 percent, while youth unemployment remains at 24 percent. With the national debt approaching 80 percent and the budget deficit hitting 11 percent of GDP, the junta is running out of time and space to maneuver.

Unfortunately, there is little indication that the big winners of the recent parliamentary elections — the moderate Islamist Muslim Brotherhood and the Salafist Al Nour party received some two-thirds of the votes and will write Egypt’s new constitution — appreciate the gravity of Egypt’s economic situation or understand the importance of economic liberalization in sustaining high rates of growth. If anything, liberalization seems to be treated with suspicion, because the initial reforms of the Egyptian economy were pushed through by Mr. Mubarak and the corrupt business elite that surrounded him. Rather than wealth-creating, competitive capitalism, Egyptians got crony capitalism.

It would be a mistake to think that economic reform can wait until all of Egypt’s political problems are resolved. If the economy continues to stagnate, Egypt’s best and brightest will leave the country and millions of Egyptians will remain mired in poverty. Only a free and vibrant economy can provide the people of Egypt with meaningful jobs and the dignity that comes from being able to make a living and provide for one’s family. That is the real lesson that Egypt and other Arab countries ought to learn from the death of Mohamed Bouazizi.

Marian Tupy is a policy analyst at the Cato Institute's Center for Global Liberty and Prosperity in Washington, D.C.

Why Does U.S. Pay to Protect Prosperous Allies? by Christopher A. Preble

Fri, 03 Feb 2012 00:00:00 -0500

For some time now, Republican hawks like Sen. John McCain and Rep. Howard P. "Buck" McKeon have been saying that our military budget is inadequate for the threats we face. They like to gripe that President Barack Obama is orchestrating the decline of American power.

Some of this is pure partisanship. Republicans criticize Democrats just as Democrats criticized President George W. Bush. The hawks, though, have a special devotion to the military budget. In their view, some military spending is good; more is even better. But if overspending on the military and promoting the United States as global policeman are benchmarks of approval, they should have little to complain about with our current president.

Contrary to his rhetoric of change, the president sounded like a neoconservative when he declared during his recent State of the Union address that the United States was, and would remain, the world's "indispensable nation." Obama's proposed Pentagon budget, released last week, affirmed his intention to retain most of the U.S. military's current missions, even when they aren't needed to safeguard the United States' vital security interests.

Meanwhile, the Pentagon's latest strategy document was carefully designed to convince allies and adversaries alike that the United States can continue to prosecute multiple armed conflicts in far-flung corners of the globe. Taken together, Obama's strategy document, budget and State of the Union remarks articulate a coherent philosophy on military spending and global engagement that ought to hold a lot of appeal for the neoconservatives in the GOP.

But partisan politics aside, what our foreign policy leaders have consistently ignored is an argument that should have strong sway at a time of economic uncertainty: This country's tax dollars can be better spent than on defending wealthy allies who are more than capable of protecting themselves.

The administration plans to withdraw some U.S. troops from Europe, but as many as 70,000 are likely to remain. Meanwhile, the number of troops in Asia will be increased. These troops serve to reassure our allies of our commitment to defend them. It is working as designed: Other countries do not spend enough to satisfy their defense needs.

The end result is that Americans pay more. The Obama administration's budget will cost every American nearly $2,000 next year. The figure rises by hundreds of dollars when one accounts for homeland security, payments to veterans, and the few billion dollars tucked away in the Department of Energy for the nation's bloated nuclear arsenal. All told, every American will likely shell out more than $2,700 on spending classified as national defense. That is at least 2½ times what the British spend, five times more than what the Germans spend, and six times what the Japanese spend.

It is hard to see how that is good news for Americans struggling to make ends meet. Obama's magnanimity is especially ironic given his emphasis on "fairness" and "shared sacrifice." His rhetoric apparently does not apply to people living outside the United States. American troops will continue to be tasked with policing the world, and American taxpayers will be on the hook to pay for it.

The administration has proposed to restrain the growth of military spending. But total U.S. military spending will remain well above pre-9/11 levels. The Obama administration is requesting $525 billion for the Pentagon's base budget in 2013, plus another $88.4 billion to pay for the war in Afghanistan. To put this in perspective, that is more than the annual average during Ronald Reagan's time in office (about $526 billion in today's dollars). One seldom hears GOP hawks speak of Reagan as a misguided dove who left the country vulnerable to attack.

Focusing only on budget numbers, however, misses the big picture. Instead, we must focus on what we will spend and why. The answer is clear: Our military budget is large by historical standards because Washington is unwilling to revisit the premise that Americans are responsible for everything that happens in the world, even things that have no connection to American security or prosperity.

Our fiscal crisis has created an opportunity to revisit our commitments abroad. We should focus American power on our core interests, and call on other countries to take responsibility for their own defense.

Intuitively, that exercise should satisfy both liberal demands that "everyone pay their fair share" and conservative demands that our government "live within its means." But given the rhetoric we have heard so far, it is doubtful that this election cycle will produce a leader who will seriously contemplate how we can most prudently provide for our common defense.

Christopher Preble is vice president for defense and foreign policy studies at the Cato Institute and the author of The Power Problem: How American Military Dominance Makes Us Less Safe, Less Prosperous, and Less Free.

The Current Wisdom: Climate Change Controversy in the Wall Street Journal by Patrick J. Michaels

Thu, 02 Feb 2012 00:00:00 -0500

The Current Wisdom is a monthly Cato feature written by Senior Fellow Patrick J. Michaels on global climate change. These articles usually feature new and interesting items in the scientific literature with important implications for climate change regulations.

Prior to April, 2011, issues of this Wisdom, which began in 2010, are available at our blog Cato@Liberty (www.cato-at-liberty.org/).

This edition departs from our usual routine because of the very vitriolic fight that has broken as the result of publication of a January 27 op-ed titled “No Need to Panic about Global Warming” in The Wall Street Journal. Authored by 16 high-profile scientists, it made common-sense climate arguments that readers of this Wisdom and other Cato publications on climate science and policy are certainly familiar with.

The January 27 piece can be summarized as follows:

• There has been no net warming for “well over ten years;”

• Global warming forecasts confidently made by the UN in 1990 were clearly exaggerations;

• Carbon dioxide, the main “greenhouse” emission, stimulates plant growth;

• Climate scientists on the federal dole have a track record of punishing those who do not express alarmist views;

• Climate alarmism, public funding, and the growth of government and taxation create self-feeding mutual incentives; and

• Doing “nothing” about climate change in the next 50 years has little effect on climate mitigation compared to initiating taxation now.

None of the above are earthshaking propositions to any serious student of climate change. Monthly temperature departures from average show no significant trend going back to 1996. If one is concerned about biasing from the warm El Nino year of 1998, beginning post-2000 yields the same result. The UN was forecasting that global temperatures would be rising around twice the mean rate actually observed in surface temperatures. Greenhouse owners jack up the carbon dioxide concentration of their air several fold to stimulate plant growth. Alarmism breeds funding and new agencies that require more tax dollars, and funding begets tenure. The futility of politically feasible emissions reductions policies has been demonstrated for decades.

By January 30, the New York Times, whose editorial stance on global warming is (to put it mildly) different than that of the Journal, brought in their high-profile environmental blogger, Andrew Revkin, to carp principally about the last bullet item.

His post, “Scientists Challenging Climate Science Appear to Flunk Climate Economics,” claimed that the Journal scientists had misrepresented the work of Yale economist William Nordhaus, quoting the latter’s “wise policy” (no bias there) of slowly introducing a carbon tax.

Nordhaus responded that the Journal piece “completely misrepresented my work.”

At that point, Revkin opened up the controversy to commentary. Readers can decide for themselves.

Here is Nordhaus’s complete comment on the Journal op-ed:

The piece completely misrepresented my work. My work has long taken the view that policies to slow global warming would have net economic benefits, in the trillion of dollars of present value. This is true going back to work in the early 1990s (MIT Press, Yale Press, Science, PNAS, among others). I have advocated a carbon tax for many years as the best way to attack the issue. I can only assume they either completely ignorant of the economics on the issue or are willfully misstating my findings.

And here is the response of the Journal article authors:

We have accurately represented Professor Nordhaus’s findings in our Wall Street Journal editorial of 01-27-12, while making and intending no statement regarding his policy beliefs and advocacy. In his 2008 book, A Question of Balance, Weighing the Options on Global Warming Policies, Professor Nordhaus provided the computed discounted costs and benefits for a variety of policies, assuming the IPCC central value for warming due to increased atmospheric CO2 (3 degrees C for doubling of CO2).

He finds (Table 5.3 of the book) that a policy of delaying greenhouse gas controls for 50 years gives a benefit-to-cost ratio just slightly less than his “optimum” policy. The optimum policy is a universal harmonized carbon tax, which Professor Nordhaus advocates. It starts small and is increased gradually over decades. In terms of net benefits, the 50-year-delay policy is far better than more aggressive policies that would severely limit atmospheric concentrations of CO2 or model-calculated global temperature rises.

Both the 50-year-delay policy and the optimum policy allow world economies to continue to develop with relatively little disruption. Aggressive policies considered in the book do not have this characteristic and display sharply higher abatement costs and lower benefit-to-cost ratios.

As we note in the Wall Street Journal editorial, several more aggressive policies are negative return propositions.

Furthermore, in Chapters I and VI, Professor Nordhaus takes pains to explain that the requirement of universality of policy application is critical; regional, national, or group participation differences can be expected to lower policy effectiveness, perhaps substantially: “... there are substantial excess costs if the preponderance of sectors and countries are not fully included. We preliminarily estimate that a participation rate of 50 percent, as compared with 100 percent, will impose an abatement-cost penalty of 250 percent.” (Chapter 1, p.19). Therefore the optimum policy should be considered an ideal upper limit that may not be achieved in real world application.

We wish to emphasize once again that the above assumes that the IPCC climate results are correct and that significant environmental damage would result, both of which we strongly dispute. The statements made in the Wall Street Journal editorial report Professor Nordhaus’s findings accurately and do not bear on his policy advocacy.

Here is Table 5.3:

Of course, that wasn’t the end.

It seems that if one ever needs to start a fire in the woods, simply rub two climatologists together. So, in the wee hours of February 1, a response to the Journal article, signed now by 38 scientists, was published.

For clarity, let’s call this one “Trenberth et al.”, for its senior author, Kevin Trenberth of the U.S. National Center for Atmospheric Research.

Summarizing Trenberth et al.:

• The authors of the original Journal article were largely not climate scientists, and those that were, held “extreme views.”

• Warming has not “abated” in the last decade.

• Scientific societies worldwide concur that “the earth is heating up and humans are primarily responsible”. More than 97% of all actively publishing climate scientists “agree that climate change is real and human caused”.

• ”... The transition to a low-carbon economy will not only allow the world to avoid the worst risks of climate change, but could also drive decades of economic growth.”

Trenberth et al. is surprisingly weak and incomplete. The 16 original authors are all individuals that are highly competent in their fields, most are physicists of one stripe or another, and all can read and summarize a scientific literature. In fact, most would hold that climate science is nothing more than applied physics.

“Extreme views” lie in the eye of the beholder, and science only grudgingly backs away from established paradigms. For example, despite the obvious jigsaw-puzzle fit of the earth’s continents, it took 100 years of bickering before continental drift was accepted over geological stasis. And, in this case, the “extreme view” of the most prominent climate scientist of the 16, MIT’s Richard Lindzen, is hardly an outrage.

Lindzen holds that the “sensitivity” of surface temperature to changes in atmospheric carbon dioxide has been overestimated because of an inaccuracy in the way that computer models magnify warming. In and of itself, it is mainstream, not extreme, to entertain the hypothesis that doubling carbon dioxide on its own would only cause a bit more than 1 degree (C) of global surface warming. Computer models arrive at much higher values, around 3.5°C, by amplifying the carbon dioxide effect because a slightly warmer atmosphere contains more water vapor, which itself is a potent greenhouse gas. Clouds are also changed in a way that enhances warming. There is evidence from the outgoing radiation signal of the earth that the effects of water vapor and clouds have been overestimated.

The 38 must somehow disagree with Susan Solomon, whose 2010 article in Science attributing the lack of recent warming—that the 39 deny—to unanticipated changes in stratospheric water vapor with no known cause.

The 38 must somehow disagree with the global temperature sensing from satellites, which also shows no net warming for the last 14 years. Now, one could argue that the satellites are measuring temperatures above the surface in the lower atmosphere, but the computer models that the 38 find so accurate, predict that the lower atmosphere should be warming faster than the surface over most of the planet.

Finally "more than 97% of all actively publishing* climate scientists agree that climate change is real and human caused" is probably an underestimate, as virtually everyone acknowledges that the surface temperature is warmer than it was, and that multifarious human activities have some influence on climate. Rather, he misses the point well-made by the original Journal article, which is that the rise in surface temperature is clearly below the values first forecast by the UN in 1990. The core—unsettled—issue in climate science is the "sensitivity" of temperature to carbon dioxide, and there are several independent lines of evidence, including the surface temperature history and the water vapor problems, that argue that it has been substantially overestimated.

In global warming, it's not the heat, it's the sensitivity. But don’t expect much sensitivity and expect a lot of heat when climatologists voice their opinions.

* The part about “actively publishing” is saved for another day. The climategate emails—and there are plenty by, to, or about these 39 scientists, detail how difficult it is to publish anything they disagree with, thanks to intimidation and manipulation of editors, blackballing of those who disagree with them, and other blood sports.

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

The Federal Reserve's Crony Capitalism by James A. Dorn

Thu, 02 Feb 2012 00:00:00 -0500

The Federal Reserve’s decision to release forecasts for short-term interest rates is supposed to clarify monetary policy and reassure the public. By keeping the federal funds rate close to zero for three more years, and switching from shorter to longer-term securities, the Fed hopes to spur investment and growth. The problem is that manipulating interest rates and allocating credit to favored parties fosters crony capitalism, not market liberalism.

Clarity in capital markets is not improved by distorting interest rates, which are relative prices. Nor is monetary policy improved by engaging in fiscal policy and the allocation of credit. Targeting inflation at 2 percent is 2 percent too much. Nominal interest rates should reflect real interest rates in a world of zero inflation, if they are to perform their function of allocating capital efficiently.

By pegging nominal interest rates at artificially low levels, the Fed is penalizing millions of people who have their assets in saving accounts or money market funds and are getting near zero nominal returns. With CPI inflation of 3 percent in 2011, the real rate on those assets is negative. The Fed’s low interest rate policy, designed to help fund big government and stimulate housing, is decapitalizing many households who do not want to take on more risky assets. Private virtue is being penalized by public vice.

Retirees, or those near retirement, typically prefer less risky assets. But with the average rate on a savings account at 0.24 percent, on a money market account at 0.22 percent, and on a 1-year CD at 0.53 percent, nominal returns are close to zero, and real returns are negative—even at relatively low rates of inflation.

The longer rates are held artificially low, the more savers will suffer, and the more tempted they will be to take on risks they never would have considered. Risk mismatches will complicate Fed policy when rates must rise to prevent serious inflation. Bond prices will collapse, and those investors who trusted the Fed to support longer-term asset prices will be especially harmed. There will be significant political pressure to keep all rates lower for longer, even if inflation is above the Fed’s 2 percent target. So how can that target be credible?

Fed chairman Ben Bernanke has said that he will put equal weight on price stability and full employment, as dictated by the Fed’s dual mandate. But “price stability” means zero inflation, not 2 percent. The Fed has no fixed anchor: there is no rule to guide it, only discretion. And that discretion is still influenced by Keynesian thinking and a Phillips Curve mentality.

Bernanke is willing to tolerate a little more inflation to try to engineer less unemployment. Yet, he must know this is a Faustian bargain that cannot work. Indeed, the Fed’s press release following the FOMC meeting on January 25 admits, “The maximum level of employment is largely determined by nonmonetary factors.”

The Fed has largely lost its independence. Congress has asked too much of the Fed, and Bernanke has vastly expanded the Fed’s powers and balance sheet to comply. Some asset prices have been inflated (especially gold and bonds), but overall inflation has remained relatively low because people and businesses have been holding large cash balances, and banks have parked their excess reserves at the Fed for a risk-free return. The Fed has helped create its own “liquidity trap” by paying interest on excess reserves, which has reduced the so-called money multiplier.

However, as the economy regains steam and loan demand increases, those excess reserves will enter the marketplace and increase nominal spending and prices. The Fed will need to reduce the size of its balance sheet and nip inflation in the bud; but policymakers may act too late. The result will be stagflation.

Bernanke has placed the Fed in a precarious position. There is no way the FOMC can accurately forecast interest rates or determine what the efficient allocation of capital should be. Interfering with market interest rates is an exercise in market socialism, not capitalism.

In his press conference following the historic January 25 policy meeting, Bernanke was asked whether the Fed’s inflation target of 2 percent was intended to depreciate the purchasing power of the dollar. Bernanke replied that the real purpose is to “avoid deflation.” He then tried to downplay the idea that mild inflation would erode the value of money, because most people would protect their money by investing it, and not put it under the mattress. He admitted that interest rates are low now, but in the long run they tend to “compensate” for inflation.

This was an artful dodge. In fact, inflation always erodes the domestic purchasing power of the dollar. At the current 3 percent CPI inflation rate, the average level of money prices would increase by 34 percent in a decade, and by 81 percent in 20 years. Even at 2 percent, the price level would double every 35 years—no matter what the interest rate is. By suppressing nominal interest rates, the Fed is denying savers the means to safeguard their property; yet Bernanke barely gives that failure a mention.

Transparency is a noble goal, but it is best achieved under a rule of law and freely determined prices. The Fed’s transparency crusade has not imposed any rule on the Fed or moved us closer to sound money. Forecasting short-term rates near zero for the foreseeable future sends the wrong signal—namely, that financial repression and crony capitalism will continue.

James A. Dorn is the vice president for academic affairs for the Cato Institute and editor of the Cato Journal.

Obama's Higher Education Reforms Doomed to Fail by Neal McCluskey

Wed, 01 Feb 2012 00:00:00 -0500

Usually low-tier, last week President Obama signaled in both the State of the Union and a University of Michigan speech that higher education will loom large in Campaign 2012.

With Americans outraged over skyrocketing prices and student debt, it makes sense. Unfortunately, Obama's proposed solutions aren't similarly sensible.

In his speeches, the president talked tough about reining in colleges that raise prices at breakneck speeds, casting much needed attention to a decades-old problem.

But decrying symptoms doesn't cure a disease. That requires attacking root causes, which is where Obama fails: Rather than assault ever-expanding student aid, which practically begs colleges to inflate prices, the president wants to increase aid while imposing weak price controls on schools and states.

Obama isn't totally off, of course, in reasoning that colleges largely set their own tuition, so one way to control prices is to pressure schools. And he's right that states tend to slow funding for public colleges during bad economic times.

But how is it colleges can raise their prices at incredible rates and still get people to pay?

Because students use lots of money belonging to other people, and Washington ensures that the funding meets ever-ballooning bills.

Indeed, in 2010 the federal government disbursed roughly $140 billion in financial aid to students, a staggering amount that has exploded from roughly $30 billion, adjusted for inflation, in 1985.

And those tightfisted states?

According to data from the State Higher Education Executive Officers, inflation-adjusted state and local allocations to public institutions actually rose from $69.2 billion in 2000 to $74.9 billion in 2010.

Gov't Spending Up

In that same time, however, inflation-adjusted tuition and fees at public four-year colleges increased from $4,586 to $7,889.

Schools hiked their prices despite state and local appropriations rising.

Corroborating that cheap states aren't the primary drivers of college costs are private institutions. They haven't lost big state and local subsidies because they've never gotten them, yet they increased real prices from $21,013 in 2000 to $28,254 in 2010.

Still, on a per-student basis state and local funding has been decreasing, because enrollment has significantly grown.

Such losses might be regrettable were students graduating and moving on to high-paying jobs. But they aren't.

According to the federal Digest of Education Statistics, the latest six-year graduation rate for public four-year programs is a dismal 55 percent. In addition, about one-third of bachelor's holders are in jobs that don't require degrees. Finally, real earnings for people whose top attainment is a bachelor's have dropped over the decade.

Simply put, there are too many people in college. Unfortunately, to deal with these realities the president is proposing to increase aid, to which he'd couple a few soft price controls.

Too Many Students?

He proposes, for instance, increasing spending on Perkins Loans, Work Study, and Supplemental Educational Opportunity Grants to $10 billion, but giving less money through those programs to colleges that, according to the White House, "show poor value, or... don't act responsibly in setting tuition."

The president would also create a $1 billion "Race to the Top" that would "incentivize" states to, among other things, "maintain adequate levels of funding for higher education."

The White House doesn't define "adequate," but the implication is clear: Spend more taxpayer money, get more taxpayer money.

Ultimately the plan is a stinker, with the disaster-exacerbating aid increase the most likely part to pass. Few in Washington can resist doling out "free" money.

And the price controls?

Such controls are almost always bad, distorting supply and demand. But given the government-fueled Ivory Tower excess, perhaps weak controls would be helpful, at least in the short term.

But the ones proposed would have little power. Even plussed-up to $10 billion, the programs the president would employ for leverage would be dwarfed by Pell Grants, Stafford Loans, and tax incentives, which tally in the hundreds of billions. Most colleges could more than make up for slight Perkins or Work Study losses with other aid.

And Race to the Top? If it's at all like its K-12 cousin, it'll be a dud. Lots of states made huge fusses to get the money, but since it's been awarded the winners have shown little urgency to implement their promised reforms.

It's good that the president is focusing on higher education. But his remedies would do nothing to cure the disease.

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.

Too Much Government Surveillance by Nat Hentoff

Wed, 01 Feb 2012 00:00:00 -0500

I was thrilled to see this headline on the American Civil Liberties Union's website after the Supreme Court's unanimous Jan. 23 ruling on United States v. Jones: "Supreme Court GPS Ruling: Bringing the 4th Amendment Into the 21st Century" (aclu.org, Jan. 26). Wow!

And this dramatic praise from Marcia Hofmann, the senior staff attorney for leading digital civil liberties protector, the Electronic Frontier Foundation:

"The Supreme Court has unanimously confirmed that the Constitution prevents unbridled police use of new technologies to monitor our movements" ("Unanimous Supreme Court Ensures Americans Have Protections From GPS Surveillance," eff.org, Jan. 23).

Do you hear that, President Obama?

But as soon as I read Justice Antonin Scalia's decision, I knew the Supreme Court had committed no such all-encompassing attack on how George W. Bush, Dick Cheney and Barack Obama have turned us into a society constantly under surveillance by the government.

First, let's look at the actual case: In 2005, a joint FBI and Washington, D.C., police task force covertly placed a Global Positioning System (GPS) device on Antoine Jones' Jeep, which was parked in a public lot in Maryland. For four weeks, the GPS, using satellites, allowed the authorities to continuously monitor Jones' actions and movements as he drove his Jeep.

From what the authorities learned from the GPS's tracking, Jones was arrested and charged with conspiracy to distribute cocaine. Justice Scalia, joined by colleagues John Roberts, Anthony Kennedy, Clarence Thomas and Sonia Sotomayor, declared in the court's decision: "The government physically occupied private property for the purpose of obtaining information. We have no doubt that such a physical intrusion would have been considered a 'search' within the meaning of the Fourth Amendment when it was adopted."

Scalia is notably proud of being an "originalist" — relying on the language of the Constitution when our founders were here. Accordingly, he adds that he is applying in this case "an 18th-century guarantee against unreasonable searches."

However, Justice Samuel Alito, in a concurring opinion with the three other justices, argues that "it is almost impossible to think of late-18th-century situations that are analogous to what took place in this case... the use of longer-term GPS monitoring in investigations of most offenses impinges on expectations of privacy."

All four justices maintain that the familiar "expectation of privacy" involves much more than government infringement of our private property rights.

Strongly agreeing with Alito, the Rutherford Institute's president, John W. Whitehead, an incisively alert constitutionalist, reminds us:

"The government's arsenal of surveillance technologies now includes a multitude of devices which enable it to comprehensively monitor an individual's private life without necessarily introducing the type of physical intrusion into his person or property covered by the (Jones) ruling" ("U.S. v. Jones: The Battle for the Fourth Amendment Continues," rutherford.org, Jan. 23).

Scalia did not ignore Alito's reminder of the century we live in, but he tried to have the high court postpone doing anything about it, saying: "It may be that achieving the same result through electronic means without an accompanying trespass (on private property) is (also) an unconstitutional invasion of privacy, but the present case does not require us to answer that question."

What about those of us who still care about our privacy, sir, which is increasingly limited by so many other means?

Justice Sotomayor, one of the justices to concur with the court's ruling, gently chides Scalia, writing:

"People disclose the phone numbers that they dial or text to their cellular providers; the URLs that they visit and the email addresses with which they correspond to their Internet service providers; and the books, groceries and medications they purchase to online retailers.

"I, for one," she continues, "doubt that people would accept without complaint the warrantless disclosure to the government of a list of every website they had visited in the last week, or month, or year" — without the government having physically occupied their property.

A growing number of Americans and I would like to ask Justice Scalia and his four "let's stop here" colleagues why they're waiting to rule on our expectations of privacy in this century and others to come.

To those who are greatly overstating the significance of this decidedly limited U.S. v. Jones decision, I bring back John W. Whitehead, who does not mince his words:

"We have entered a new and frightening age when advancing technology is erasing the Fourth Amendment. Thankfully, in recognizing that the placement of a GPS device on Antoine Jones' Jeep violated the Fourth Amendment's protection against unreasonable search and seizure, the U.S. Supreme Court has sent a resounding message to government officials — especially law enforcement officials — that there are limits to their powers" ("Victory: In 9-0 Ruling in U.S. v. Jones, U.S. Supreme Court Declares Warrantless GPS Use by Police Unconstitutional," rutherford.org, Jan. 23).

But it's not "a resounding message." In reporters' parlance, U.S. v. Jones is now a dead story. I'm not aware of any urgency on either side in Congress to address our Fourth Amendment expectations of privacy in such a way that will exceed the private property essence of U.S. v. Jones.

We know that President Obama, if re-elected, is tone-deaf on reviving the Fourth Amendment and certain other parts of the Bill of Rights, not to mention the separation of powers. (Obama, after all, was the government in this case.) And, watching the endless Republican presidential candidates' debates, I've not sensed any deep concern among them, with the exception of Ron Paul, about the flickering remnants of our personal privacy.

Next week, John W. Whitehead (despite calling this particular ruling "a resounding message") and others detail the frightening ways that swiftly advancing technology is tracking us far beyond the personal property limits on government surveillance in U.S. v. Jones.

Have you asked your children what their expectations of privacy are? How many of them can tell the compelling, tumultuous history of the Fourth Amendment since the 18th century? Shouldn't they know?

Nat Hentoff is a senior fellow at the Cato Institute.

No More Bipartisan Bailouts by Michael D. Tanner

Wed, 01 Feb 2012 00:00:00 -0500

One of the few lines in President Obama’s State of the Union address that actually received bipartisan applause was his vow of “no bailouts, no handouts, and no cop outs.” Of course the president then went on to claim credit for his bailout of the auto industry and promise additional handouts to the “green energy” industry.

Both liberals and conservatives often succumb to a narrative that pits big government against big business. No doubt many of big government’s tax and regulatory policies do make it more difficult for businesses to expand and hire people. But just as often, big business and big government are all too happy to work hand in hand to thwart the free market.Confusing support for free markets with support for the corporate agenda is a bipartisan failing. In a free market, for example, corporations compete against one another on their merits. Government doesn’t pick winners and losers or prefer one type of industry over another.

Yet, Rick Santorum shares President Obama’s desire for special tax breaks for “manufacturing.” Both Newt Gingrich and Mitt Romney join President Obama in backing government subsidies for ethanol and other alternative energy.

And obviously, in a free market, when businesses fail because they made stupid investment decisions, they go bankrupt. But both Romney and Gingrich joined President Obama (and President Bush) in supporting TARP and the bailout of some of America’s biggest banks and investment firms. This was not a one-time situation brought about by a unique crisis: Dodd-Frank enshrines the principle of “too big to fail,” all but guaranteeing future bailouts.

The Cato Institute estimates that corporate welfare now tops $125 billion per year. Among the biggest beneficiaries are companies such as Boeing, Xerox, IBM, Motorola, Dow Chemical, and General Electric. At a time when we are facing a $15.3 trillion national debt and borrowing 34 cents out of every dollar we spend, should we really be spending money to subsidize McDonald’s advertisements for Chicken McNuggets overseas?

And, when they don’t get direct subsidies, businesses are forcing taxpayers to subsidize consumer purchases of their products.

For example, Big Pharma poured more than $150 million into advertising in favor of Obamacare. Why? Among other things, every insurance plan in America will now be required to cover pharmaceutical products. And, closing the Medicare Part D “donut hole” will encourage seniors to buy brand-name drugs rather than cheaper generics. Speaking of the Medicare prescription-drug program, guess who was the biggest lobby in favor of the entitlement expansion? The drug companies even funneled millions of dollars to Newt Gingrich’s Center for Health Transformation. No surprise, then, that Gingrich supported the Medicare expansion, calling it a cost-saving idea, even though it added $17 trillion to the Medicare’s unfunded obligations. Among the biggest supporters of Obamacare’s individual insurance mandate are the big insurance companies. After all, isn’t it great for the government to force people to buy your product? It certainly beats having to provide cheaper and higher-quality insurance.

Big businesses also use regulations to prevent competition or impose costs on their competitors. For example, General Electric is among the biggest supporters of President Obama’s “cap and trade” proposals. GE is not doing this out of some sense of altruistic global citizenship, but because it operates a unit that would trade cap-and-trade credits. The company stands to reap billions in profits were Obama’s plan to pass.

Similarly, Walmart stunned many by coming out in support of an employer health mandate. But it’s really not that surprising. Walmart actually spends more on employee health care than its competitor Target. Mandating that all companies provide health insurance will drive up Target’s costs, benefiting Walmart.

President Obama is planning to mount a reelection campaign that attempts to paint Republicans as the captives of special interests, ignoring his own addiction to corporate bailouts, handouts, and cop outs.

Polls show that despite the president’s drumbeat about inequality, Americans are not particularly concerned about income disparities. But there does seem to be a growing concern that the system seems to be rigged to benefit the powerful and well connected. Simply put, Americans don’t care about unequal outcomes as long as the system is fair.

If Republicans want to counter this, they will need to take a firm stand in favor of free markets, rather than special-interest corporatism. They should stop talking about how “pro-business” they are, and talk about the virtues of free-market capitalism — emphasis on the “free market.”

Will they do so?

Last week, both Romney and Gingrich came out in favor of sugar subsidies. That isn’t encouraging.

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.

Six Reasons Why the Wars We Wage Often Go Wrong by Jim Powell

Tue, 31 Jan 2012 00:00:00 -0500

Drums are beating for a pre-emptive war to take out such nuclear facilities as Iran might have. But considerable caution is in order, because this is basically the same story Americans heard not so long ago, in 2003, to promote the pre-emptive war against Iraq. Although the United States “won” that war, intelligence about Iraq’s alleged weapons of mass destruction turned out to be wrong, the killing has gone on for nearly a decade, Sunni and Shiite factions appear to be going at each other again, and with Saddam Hussein gone, there’s a political/military vacuum that Iraq’s larger neighbor Iran is undoubtedly eager to exploit.

The calls for another pre-emptive war are particularly ironic considering that Iran used to be a friend of the United States. Our CIA helped the Shah secure his power in 1953, because he helped prevent Soviet penetration of the Mideast. But the Shah went on to establish a secular, authoritarian regime that made plenty of enemies. Ayatollah Khomeini became one of the Shah’s most formidable enemies as early as the 1960s. Because the U.S. backed the Shah, his enemies became our enemies, and they unexpectedly seized power in 1979. The U.S. affirmed its status as an enemy by backing Saddam Hussein after he attacked Iran the following year, in what became an eight-year blood bath.

Iranian leaders have done just about everything to convince the world that they are a bunch of dangerous fanatics, so the prospect of a nuclear Iran is scary. But by now we ought to have learned that a pre-emptive war can multiply the complications.

This is because war is the most costly, violent and unpredictable thing governments do. Again and again, even decisive victories can turn out to be serious mistakes, if not catastrophes, because of unintended consequences. While we might be able to control what we do, we cannot control how other people react to what we do.

Here are 6 reasons why wars go wrong:

1. Nations at war often try to avenge their suffering, which means they are likely to inflame hatreds that persist for a long time and provoke more wars.

In April 1917, President Woodrow Wilson led the United States into World War I. He claimed it was “the war to end wars.” He vowed that it would “make the world safe for democracy.” At that time, the war had been stalemated for three years — neither side able to impose its will on the other. By intervening on the side of the British and the French, Wilson made it possible to break the stalemate, win a decisive victory and dictate terms to the losers.

Wilson imagined he could negotiate peace on noble principles expressed in his January 1918 ”Fourteen Points” speech before a joint session of Congress. But almost a million British soldiers and civilians died in the war. Almost 1.7 million French soldiers and civilians died. Hundreds of thousands of soldiers succumbed to the influenza pandemic. In addition to battle-related destruction of property, retreating soldiers destroyed just about everything that might be useful for their adversaries. They cratered roads, burned homes, demolished factories, poisoned wells, flooded mines, ruined crops and slaughtered livestock.

Wilson, who had more formal education than any previous U.S. president, failed to understand how determined British Prime Minister David Lloyd-George and French Premier Georges Clemenceau were to avenge their grievances against Germany. Clemenceau, for instance, acknowledged that “My life hatred has been for Germany because of what she has done to France.” Wilson was hopelessly outmaneuvered during the postwar negotiations, and the result was the vindictive Versailles Treaty that had nothing to do with the Fourteen Points.

The treaty, forced on the Germans, triggered a nationalist firestorm that enabled a lunatic like Adolf Hitler to attract thousands of followers by promoting hatred and violence. If the United States had stayed out of the war, quite likely it would have ended with some kind of negotiated settlement and better long-term prospects for peace.

2. The overwhelming stresses of war can trigger economic chaos, political crises and totalitarian regimes.

As long as Woodrow Wilson was neutral during World War I, he didn’t have any reason to care what the Russians did. But when he entered the war, he had an incentive to keep Russia fighting on the Eastern Front. This tied up German soldiers there. If the Russians quit the war, as they were anxious to do, Germany would have been able to move some of their soldiers to the Western Front, causing more trouble for the British, French and Americans. So Wilson put pressure on the Russian government. His policy was “No fight, no loans.” He bribed the financially-strapped Russians.

But Russia had begun disintegrating from the day it entered the war in August 1914. Harvard historian Richard Pipes reported that “the army required each month a minimum of 100,000 to 150,000 new rifles, but Russian industry at best could provide only 27,000.” Large numbers of Russian soldiers were sent to the Eastern Front unarmed, and Russian mothers were outraged. The government conscripted some 11 million peasants into the army, which depopulated farms and caused chronic food shortages. In any case, there wasn’t enough railroad capacity both to ship soldiers to the front and ship food for the people — three-quarters of Russian railroad lines had just one track. Massive corruption undermined political support for the government. “There is no indication that the dark and violent history of Russia ever occupied Wilson’s attention,” American diplomat and historian George F. Kennan observed in Russia Leaves The War (1956), which won a Pulitzer Prize.

By keeping Russia in the war, Wilson unintentionally accelerated the disintegration of the Russian army. Kennan reported, “not only had Russia become involved in a great internal political crisis, but she had lost in the process her real ability to make war. The internal crisis was of such gravity that there was no chance for a healthy and constructive solution to it unless the war effort could be terminated at once.” Staying in the war, Kennan added, “provided grist to the mill of the agitator and the fanatic: the last people one would have wished to encourage at such a dangerous moment.” Lenin tried to seize power three times during the summer of 1917, but he failed even though hundreds of thousands of Russian soldiers were deserting. Lenin didn’t succeed until his fourth attempted coup in October 1917, when the Russian army had virtually collapsed.

On August 23, 1939, Lenin’s successor Josef Stalin approved a pact with Hitler, pledging (1) that Germany and the Soviet Union wouldn’t attack each other and (2) that they would carve up Poland. “By freeing Germany from the risk of waging war on two fronts,” noted the French historian Stéphane Courtois, “the pact led directly to the outbreak of World War II.” A week after the pack was approved, Hitler invaded Poland, and the war was underway. We might have been spared all that if Woodrow Wilson hadn’t been so anxious to have Russia continue fighting in World War I.

3. If allies have conflicting aims, a war is likely to have conflicting outcomes.

U.S. President Franklin Delano Roosevelt and British Prime Minister Winston Churchill embraced Stalin as an ally after Hitler ordered the invasion of the Soviet Union in June 1941, even though Hitler and Stalin had been odious allies up to that point. FDR and Churchill figured they needed all the help they could get.

But this marriage of convenience changed the nature of World War II. It was no longer a struggle for freedom, because Stalin ranked among history’s worst mass murderers — approximately 42 million deaths. Moreover, the Nazis developed concentration camps based on what they had learned about earlier Soviet concentration camps. Rudolf Hess, who organized Auschwitz, cited Nazi reports that “described in great detail the conditions in, and organization of, the Soviet camps, as supplied by former prisoners who had managed to escape. Great emphasis was placed on the fact that the Soviets, by their massive employment of forced labor, had destroyed whole peoples.”

Stalin exploited more opportunities to expand his Soviet empire after he allied with FDR and Churchill than before. Hundreds of millions of people were liberated from the Nazis, but most were re-enslaved by Stalin. He seized Estonia, Latvia, Lithuania, generous portions of Poland, Finland and Rumania. Moreover, Poland, Bulgaria, Czechoslovakia, East Germany, Hungary and Rumania became Soviet satellites.

On August 8, 1945, two days after the United States dropped an atomic bomb on Hiroshima, the Soviet Union declared war against Japan and grabbed more territory. The Soviet Union conquered Manchuria, Inner Mongolia, Sakhalin Island, the Kuriles and Korea. In addition, Stalin helped Mao Zedong who was fighting to establish a communist regime in China. Altogether, within five years after World War II the number of people subject to communist oppression in Europe and Asia soared from 170 million to about 800 million.

4. A vulnerable adversary can become unbeatable if it unexpectedly gains a big ally.

At the National Press Club, January 12, 1950, Secretary of State Dean Acheson gave a speech identifying nations that the United States pledged to defend from an attack. Acheson’s “defense perimeter” notably didn’t include South Korea. That nation, after all, had long been embroiled in conflicts involving its neighbors China, Russia and Japan.

Then on June 25, 1950, North Korean communist dictator Kim Il Sung attacked South Korea. North Korean soldiers crossed the 38th Parallel and entered South Korea. President Harry Truman decided to try stopping this communist aggression, even though South Korea was much less of an issue than China that had already fallen to the communists the previous year. On July 19, Truman asked Congress for $10 billion of emergency appropriations to fund a “police action” in Korea — he didn’t want to ask Congress for a declaration of war and risk having that defeated.

U.S. forces, led by General Douglas MacArthur, landed behind North Korean lines at Inchon — a very bold move — and within a few weeks he was advancing into North Korea. He did so well that Truman let him have a substantially free hand. In late 1950, MacArthur told reporters that the war was almost over.

He might have been wise to settle for occupying North Korea’s capital, Pyongyang, but he pushed his luck as he continued heading north toward the Yalu River on the Chinese border. Then came reports that indicated South Korean soldiers were “heavily engaged with a fiercely resisting [unidentified] enemy.” U.S. forces captured some prisoners who turned out to be Chinese. MacArthur began to hear that Chinese “volunteers,” as Chairman Mao called them, had crossed the border. MacArthur commented that the situation was “not alarming.” But the increasing number of shootouts suggested that a large number of Chinese soldiers might be in North Korea. Then the New York Times reported that “Chinese Communist hordes, attacking on horse and foot to the sound of bugle calls, cut up Americans and South Koreans in an Indian-style massacre.”

In fact, some 300,000 Chinese soldiers had swarmed across the border and forced MacArthur to retreat. The Chinese captured Seoul, South Korea’s capital. Eventually MacArthur battled his way back to the 38th Parallel, and the war became stalemated.. An armistice was signed on June 7, 1953. U.S. armed forces had doubled to 3 million, military spending had quadrupled, the war had cost an estimated $75 billion (real money back then), and 54,246 American lives had been lost. Six decades later, U.S. forces are still in South Korea.

5. Major powers can be thwarted by people who are fighting for their homeland, know their territory well and have nowhere else to go.

After running as a peace candidate during the 1964 election, President Lyndon Johnson authorized the escalation of the Vietnam War. He embraced the “domino theory” that a communist takeover in one country like Vietnam could result in other Asian countries falling to communists. But as noted, the biggest domino — China — had already fallen.

President Johnson seemed to view Vietnam as if it were a social welfare program. He declared, “Our foreign policy must always be an extension of our domestic policy” — namely, his Great Society entitlements. “I want to leave the footprints of America [in Vietnam]. I want them to say, ‘This is what Americans left — schools and hospitals and dams.’” Johnson’s Vice President Hubert Humphrey was even more carried away by the dream of doing good in Vietnamese jungles: “We ought to be excited about this challenge, because here’s where we can put to work some of the ideas about... nation-building... new concepts of education, development of local government, the improvement of health standards... and really the achievement and fulfillment of full social justice.”

Johnson made many mistakes besides having unrealistic expectations. He micro-managed the war and severely restricted what military commanders could do. His policy of gradual escalation seemed to convince the communist North Vietnamese that the United States was a reluctant warrior who could be defeated if they persisted long enough. Johnson and his top brass over-estimated the American advantages of superior weapons, especially air power.

Such policies led many observers to believe that if only the military had been unleashed, they could have won the Vietnam War, but there are reasons to doubt that. Vietnamese were fighting on their homeland. They knew the jungles well, they had nowhere else to go, and their survival was at stake. Americans didn’t know the jungles, everyone figured that eventually we would go home, and American survival wasn’t at stake, because the United States was more than 8,000 miles away. Moreover, since North Vietnamese insurgents wore ordinary civilian clothing, and they mingled among the South Vietnamese, American soldiers could never be sure which were the people they were trying to help and which were the enemies plotting for murder and mayhem. These are crucial advantages that native people always have when dealing with a foreign military presence. Such advantages go far to explain why major powers have become bogged down in guerrilla wars.

6. People don’t want somebody else building their nation, even when they’re making a mess of it — especially during a civil war.

In 1957, the U.S. Central Intelligence Agency fixed parliamentary elections in Lebanon. Former CIA officer Victor Marchetti recalled, “the CIA had helped elect so many pro-American candidates that the established Arab nationalist politicians were furious, realizing that the cheating was eroding their power base. The feud that had been brewing between Arab nationalists and the pro-Western Christians erupted into civil war. President Eisenhower sent in the marines. They were withdrawn after a few months, but what had been perhaps the most stable state in the Middle East was on the road to total polarization and eventual disintegration.”

A quarter-century later, U.S. and French forces were in Lebanon again. They attempted to serve as peacekeepers amidst the civil war that raged on. In October 1983, two truck bombs struck the barracks — an inviting stationary target. Among the dead were 58 French personnel and 241 Americans. The American death toll included three Army soldiers, 18 Navy seamen and 220 Marines. Apparently recognizing the futility of trying to referee a civil war, President Ronald Reagan ordered that U.S. forces be withdrawn from Lebanon.

In 1993, Bill Clinton imagined that the U.S. could build a nation in Somalia — or as Clinton’s then-UN ambassador Madeleine Albright put it: “nothing less than the restoration of an entire country.” The first step was to be the disarming of warlords. Of course, they wouldn’t be warlords without their guns, so the U.S. found itself embroiled in another civil war. Tragically, American soldiers were killed for nothing that involved a vital U.S. interest, certainly nothing that well-intended intervention was capable of resolving. Clinton recognized the futility of the intervention and withdrew U.S. forces.

The following year, however, Clinton was at it again. He ordered 20,000 U.S. soldiers to Haiti, so they could help alleviate hunger and establish a democracy. Eight years later, Haitian poverty rates were higher, literacy rates were lower than when the mission had begun, and political turmoil persisted. Why was anybody surprised at the futility of this intervention?. Since Haiti gained independence in 1804, Historians Robert Debs Heinl, Jr. and Nancy Gordon Heinl described it as “a country with nearly 200 revolutions, coups, insurrections and civil wars.”

After 9/11, President George W. Bush ordered U.S. forces into Afghanistan to destroy the camps where al-Qaeda terrorists were trained. This mission became a decade-long (and counting) nation-building project. Now, although almost 2,000 U.S. soldiers have died there and hundreds of billions of dollars have been spent fighting, Afghans continue to grow opium, stone women and engage in bloody power struggles. One might have thought that our sacrifices would have at least bought a loyal ally. But Afghan President Hamid Karzai declared his country would side with Pakistan in the event of a conflict with the United States. The British weren’t able to reform Afghanistan, nor could the Russians, and it’s doubtful whether we’ll be able to do any better.

Clearly, if government intervention cannot save relatively small nations like Lebanon, Somalia, Haiti or Afghanistan, there’s no reason to believe the world can be saved by having our government spend more money and order more American soldiers into harm’s way. Washington would do well if it could save itself from bankruptcy as a result of runaway spending and debt.

What people everywhere need is more freedom and free markets. We can’t force these things on others, but we can reverse anti-business policies that have throttled the American economy. When America becomes a dynamo again, more people overseas will find it in their self-interest to adopt the kinds of policies that work for us, much as millions of people embraced English as a principal language of business, science, technology and popular culture.

We need less foreign intervention, not more, to avoid gratuitously making enemies and contributing to difficult situations like we face with Iran now. This means restraining the government sector — the sector of bellicose rhetoric, seizures, embargoes, blockades, sanctions and wars. We need to encourage more voluntary, people-to-people international relations by businesses and nonprofits as well as individuals. Government can help do this by reducing restrictions on the movement of people, goods and capital.

Meanwhile, we need to be vigilant about maintaining a strong national defense that can protect us against aggression and perhaps more important, a strong national defense that can convincingly deter aggression. Deterrence is probably our best bet with Iran as it proved to be with the Soviet Union and China. Britain’s Prime Minister Margaret Thatcher paid Ronald Reagan a supreme compliment when she declared that “He won the cold war without firing a shot.”

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.

A Flat Tax Is the Answer by Daniel J. Mitchell

Tue, 31 Jan 2012 00:00:00 -0500

The class-warfare crowd is predictably outraged that Mitt Romney supposedly paid just 13.9 percent of his income to the crowd in Washington. Surely this is a sign of both inequity and iniquity. Meanwhile, previewing a theme for the general election, President Obama said in his State of the Union address that "millionaires and billionaires" should cough up at least 30 percent of their earnings to the IRS.

This is bad policy based on inaccurate data.

Let's deal first with the flawed numbers. Capital gains taxes and dividend taxes are both forms of double taxation. That income already is hit by the 35 percent corporate income tax. So the real tax rate for people like Mitt Romney is closer to 45 percent. And if you add the death tax to the equation, the effective tax rate begins to approach 60 percent.

Here's a simply analogy. Imagine you make $50,000 per year and your employer withholds $5,000 for personal income tax. How would you feel if the IRS then told you that your income was $45,000 and you had to pay full tax on that amount, and that you weren't allowed to count the $5,000 withholding when you filled out your 1040 form? You would be outraged, correctly yelling and screaming that you should be allowed to count those withheld tax payments.

Welcome to the world of double taxation.

The Obama approach is also bad economics. Every economic theory — even socialism and Marxism — agrees that saving and investment are the key to long-run growth and higher living standards. So does it make sense to deprive the economy of productive capital by imposing punitive layers of double taxation? To make matters worse, double taxation means transferring the money to the buffoons in Washington, where it will be squandered on inefficient and wasteful programs.

Europe's welfare states are on the brink of collapse because they adopted the mentality that government spending was better than private saving and investment. Should we copy their failures?

The right way to ensure both fairness and growth is the flat tax. Get rid of the 72,000 pages of corruption and complexity in the Internal Revenue Service code and replace it with a postcard-sized flat tax. One low tax rate with no double taxation. That's good for the economy and competitiveness.

And if Mitt Romney makes 100,000 times more than me, he'll pay 100,000 times more in tax.

Daniel J. Mitchell is a top expert on tax reform and supply-side tax policy at the Cato Institute.

Gingrich's Grandiose Claims about Authoring the Supply-Side Revolution by Alan Reynolds

Tue, 31 Jan 2012 00:00:00 -0500

Whenever Newt Gingrich has been asked to explain why he is supposedly more "conservative" than other Republican presidential candidates, he has repeatedly replied that he "helped Ronald Reagan and Jack Kemp develop supply-side economics." If that were true, I think I would know about it.

I was jointly responsible (with Jude Wanniski) for bringing the phrase "supply-side" economics into popular parlance in 1976. I helped write the economic policy chapters in Jack Kemp's 1978 book An American Renaissance. I worked with David Stockman and Larry Kudlow in the first Reagan transition team in 1981. I was research director of the Kemp Tax Reform Commission in 1995-96.

What I most recall about Newt Gingrich is that Kemp arranged for me to meet with him in 1982 because Jack worried that Newt was being seduced by OMB Director David Stockman's arguments that lower tax rates must take a back seat to deficit reduction. Stockman argued that deficits would absorb savings, crowd out investment and abort the 1983 recovery. I do not recall persuading Gingrich that Stockman was mistaken, but I believe Gingrich did oppose a 1982 law that rolled back incentives for business investment. Gingrich later opposed the Kemp-Kasten tax reform in 1986, but all was forgiven in 1990 when he tried to block the counterproductive "read my lips" tax hikes of the first President Bush. On balance, Gingrich was usually a political ally of Kemp and Reagan, like most of the young Republican congressmen at the time.

To suggest that the logic and evidence behind supply-side economics was in any sense "developed by" by Gingrich, rather than by numerous economists allied with Jack Kemp, is worse than the typical "Newtonian" exaggeration. It is simply preposterous. The story of what actually happened is ably retold in several books, most recently Econoclasts by historian Brian Domintrovic, and earlier in The Seven Fat Years by former Wall Street Journal editor Robert L. Bartley. There is no mention of Gingrich in such histories of supply-side economics.

The phrase "supply-side" was launched two years before Gingrich came to Congress. In April 1976 I persuaded Wall Street Journal editorial writer Jude Wanniski to embrace a label that Herb Stein coined at a conference I attended. Several of us had been talking and writing along similar lines since 1971, however, including Art Laffer, Nobel Laureate Bob Mundell and former Treasury Undersecretary Norm Ture.

If the test of supply-side authenticity was simply about who could dream up the lowest tax rate, nobody could beat Ron Paul's comment in a recent debate: "What's wrong with zero?" What's wrong with zero is that it won't get the bills paid. So, proposing to cut some taxes to zero (as Gingrich proposes for dividends and capital gains) necessarily means increasing some other taxes to fill the gap. Lower tax rates have often brought in more revenue than higher tax rates, particularly for capital gains and corporate profits, but that certainly does not mean that zero is the revenue-maximizing tax rate.

No well-crafted flat tax plan ever claimed to raise as much revenue as current law with a tax rate as low as 15 percent while keeping all the popular deductions. Asked about the obvious revenue losses, Newt says, "Terrific; that means we have to cut spending even more." We need a lot more specific information about such hypothetical spending cuts before any politician's hypothetical tax cuts might be taken seriously.

Repeatedly borrowing trillions more just to pay for unsustainable schemes like the 2010 payroll tax holiday is not what supply-side economics is about. Serious tax reform means finding ways of funding the government that will do the least possible damage to the economy, not assuming that faster economic growth alone can fix fiscal problems of the unprecedented size that we currently face. Runaway debt depresses growth precisely because it portends horrific future taxes.

Gingrich also gives himself great credit for "cutting taxes, cutting spending and balancing the budget for four years" as Speaker of the House from 1994 to 1998. He does deserve credit for persuading President Clinton to reduce the top capital gains tax to 20 percent from 28 percent in 1997. Revenues from capital gains subsequently soared to $89.1 billion in 1998 and $127.3 billion in 2000. But Newt can't have it both ways. If he takes credit for the revenue windfall from a capital gains tax of 20 percent — which contributed mightily to the balanced budget after 1998 — then Gingrich cannot turn around and promise a similar fiscal miracle from his proposed capital gains tax of zero.

Gingrich also deserves some credit for cutting non-defense spending from 17 percent of GDP in 1993 to 16 percent in 1998, although defense spending fell faster — from 4.4 percent of GDP to 3.1 percent in the same period. The task is much more challenging today. The publicly-held national debt was 40.6 percent of GDP at the end of 1989 when Reagan left office, and was still 40.2 percent at the end of 2008. But it jumped to 68.6 percent of GDP at the end of last year, and is projected to keep rising indefinitely. Non-defense spending in the Obama years has exploded to 20 percent of GDP, so trimming it by just one percentage point (as the Republican Congress did in 1994-98) is now far too timid a goal.

Newt Gingrich's alleged role in the development of supply-side economics sometimes looks like a deliberate distraction from deeper questions about why he claims to be more "conservative" than other candidates. Gingrich is the only candidate who repeatedly advocated federal legislation making health insurance compulsory. He has enthusiastically supported federal subsidies for ethanol and other green energy boondoggles. And he dismissed a thoughtful plan from Paul Ryan to slow the growth of entitlements as "right wing social engineering." Other candidates have their own faults. Romney seems hawkish for my taste, too prone to blaming our problems on China, and too harsh on immigration. But those are very common views among conservatives, arguably making Newt more moderate than Mitt in these respects.

For Newt Gingrich to toss out strikingly grandiose and obviously unworkable ideas about scrapping many taxes and slashing others is for him to reveal that he's far from moderate. But being immoderate is not the same as being conservative. And voicing flippant disregard for budget problems of the magnitude we face is not the same as being any sort of economist, supply-side or otherwise.

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

Fearmongering Won't Make Us Healthier by Patrick Basham, John Luik

Tue, 31 Jan 2012 00:00:00 -0500

A poster warning New York subway riders to avoid consuming too much sugary soda — by picturing a diabetic amputee — gained notoriety last week because, it turned out, the man pictured wasn't an amputee at all. He'd been photoshopped.

But the ad should have generated controversy for an entirely different reason: It's the latest inappropriate use of a scary, graphic image to try to produce a government-mandated change in consumer behavior.

Though fear is the weapon of choice for government health police — whether they're trying to stop people from eating fatty foods, smoking cigarettes or drinking too much — it simply doesn't work.

The case for alarmist warnings is based on four assumptions. First, people wish to avoid disease and death. Second, consumers suffer from an "information deficit," that is, they either don't understand the risks of a given behavior or they underestimate those risks. Third, once they know that a certain behavior or product can lead to disease and death, they will avoid it. And, fourth, warnings give people the information necessary for them to change their behavior.

The reality, however, is that assumptions two, three, and four are, for many people, false.

Many people filter out much of the information available to them because they find it neither relevant nor interesting. Also, warnings aren't processed because individuals tend to avoid information that has negative self-implications. Through a process known as "cognitive readjustment," people tend to exempt themselves as individuals who should be concerned with a warning. Even though someone has read and remembered a warning, they also can discount its personal applicability.

Even warnings that are read and processed are often discounted due to what experts call "warning fatigue," where the overabundance of warnings or the familiarity of a specific warning diminishes its effectiveness. Consequently, the empirical research on scary tobacco warnings, for example, turns conventional wisdom on its head. Such fear-based public health education campaigns simply do not work.

The evidence from empirical studies of their effects in real world settings demonstrates these types of warning failures are extensive. Almost a decade after the federal government mandated warnings on alcohol products, neither the risk perception nor the drinking behavior of those drinkers most likely to be a risk to themselves or others had changed. There is equally compelling evidence about the failure of food labeling. The USDA found that labeling is an ineffective policy tool.

The truth is that more often than not, scary or detailed warnings cause many consumers to disregard the information completely. A consumer's income is the key factor in determining which foods, for example, are purchased, and that income cancels out the effects of information.

The danger, however, is not simply that labels and warnings will fail; they may also be counterproductive. For example, large numbers of excessive risktakers display what psychologists call "reactance," in which there is a high level of resistance to the demands of outside authority and control.

For these individuals, a warning label represents an attempt to unreasonably (at least from their perspective) shape their behavior and makes them more likely to ignore rather than heed the warning. Warning labels also highlight risk, and for those attracted to risk-taking, this serves to make the very thing warned about more, rather than less, attractive.

The use of such warnings contradicts two of the central principles of medical ethics and the ethics of health promotion: beneficence — doing good — and nonmaleficence, avoiding harm where compelling evidence demonstrates that warnings will do no good and might cause harm. Curiously, the FDA now advocates scary tobacco warnings even though its own study found them ineffective.

Today's health warnings improperly utilize the state's legitimate authority in a manner that converts public health advertising into displays for the government's opinions.

New Yorkers have the right to shape their own lives, together with the responsibility for the results of doing so, without the intrusion of Mayor Bloomberg's taxpayer-funded advocacy.

Patrick Basham, a Cato Institute adjunct scholar, and John Luik, a Democracy Institute senior fellow, are the authors of "Health Warnings on Consumer Products: Why Scarier Is Not Better."

Addicted to Collecting: From Malcolm Forbes to Me by Doug Bandow

Mon, 30 Jan 2012 00:00:00 -0500

Last week Sotheby's auctioned off 13 French military paintings from the once legendary Forbes collection. It represents the end of an era.

Malcolm Forbes lived large with his eponymous Forbes magazine, adventurous motorcycle trips, and celebrity-drenched parties. Of even more interest to me, he amassed a fascinating and eclectic collection of most anything that caught his eye. There was military art — including the large paintings and watercolors by two of the finest French artists who worked around the time of the Franco-Prussian War for sale at Sotheby's.

More famous were the Faberge Eggs produced for the Russian czars before the Soviet Revolution. At one point Forbes owned more of the wondrous jeweled creations than were left in Moscow.

Forbes also accumulated a large number of autographs — indeed, years ago I sold a letter by Ronald Reagan which had been left in my hands at the close of his first presidential campaign to the collection. And there were the toy soldiers, enough to return any guy to his childhood.

Selections of Forbes' acquisitions were displayed at the offices of Forbes magazine, which I got to see on my occasional visits to friends on staff. Where else could you go for a business lunch and view paintings illustrating the Franco-Prussian War, the finest collectibles of the long-deposed Russian monarchy, and toys with which little boys played a century ago? My favorite were documents not just recording American history, but representing American history — such as Robert E. Lee's note to Ulysses S. Grant requesting a meeting to discuss surrender terms as the Civil War came to a close.

The Forbes Collection was a dream for anyone bitten by the collecting bug. Combine the interest, money, and opportunity to amass a collection with a fine building on Fifth Avenue in which to display the highlights to the public. And the contents had special appeal for me, since I enjoy history and especially military history. Indeed, I violated the Commandment against coveting my neighbor's possessions every time I visited the Forbes Museum.

Unfortunately, all good things must pass away. When Malcolm Forbes died the driving force behind the collection disappeared. The family didn't as much see the value of holding onto exotica like Faberge Eggs. So the items were gradually sold off.

The Eggs went as a group to a wealthy Russian businessman, thereby returning to their ancestral home. One auction disposed of the Reagan autograph that I once owned along with the Lee note — how I wish I had had the funds to bid on it. The toy soldiers went in another sale. And now the most important military art.

You have to be a collector to understand collecting. I inherited the collecting gene from my parents. We were stationed in Great Britain when I was in high school. I would travel with them around that glorious island on antiquing expeditions. My Dad liked clocks, my mother bought cameos, and both of them enjoyed pictures, pitcher and bowl sets, and oddities like bed warmers and knife cleaners. I picked up an occasional bladed weapon and chess set with my limited income from a paper route, bagging groceries at the commissary, baby-sitting, and mowing lawns.

Back in the U.S. my hobby went dormant while I was in college. Afterwards I checked out want ads for chess sets and picked up an occasional tourist set when overseas, but little more. Then I met a county fire official who was selling off a few chess sets. The ones I bought were nothing special, but I started "hitting the shops" with him, since his girlfriend had no interest in such nonsense.

Without Malcolm Forbes' money I couldn't create a collection to match his, of course, but I came up with my own interesting mix — a few chess sets, military pictures, icons, eagles, and autographs. For others these items acted as "conversation pieces" gathering dust. For me I got to touch history. Nothing quite so dramatic as Lee's surrender note, but still, a feeling that I was reaching across time.

Some of my favorite finds were part of history. For instance, I bought inexpensive busts of Felix Dzerzhinsky and Lavrenti Beria, heads of the Cheka and NKVD, as the Soviet secret police were variously called. What kind of a system celebrates mass murderers? I'm really not a com-symp, but I think Felix and Lavrenti, as well as the abundant plastic commie tchotchke that now fill my office are, well, cool. How else to explain it?

It's that desire to possess which unites collectors, from the extraordinary, such as Malcolm Forbes, and those of us on much smaller budgets. My buddy likes beer steins, as well as other items which variously catch and then lose his interest, such as the chess sets he sold me more than two decades ago. I've met women who collected napkin rings and hat pins. And a fellow with a passion (some would say obsession) with frogs, which filled his house. There was even the collector of the macabre whose day job was handling make-up for guests at one of the cable television channels.

Collectors share a fascination with the hunt, looking for that special find. The issue is less about value than uniqueness. Finally finding something for which we've been searching for years. An item which reminds us of our childhood, a special person, or a critical historical moment. Something which just speaks to us in a quirky way.

Our passions often are impossible to explain or even understand. A couple of years ago an analyst at Human Rights Watch, Marc Garlasco, was attacked because he collected German militaria, leading some to accuse him of being a Nazi-sympathizer. It was a convenient political meme, since he had criticized Israel's human rights practices.

Of course, Nazism generates a special, and well-warranted, revulsion for having attempted to eradicate an entire people. But the vast majority of collectors of Third Reich material do so because of its historical and military significance, not because they are hoping for a Nazi revival. Moreover, most German militaria have nothing to do with Nazism — the Iron Cross dates back to 1813, for instance. The finest German "regimental" beer steins, personalized drinking vessels purchased by members of individual military units, predate World War I. German material is the premier military collectible, highly sought by collectors. For most of them something with a swastika is just like my busts of Felix and Lavrenti.

However, most collectibles are non-controversial, at least other than raising questions about our sanity. Even I have limits. I mean, Beanie-Babies. They were mass produced, but turned into a financial bubble, a bit like houses (though far less costly, of course) today. Entire showcases at antique shops were filled with BBs; people presented themselves as BB "authenticators," who would make sure that everything, including the label, was authentic. The market eventually crashed, and now one often finds BBs tossed indiscriminately into big boxes and priced at a couple bucks each.

Still, collecting really is a harmless hobby, other than for spouses and kids forced to put up with the clutter. I remember a nature guide who commented that he felt things he couldn't explain when he saw a bird. A historian once told me of his pleasure in "fondling" books. Neither was involved in kinky sex. They just found their passions elsewhere.

Mine is collecting. A few years ago I bought a carved Soviet T-34 tank with a chess clock contained in one set of treads. Under the turret was space for the chess pieces. It's a homemade item that never would end up in a Sotheby's auction. But when I saw it, well, to coin a phrase, my blood ran cold. Some Red Army veteran and chess enthusiast probably made it after surviving the Great Patriotic War. I love both chess and history. What could be cooler?

I still drop by the Forbes Magazine offices from time-to-time, but it isn't the same with the collections being sold off. Still, I can continue to touch history in my own way. After all, Felix and Lavrenti are always there, staring down at me even as I write these words.

Doug Bandow is a senior fellow at the Cato Institute. A former special assistant to Ronald Reagan, he is the author of Foreign Follies: America's New Global Empire (Xulon).

Obama's Odd Sense of Fairness by Richard W. Rahn

Mon, 30 Jan 2012 00:00:00 -0500

President Obama keeps demanding that the rich pay more because “it is only fair.” In his State of Union address, he said millionaires should pay a minimum of 30 percent of their income in taxes. The 30 percent number seems to have come from divine inspiration rather than an exercise in logic.

In fact, the very rich pay far more in taxes than the relatively low nominal numbers they report on their tax returns. Many very wealthy people obtain most of their income from dividends, capital gains and interest on tax-free state and municipal bonds. The actual tax rate Mitt Romney, Warren Buffet and most other wealthy people pay on dividends, when correctly calculated, is about 52 percent, as reported by the Organization for Economic Cooperation and Development (OECD), which includes the federal and state corporate-level-profits tax burden, plus federal and state taxes on dividends. My Cato colleague, Chris Edwards, who prepared the accompanying chart, notes: “Just about every industrial country provides relief for the double taxation of corporate equity, either by having a lower personal rate on dividends, a personal tax credit for dividends or a lower corporate-level tax. Despite the 2003 dividend tax cut, the overall U.S. rate of dividends... is still the fourth-highest among the 34 high-income nations of the OECD.”

Mr. Obama seems to think it is “fair” to tax the same income multiple times, at a total effective rate of more than 50 percent.

Capital gains are taxed at 15 percent but will be subject to a higher rate as a result of revenue provisions in Obamacare. Now the president seems to be proposing that the rate be doubled to 30 percent, given his comments in his State of the Union address. Over the past half-century, the United States has raised and lowered the capital-gains tax rate many times. When rates went up, revenues went down and vice versa, because for the most part, people can choose when to take their capital gains or losses. Virtually all independent economic studies and even a U.S. Treasury study show that a capital-gains tax-rate increase will almost certainly be a big revenue loser and job killer and will depress economic growth. When Mr. Obama was asked about this during his first presidential campaign, he acknowledged that a capital-gains tax increase might lose revenue, but he wanted it anyway because of “fairness.”

So, according to the president, it is “fair” that everyone has to pay higher taxes or have fewer government services in order to make sure that high-income earners pay an increased rate of tax for risking their capital and creating jobs. This is perhaps the best description of “Alice in Wonderland” economics.

As with dividends and capital gains, interest is also subject to multiple levels of taxation, and so the nominal tax rate on it is far lower than the properly measured real rate. Many wealthy people buy state and local government bonds, which are tax free but normally have a lower rate of interest. The reason state and local governments are allowed to issue tax-free bonds is to enable them to have access to low-rate capital for building schools, roads, bridges, etc. To force high-income people to pay higher tax rates, this “tax preference” would need to be abolished, resulting in much higher interest-rate costs for state and local governments, which, in turn, would mean fewer new schools and highway improvements. I expect that many in the president’s political base who want more schools would not view this required tax change as being “fair.”

The federal government admits that hundreds of billions of taxpayer dollars are wasted through fraud and mismanagement. Medicare fraud alone costs tens of billions of dollars each year. Nevertheless, somehow the president thinks it is more “fair” to enact job-destroying tax increases rather than insisting that officials in his own administration clean up the fraud and waste or lose their jobs, as would happen in any private company.

Much of the president’s mental confusion about what is “fair” seems to stem from viewing people as “classes” rather than individuals. The American Constitution is all about protecting individual (not class) liberties and rights. If you think the “rich should pay more,” then you are thinking in class terms. Assume for the moment there are two individuals, each 45 years old with the same IQ, who went to the same college and dental school and are equally skilled dentists in private practice. However, one is married with four children in expensive colleges, and thus chooses to work 60 hours per week. The other dentist has no children and chooses to work just 30 hours per week and thus makes half as much. The president thinks it is “fair” to tax the industrious dentist at a higher tax rate. (Note: the bottom 50 percent of taxpayers pay just 2.3 percent of federal income tax, and the top 1 percent of taxpayers pay 36.7 percent, more than twice their share of earning.)

Those who are mentally mature enough to understand that people change their behavior in response to economic incentives and penalties and who view their fellow citizens as individuals rather than impersonal members of a class will have a very different notion of what “tax fairness” means than those who are not so mentally mature. By the way, did you see the report from the University of Minnesota’s Smart Politics that “President Obama’s 2012 State of the Union address rated at an 8th-grade comprehension level using the Flesch-Kincaid readability test, the third-lowest score of any State of the Union address since 1934”?

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

Blame the U.S. for the Housing Bubble, Not China by David Boaz

Mon, 30 Jan 2012 00:00:00 -0500

In his New York Times Magazine column, Adam Davidson cited David Boaz of the Cato Institute as an economist who believes that easy money from China exacerbated the housing bubble in the U.S. In fact, Boaz places the blame much closer to home. His clarification is below.

Adam Davidson's citation of me as someone who believes "that all that easy money from China helped make the housing bubble much bigger and last longer, which created a far bigger crisis when the bubble finally burst" took me by surprise. It would be fine without that little prepositional phrase "from China." Easy money, yes. Housing bubble, yes. Pain when bubbles burst, absolutely. But is China to blame? I'd be inclined to point the finger closer to home.

This was a crisis caused by regulation, subsidization, and cheap money. Christopher Hitchens had a point when he wrote, "There are many causes of the subprime and derivative horror show that has destroyed our trust in the idea of credit, but one way of defining it would be to say that everybody was promised everything, and almost everybody fell for the populist bait."

There was substantial agreement in Washington for years that home ownership was a good thing and that more home ownership would be even better. Thus Congress and regulators encouraged Fannie, Freddie, and mortgage lenders to extend credit to under-qualified borrowers. To generate more mortgage lending to low and moderate income people, the federal government loosened down-payment standards, pressured lenders to increase their percentages of "affordable" loans, and implicitly guaranteed Fannie and Freddie's dramatic expansion.

All that hard work paid off: The share of mortgages classified as non-prime soared, and the quality of those loans declined. Fannie and Freddie's debt was implicitly backed by the U.S. Treasury — despite many warnings — and they were able to expand their debt and engage in risky transactions. As Lawrence Summers wrote, "Little wonder with gains privatized and losses socialized that the enterprises have gambled their way into financial catastrophe."

Federal Reserve credit expansion, especially in 2001 — 2005, helped to make all this lending possible. "Everybody was promised everything" — cheap money, easy lending, and rising home prices. All that money and all those buyers pushed housing prices up sharply. But all good things — at least all good things based on unsustainable policies — must come to an end. When housing prices started to fall, many borrowers ran into trouble. Financial companies threatened to fall like dominos, and an ever-expanding series of bailouts began issuing from the Treasury department.

But what about China? China was eager to buy our debt, both Treasury bonds and Fannie and Freddie's debt. But it was Congress that ran the deficits, and the Fed that kept interest rates artificially low. We don't need to go to Beijing to find the villains in this piece.

So should we get tough on China? Adam Davidson has a point when he says that, "candidates always talk tough. Presidents opt for a gentle, nudging approach. They know that China, alone, gets to decide." I'd put it a little differently. Presidents usually realize that a trade war between the world's two largest economies is a very bad idea. China's currency is probably artificially low. But economists disagree on just how low. And if we don't know what it "ought" to be, how can we know what to do in response?

The real point of economic activity is not to create jobs but to add value, to create wealth and prosperity and a higher standard of living. Judged by that standard, we should probably be thanking China. If China is keeping its currency artificially low, it is hurting people who hold Chinese currency and subsidizing those of us who buy Chinese products. As the economist Mark J. Perry writes, "In the best of all possible worlds for the United States, China would use its labor and capital to manufacture consumer products like clothing, footwear, furniture, electronics, and appliances and send $300 billion worth of these products to U.S. consumers for free every year as a gift or a form of foreign aid to the American people. In addition, the Chinese would produce and send to America another $100 billion worth of raw materials, parts, industrial supplies, inputs, and natural resources at no charge, as a gift to American manufacturers every year."

They don't do that, of course. But if they're selling us products at a discount, American consumers are benefiting.

Our economy could use plenty of reforms — lower, flatter, simpler taxes; a more stable monetary policy or even a move toward free markets in money; reduced regulatory burdens; the de-monopolization of services from education to mail delivery; and less government spending. In all those cases, the problem and the solution are right here in the USA.

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.

Should the U.S. Take a Harder Stance on China's Currency? by Steve H. Hanke

Mon, 30 Jan 2012 00:00:00 -0500

The United States has a long history of waging currency wars in Asia. We all know the sad case of Japan. The U.S. claimed that unfair Japanese trading practices were behind the ballooning U.S. bilateral trade deficit.

To correct the so-called problem, the U.S. demanded that Japan adopt an ever-appreciating yen policy. The Japanese complied and the yen appreciated against the greenback, from 360 in 1971 to 80 in 1995 (and 77, today). But this didn't close the U.S. trade deficit with Japan. Indeed, Japan's contribution to the U.S. trade deficit reached almost 60 percent in 1991. And, if that wasn't enough, the yen's appreciation pushed Japan's economy into a deflationary quagmire.

Today, the U.S. is playing the same blame game with China. And why not? After all, China's contribution to the U.S. trade deficit has surged to 45 percent.

Let's hope China ignores U.S. demands for an ever-appreciating yuan. China's compliance would do little more than attract massive hot money flows into the country and destabilize its economy. This would be bad news for the world economy's main engine of growth.

To appreciate just how dangerous currency wars can be, let's lift a page from the U.S. government's old currency war playbook. During his first term, President Franklin D. Roosevelt delivered on his Chinese currency stabilization "plan." China's yuan was pegged to the price of silver, and it was asserted that higher silver prices would benefit the Chinese by increasing their purchasing power. Congress granted the Roosevelt Administration the authority to buy silver in massive quantities. The administration pushed the price of silver up by 128 percent in the period between 1932 and 1935. As the dollar value of silver went up, so did the value of the yuan.

America's "plan" worked like a charm, but it had consequences that Washington had not quite advertised. The rapid appreciation of the yuan threw China into the jaws of the Great Depression. Between 1932 and 1934, its gross domestic product fell by 26 percent and wholesale prices in the capital city, Nanjing, fell by 20 percent. China officially abandoned the silver standard on November 3, 1935. This spelled the beginning of the end for Chiang Kai-shek's Nationalist government.

China's (as well as the rest of the world's) future lies with stability. Stability requires China to adopt a free-market, fixed exchange-rate system — just like the one in Hong Kong. It's time for China to end Washington's currency war. China can do this by a preemptive strike: adopt a fixed yuan-dollar exchange rate and dump capital controls.

Steve H. Hanke is a Professor of Applied Economics at The Johns Hopkins University and a Senior Fellow at the Cato Institute.

Gingrich Grandiosity And Supply-Side Economics by Alan Reynolds

Mon, 30 Jan 2012 00:00:00 -0500

A Washington Post headline proclaims, "Supply-siders find an ally in Gingrich."

Art Laffer endorsed Newt last month, but that is not news. What accounts for the plural in "supply-siders" is one of Gingrich's policy advisor (a libertarian lawyer) plus two more (an investor and a self-described economist) who are refugees from Herman Cain's campaign. The same article goes on to mention Columbia Business School Dean Glenn Hubbard, whom I would certainly count as a supply-side sympathizer. The article also counts former Congressman Vin Weber in Romney's camp, and Weber was a long-time ally of our mutual friend the late Jack Kemp.

Some supply-siders evidently find an ally in Romney, while others were more inclined to support Cain or Perry in the past and perhaps Gingrich or Santorum today. If it was simply about who can dream up the lowest tax rate, it's hard to beat Ron Paul's comment in a recent debate: "What's wrong with zero?" But zero won't get the bills paid, so cutting one tax to zero (such as the tax on dividends or capital gains) means increasing some other tax to fill the gap. We have to find credible ways of funding the government that will do the least possible damage to the economy. Repeatedly borrowing trillions more just to pay for unsustainable tax giveaways ("to put money in people's pockets") is not what supply-side economics was ever about.

Whenever Newt Gingrich has been asked to explain why he is supposedly more "conservative" than other Republican presidential candidates, Newt has repeatedly replied that he "helped Ronald Reagan and Jack Kemp develop supply-side economics." If that were true, I think I would know about it.

I was jointly responsible (with Jude Wanniski) for bringing the phrase "supply-side" economics into popular parlance in 1976. I helped write the tax chapter in Jack Kemp's book 1978 An American Renaissance. I spent nine years as chief economist with Wanniski's consulting firm Polyconomics. I worked with David Stockman and Larry Kudlow in the first Reagan transition team in 1981.

Kemp arranged for me to meet with Gingrich in 1982, because Jack was worried that Newt had been seduced by OMB Director Dave Stockman's arguments that the Reagan tax cuts must tax a back seat to deficit reduction. Stockman was arguing that deficits would absorb savings, crowd out investment and abort the recovery. That argument (and Alan Greenspan's advice) had already inspired some crippling policy mistakes, such as waiting until mid-1983 to phase-in the tax rate reductions, and keeping the top tax on labor income at 50 percent. Incentives for business investment were also curtailed in a 1982 law, which I believe Newt opposed. Unfortunately, Gingrich also opposed the Kemp-Kasten tax reform in 1986, but all was forgiven in 1990 when he tried to block the counterproductive "read my lips" tax hikes of the first President Bush.

If Gingrich had simply said that he (like many others) supported the original Kemp-Roth tax rate reduction plan and the watered-down version of 1981, that would have been accurate and appropriately unpretentious. To suggest instead that the underlying logic and evidence was "developed by" by Gingrich, rather than by numerous economists allied with Jack Kemp, is simply preposterous. The true story is ably retold in several books, most recently Econoclasts by historian Brian Domintrovic, and earlier in The Seven Fat Years by former Wall Street Journal editor Robert L. Bartley. One looks in vain for any mention of Newt Gingrich in any history of supply-side economics.

The phrase "supply-side" dates back to April 1976 — two years before Gingrich came to Congress. With some effort, I then persuaded former Wall Street Journal editorial writer Jude Wanniski to embrace a label that Nixon economist Herb Stein coined at a conference I attended. Yet several of us had been talking and writing along similar lines since about 1971, including Art Laffer, Nobel Laureate Bob Mundell and former Treasury Underscretary Norm Ture. As conservative radio talk show host Mark Levin rightly put it,

Newt Gingrich.... had nothing to do with the development of supply-side economics.... It pre-dated his election to the House by several years. So he didn't help Ronald Reagan develop supply-side economics. He wasn't even on Ronald Reagan's radar at the time.

With more justification, Gingrich gives himself great credit for "cutting taxes, cutting spending and balancing the budget for four years" as Speaker of the House from 1994 to 1998. Many taxes went way up in 1993, of course, but Gingrich does deserve credit for persuading President Clinton to reduce the top capital gains tax to 20 percent from 28 percent in 1997. Revenues from capital gains soared to $89.1 billion in 1998 and $127.3 billion in 2000. But Newt can't have it both ways. If he takes credit for the revenue windfall from capital gains tax of 20 percent — which contributed mightily to the balanced budget in those years — then Gingrich cannot then turn around and promise a similar fiscal miracle from his proposed capital gains tax of zero.

What about spending? Nondefense spending was cut from 17 percent of GDP in 1993 to 16 percent in 1998, and Gingrich surely deserves credit for that. But defense spending fell from 4.4 percent of GDP to 3.1 percent in the same period, which had more impact on the deficit.

Newt Gingrich's alleged role in the development of supply-side economics sometimes looks like a deliberate distraction from deeper questions about why he claims to be more "conservative" than other candidates. For many years, Gingrich advocated federal legislation making health insurance compulsory, something Romney never did. Gingrich has enthusiastically supported federal subsidies for ethanol and other green energy boondoggles. And he dismissed a thoughtful plan from Paul Ryan (who Kemp greatly admired) to slow the growth of entitlements as "right wing social engineering."

For Newt Gingrich to toss out strikingly bold and obviously unworkable ideas about scrapping many taxes and slashing others is certainly not moderate. But being immoderate is not the same as being conservative. And voicing flippant disregard for budget problems of the magnitude we face is not the same as being any sort of economist, supply-side or otherwise.

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

Iran Well Prepared for the Worst by David Isenberg

Mon, 30 Jan 2012 00:00:00 -0500

Most discussions of possible United States military operations in the Persian Gulf, should Iran try to prevent maritime traffic from going through the Strait of Hormuz, generally say that while it would not be a cakewalk, it would not be an enormously difficult task either.

But that conventional wisdom is wrong, according to a recent report issued by an independent, non-profit public policy research institute in Washington DC. The report found that the traditional post-Cold War US military ability to project power overseas with few serious challenges to its freedom of action may be rapidly drawing to a close.

While such conclusions have been voiced before, most notably in regard to capabilities being developed by the People's Republic of China — which is developing an anti-access/area-denial (A2/AD) battle network that could constrain the US military's ability to maneuver in the air, sea, undersea, space and cyber-space operating domains — China is hardly the only country that has developed such options.

According to the report published by the Center for Strategic and Budgetary Assessments (CSBA), "Iran, in particular, has been investing in new capabilities that could be used to deter, delay or prevent effective US military operations in the Persian Gulf. Iran's acquisitions of weapons that it could use to deny access to the Gulf, control the flow of oil and gas from the region, and conduct acts of aggression or coercion, are of grave concern to the United States and its security partners."

The report, "Outside-In: Operating from Range to Defeat Iran's Anti-Access and Area-Denial Threats" [1] notes that Iran has been preparing for a possible military confrontation with the United States for decades. Instead of engaging in a direct military competition, which would be pitting its weaknesses against US strengths, Iran has developed an asymmetric "hybrid" A2/AD strategy that mixes advanced technology with guerilla tactics to deny US forces basing access and maritime freedom of maneuver.

Even if Iran did not disrupt Gulf maritime traffic for long, it could still have a devastating impact. A recent report by the International Monetary Fund (IMF) found that Iran's closure of the Strait of Hormuz would "neutralize a large part of current OPEC [Organization of Petroleum Exporting Countries] spare capacity," saying "alternative routes exist, but only for a tiny fraction of the amounts shipped through the strait, and they may take some time to operationalize while transportation costs would rise significantly."

"A blockade of the Strait of Hormuz would constitute, and be perceived by markets to presage, sharply heightened global geopolitical tension involving a much larger and unprecedented disruption," it said.

The IMF said that "supply disruption would likely have a large effect on prices, not only reflecting relatively insensitive supply and demand in the short run but also the current state of oil market buffers".

"A halt of Iran's exports to OECD [Organization for Economic Cooperation and Development] economies without offset from other sources would likely trigger an initial oil price increase of around 20-30% (about US$20-30 a barrel currently), with other producers or emergency stock releases likely providing some offset over time," the report showed.

It stressed that "a Strait of Hormuz closure could trigger a much larger price spike, including by limiting offsetting supplies from other producers in the region".

"If you could cut off oil flow for even several weeks the global economy would be in depression. That would be a serious price to pay; it is a sobering thought," according to Patrick Cronin, a senior advisor at the Center for a New American Security, a Washington DC think-tank.

Attacking ships is not the only option available to Iran to disrupt oil supplies, according to Cronin. In a phone interview with Asia Times Online he said, "Forget about shutting down the Strait of Hormuz, you could hit the oil infrastructure in Saudi Arabia; that would have enormous impact."

Cronin, who was involved in the reflagging of oil tankers during the Iran-Iraq war of the 1980s, agrees that the Iranian ability to disrupt maritime traffic is real. "Iran is acquiring greater capabilities and has geographical advantages. Even back in the 1980s, we were very worried."

Currently, aside from military factors, Iran can take advantage of a number of political and demographic realities.

For example, the populations, governments and much of the wealth of the region are concentrated in a handful of urban areas within range of Iran's ballistic missiles. While attacks against Gulf cities may have little direct military utility, their psychological and political impact on regional governments could be significant, especially if Iran demonstrated the capacity to arm its missiles with chemical, biological, radiological or nuclear warheads.

And, as most analysts recognize, Iran could also mobilize its network of predominately Shi'ite proxy groups located across Southwest Asia to conduct acts of terrorism and foment insurrection in states that remain aligned with the United States.

Iran's proxies could become far more dangerous should Iran arm them with guided rockets, artillery, mortars and missiles (G-RAMM). Other groups, like the Lebanese Hezbollah, could conduct a terrorism campaign designed to broaden the crisis and hold US rear areas — even the US homeland — at risk.

And while that indirect approach may not succeed, Iran could use its ballistic missiles and proxy forces to attack US bases and forces in the Persian Gulf directly.

Iran's hybrid strategy would continue at sea, where its naval forces would engage in swarming "hit-and-run" attacks using sophisticated guided munitions in the confined and crowded waters of the Strait of Hormuz and possibly out into the Gulf of Oman. Iran could coordinate these attacks with salvos of anti-ship cruise missiles and swarms of unmanned aircraft launched either from the Iranian shore or from the islands guarding the entrance to the Persian Gulf.

That last scenario is hardly theoretical. Lieutenant General Paul K Van Riper (US Marine Corps-retired) gained notoriety after the Millennium Challenge 2002 wargame, which was a major exercise conducted by the US armed forces in mid-2002, likely the largest such exercise in history.

It cost $250 million and involved both live exercises and computer simulations. The simulated combatants were the US, referred to as "Blue", and an unknown adversary in the Middle East, "Red", commanded by Lieutenant General Van Riper.

Red received an ultimatum from Blue, essentially a surrender document, demanding a response within 24 hours. Thus warned of Blue's approach, Red used a fleet of small boats to determine the position of Blue's fleet by the second day of the exercise. In a pre-emptive strike, Red launched a massive salvo of cruise missiles that overwhelmed the Blue forces' electronic sensors and destroyed 16 warships.

This included one aircraft carrier, 10 cruisers and five of six amphibious ships. An equivalent success in a real conflict would have resulted in the deaths of over 20,000 service personnel. Soon after the cruise missile offensive, another significant portion of Blue's navy was "sunk" by an armada of small Red boats, which carried out both conventional and suicide attacks that capitalized on Blue's inability to detect them as well as expected.

In the years since then, Iran has been investing in the capabilities necessary to carry out Van Riper's strategy. Looking at its maritime forces, in mid-2001 Iran launched the first of a new type of locally built craft equipped with rocket launchers.

In July 2002, a conventional arms sale triggered sanctions on several Chinese companies. Beijing had transferred high-speed catamaran missile patrol boats to Iran. The C-14 boats are outfitted with anti-ship cruise missiles. Short-range anti-ship missiles for the patrol boats also were sold from China to Iran in January 2002. The high-speed gunboat can carry up to eight C-701 anti-ship cruise missiles, and usually have one gun.

Between 2003 and 2005, authorities in the Iranian navy continued to talk about their pushes for greater self-sufficiency, including the continued development of domestically produced missile boats and frigates, as well as new details about submarine projects.

In 2006 and 2007, the Iranian navy accepted new missile boats and a frigate, as well as two types of submarines. The Sina class missile boats, introduced in 2006, were essentially Iranian copies of Kaman missile boats already in service. Also in 2006, the Iranians deployed the first of the Nahang class of midget submarines, described as the first Iranian submarine designed and produced without foreign assistance.

In 2007, the Iranian navy accepted the first of three planned Mowj-class frigates, again essentially copies of a ship already in the Iranian inventory, the Alvand class. Also in 2007, it deployed the Qadir midget submarine, sometimes referred to as the first of the Yono class.

As of 2008, the Iranian navy appeared poised to expand its fleet, most centered on stand-off anti-ship missile systems, mining operations and a wide range of smaller patrol and special operations craft. Iranian authorities have described the current mission as deterrence against aggression in their coastal waters and in prominent regional waterways.

Other analysts confirm some of CSBA's report's main points. In December, Anthony Cordesman, a well-respected expert at the Center for Strategic and International Studies in Washington, wrote:

Iran is reshaping its military forces to steadily increase the threat to Gulf shipping and shipping in the Gulf of Oman, It also is gradually increasing its ability to operate in the Indian Ocean.

This increase in Iranian capability is almost certainly not designed to take the form of a major war with the US and southern Gulf states, which could result from any Iranian effort to truly close the Gulf. It does, however, give Iran the ability to carry out a wide range of much lower level attacks which could sharply raise the risk to Gulf shipping, and either reduce tanker traffic and shipping or sharply raise the insurance cost of such ship movements and put a different kind of pressure on the other Gulf states and world oil prices.

A Center for Strategic and International Studies analysis released

in January noted that the Islamic Revolutionary Guards Corps (IRGC) had these assets at its disposal:

20,000 Naval Guards, including 5,000 marines.
Armed with HY-3 CSS-C-3 Seersucker (6-12 launchers, 100 missiles, 95-100 km), and 10 Houdong missile patrol boats with C-802s (120 km), and 40+ Boghammers with ATGMs, recoilless rifles, machine guns.
IRGC air branch reported to fly UAVs and UCAVs, and control Iran's strategic missile force.
Land-based, long-range anti-ship missiles based on land, islands (Seersucker HY-2, CSS-C-3), and ships (CSS-N-4, and others).
Based at Bandar e-Abbas, Khorramshar, Larak, Abu Musa, al-Farsiyah, Halul, Sirri.
Attacks on tankers, shipping, offshore facilities by naval guards.
Iranian navy and air force also have key assets:
Large-scale mine warfare capability using small craft and commercial boats
Free-floating mines, smart and dumb mines, oil spills
3 Kilo (Type 877) and unknown number of midget (Qadr-SS-3) submarines; smart torpedoes, (anti-ship missiles) and smart mine capability.
Use of five minelayers, amphibious ships, small craft, commercial boats.
Raids with eight P-3MP/P-3F Orion MPA and combat aircraft with anti-ship missiles (C-801K (8-42 km), CSS-N-4, and others).

But according to the CSBA report, US forces are still operating in large part in accordance with the strategy developed back in the Jimmy Carter administration (1977-1981) , when the paramount concern was the threat of a Soviet invasion.

Subsequently, US policymakers were concerned with the fall of the Shah of Iran and the rise of Khomeinism; and concern over Iraq's hegemonic ambitions during the Saddam Hussein era, but preparing to do battle with Iran over access to the Gulf itself is a relatively recent concern for which US forces have not sufficiently prepared.

And given how heavily the US depends on various bases and facilities in nationals like Bahrain, Qatar and the United Arab Emirates (UAE) , the US military should diversify and harden its Persian Gulf bases to complicate Iran's ballistic missile targeting, while creating an expanded network of distant shared access locations to support initial US power-projection operations from beyond the reach of Iran's anti-access threats.

Many US forces in the region are supported by bases that are in close proximity to Iran. In addition to the port facilities in Manama, US Navy ships frequent ports at Jebel Ali near Dubai in the UAE.

Central Command air forces operate from a number of locations in the region, including al Udeid Air Base, Qatar, and al-Dhafra Air Base in the UAE. Al Udeid hosts the USCENTAF (US Air Forces Central Command) CAOC (Combined Air Operations Center), a critical command and control node for US air and space operations throughout Central Command. These and other US forward operating locations are well within the reach of numerous strike systems, including short- and medium-range ballistic missiles, that could be launched from Iran's coastal areas.

Proxy groups also could have a major impact on US forces and forward operating locations. Using commercially obtained overhead imagery, unconventional forces could fix the coordinates of Persian Gulf port facilities, airfields and fuel depots for guided mortar and rocket attacks.

Unconventional forces could also use advanced man-portable air defense systems (MANPADS), such as the Russian-made SA-24 to attack US aircraft transiting supposedly "friendly" airspace, and use ASCMs, antiship mines, or maritime improvised explosive devices against ships in the Suez Canal, Strait of Hormuz and Persian Gulf sea ports of debarkation (SPODs).

Iran would also have benefit from being able to exploit its interior lines of operation to deploy and frequently move its mobile ballistic missiles batteries to complicate US counter-strikes, as well as create a distributed resupply network that would be resistant to attack.

While Iran's ballistic missiles are not without limitations, such as limited accuracy for some of them and lack of launchers, the report finds that they give it a strike capability that would be difficult and expensive for US forces to counter. Over the course of the next 20 years, it is possible that Iran will make progress toward addressing these shortfalls.

According to Cronin, "Iran has levers here and their anti-access and area denial capabilities are proven. We would have a difficult time."

The report notes that more than 70% of the US Air Force's budget for new aircraft over the next decade — including a new bomber — will go toward just two programs, the F-35A and a replacement aerial refueling tanker. Such systems will lead to a fighter force that, when airborne, is more survivable in non-permissive areas. But this force will still be highly dependent on close-in bases or aircraft carriers, as well as aerial refueling.

The problem for US forces is that any conflict in the Gulf is going to be extremely non-permissive. The environment will be filled with guided ballistic and cruise missiles, maritime swarming tactics, proxy forces equipped with G-RAMM, and the threat of chemical, biological, radiological or nuclear (CBRN) attacks.

The fact that other countries are deploying anti-access capabilities is not news to the Pentagon. This month, it released a Joint Operational Access Concept report and noted many of the same anti-access/area-denial capabilities mentioned in the CSBA report.

According to the CSBA report, if the US military is to successfully sustain access to the Persian Gulf against a determined effort by Iran to shut if off, it would need more than weapons. It would also need a new operational concept "that reduces its emphasis on capabilities that are over-optimized for permissive threat environments in order to prioritize capabilities needed for a range of operations in environments that will be increasingly non-permissive in nature" that it currently does not have.

Achieving this within an increasingly constrained budget would require defense planners to make difficult decisions; "the United States cannot meet the challenges that Iran could pose to its vital interests in the Gulf by simply spending more and adding new capabilities and capacity," according to the report.

Interestingly, in light of the latest US national security strategy report that emphasizes Asia as the strategic theater of concern, the report found that the capabilities needed to support such a concept for the Western Pacific and an outside-in enabling concept for the Persian Gulf have a "remarkable amount of overlap".

Both emphasize the need to develop new long-range systems such as penetrating bombers and carrier-based unmanned aircraft; increase the US Navy's undersea magazine of standoff munitions; improve air and missile defenses; and pursue forward posture initiatives that will complicate the operational planning of an enemy force.

Among the report's recommendations:

An Unmanned Carrier-Launched Airborne Surveillance and Strike (UCLASS) aircraft that will extend the reach and persistence of the US Navy's carrier air wings. The US Navy should also integrate payload modules into future Virginia-class attack submarines to partially reverse planned reductions in its capacity to conduct standoff cruise missile attacks, and develop a Large Displacement Unmanned Undersea Vehicle that could extend its undersea surveillance network.
A ship-based, solid-state laser for defending against swarming boats and salvos of anti-ship cruise missiles, and equip a new Long-Range Strike Bomber to carry anti-ship missiles and mines.
To help fulfill future expeditionary requirements, the navy should field a new Amphibious Combat Vehicle that is optimized for ground combat missions, and sustain sufficient amphibious lift capacity to support a joint theater-entry operation.
Development of air-launched missiles that can intercept ballistic missiles in their boost phase, as well as invest in promising directed energy technologies that could improve terminal defenses against cruise and ballistic missiles at a negligible cost-per shot compared to current kinetic interceptors.
The Department of Defense should also pursue advanced mines and non-lethal capabilities that could create physical barriers to terrorist G-RAMM attacks against US forces and forward operating locations.

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.

Hassling the Innocent Is TSA's Specialty by Gene Healy

Sun, 29 Jan 2012 00:00:00 -0500

"Rand Paul has got to be on the 'Top 10 People TSA Would Be Smart to Leave Alone' list," National Review's Jonah Goldberg tweeted when news broke of the senator's run-in with the Transportation Security Administration at Nashville International Airport last week.

Kentucky's junior senator missed his flight when he refused a pat-down after a body scanner showed an "anomaly" on his knee.

Someone with a conspiratorial mind-set might suspect a little payback for the grilling Paul gave TSA Administrator John Pistole last summer over the agency's policy of giving the "freedom fondle" to innocent 6-year-old girls. But that assumes the TSA has enough on the ball to carry out even a minor conspiracy.

What Paul experienced was just the routine, pointless indignity that is the agency's stock in trade. While the terrorist threat has diminished radically, the Obama administration is busy expanding the agency's reach onto highways, sporting events and train stations.

Much has been made of the bizarre martial metaphors President Obama employed in his State of the Union last week, where he urged Americans to adopt the spirit of "unit cohesion" animating SEAL Team 6: "All that mattered that day was the mission. No one thought about politics. No one thought about themselves."

Yes, why can't America function as a highly trained military unit that obeys Obama's every command without questioning it?

What made the martial rhetoric even odder was that Obama's speech began with an admission that the country is, in fact, quite safe: "For the first time in two decades, Osama bin Laden is not a threat to this country. Most of al Qaeda's top lieutenants have been defeated."

The safety we enjoy owes very little to TSA's competence and a great deal to our adversary's incompetence. Terrorism expert and Cato Institute senior fellow John Mueller notes "the rather impressive inability of the terrorists [in post-9/11 cases] to create and set off a bomb."

Indeed, "the only method by which Islamic terrorists have managed to kill anyone at all in the United States since 9/11 has been through the firing of guns — in the Little Rock and Fort Hood cases."

Even as the threat recedes, Obama's Department of Homeland Security — of which TSA is a part — is expanding the use of paramilitary checkpoints at home. In Leesburg, Fla., earlier this month, federal agents armed with semiautomatic weapons checked IDs in a training exercise at a local Social Security Administration office.

TSA VIPR teams — for Visible Intermodal Prevention and Response — conducted over 9,300 random searches in 2011, on cruise ships, at NASCAR races, on buses, and at train stations.

The Los Angeles Times described one such search at the Charlotte, N.C, Amtrak station in January, in which "three federal air marshals in bulletproof vests and two officers trained to spot suspicious behavior watched closely as Seiko, a German shepherd, nosed [a fiftysomething lawyer's] trousers for chemical traces of a bomb."

"TSA officials say they have no proof that the roving [VIPR] teams have foiled any terrorist plots or thwarted any major threat to public safety," the L.A. Times noted. Still, TSA wants funding for a dozen more VIPR teams.

Contemplating "mission creep" in Obama's TSA suggests a different martial metaphor than those employed by our newly militaristic president last Tuesday. In his book "Wartime," Paul Fussell, a veteran of the Pacific theater in World War II, devotes a whole chapter to "petty harassment" by those in power — which soldiers summed up with a salty term: "chickens—t."

"Frequent, unnecessary inspections," "insistence on the letter rather than the spirit of ordinances" — it "can be recognized instantly," Fussell writes, because it never has anything to do with winning the war."

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.

$189,000 by Michael D. Tanner

Sat, 28 Jan 2012 00:00:00 -0500

The president devoted just 189 words to the deficit and our growing national debt, but the fact is that once again this year we will borrow 32 cents out of every dollar we spend. Overall, our national debt now tops $15.2 trillion (with Congress raising the debt ceiling to $16.4 trillion last week). And that doesn’t count the unfunded liabilities of Social Security and Medicare. Throw those in, and our total indebtedness exceeds $120 trillion.

That means that if one counts only the official national debt, every man, woman and child in America owes $48,700. Include the unfunded liabilities of Social Security and Medicare, and every one of us is in debt to the tune of $189,000.

Or look at it another way. One can’t pick up a newspaper these days without reading a story about the debt crisis in Europe. France, for example, just had its credit rating downgraded. Yet, measured as a percentage of GDP (the value of all goods and services produced in a country over a year), our budget deficit is roughly a quarter larger than France’s. In fact, among European countries, only Greece and Ireland have larger deficits this year than we do.

The debt figures paint an even grimmer picture. If one includes all the unfunded liabilities of pension and health-care systems, Greece’s total debt equals 875% of its GDP. France, the next-most insolvent country in Europe, owes 570% of GDP. The United States, however, now owes 885% of GDP, more than any other industrialized country.

We have been able to avoid disaster so far only because, as the world’s preferential currency, other countries have been willing to lend us money cheaply. But that is not going to continue forever. And if our creditors begin to hike interest rates, we will be facing the same economic consequences facing so much of Europe today.

The president, when he deigns to mention the issue at all, suggests that this problem could be solved if only the rich pay their “fair share.” Of course some might suggest that the rich already pay their fair share, since the much-reviled 1% earn 16% of all income in this country, but pay 36.7% of all federal income taxes. More important, however, in this context, you simply cannot tax the rich enough to solve our debt crisis.

Take the much-discussed Buffett Rule that the president focused so much attention on during the State of the Union address. Whatever one thinks of how investment income should be taxed compared to wage income, the president’s proposal would raise less than $37 billion per year. That amounts to less than 3% of this year’s deficit. In fact, if we were to confiscate — not just tax, but confiscate — every penny owned by every millionaire and billionaire in America, it would pay barely one-tenth of our government’s total indebtedness.

That is because the debt is only a symptom of the underlying disease — a government that is growing ever larger, more intrusive and more costly. We tend to think of Europe as the home of big government. Indeed, on average, European governments consume roughly 49% of their country’s GDP. That means that roughly half of everything produced in that country is consumed by government.

However, we are not that far behind. Today, our federal government alone consumes roughly 25% of GDP. State and local governments take another 10% to 15% of GDP. And, the Congressional Budget Office projects that the federal government is currently on course to grow to 43% of GDP by mid-century. Add in state and local spending, and we will have a bigger government then than any European country except Ireland has today. One only has to look to the chronically high unemployment rates and slow economic growth in most of Europe to see what a government that size would mean for us.

Yet, as we hurtle towards a Greek-style calamity, the president offered us a laundry list of new government spending — for health care, student loans, green energy, job training, hiring veterans, more teachers and so forth. That may have made for a good campaign tactic, but it bears little resemblance to economic reality.

That reality is very simple. We’re broke. Mr. President, are you paying attention?

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.

Copyright Case May Have Profound Effect on Treaty Power by Ilya Shapiro

Fri, 27 Jan 2012 00:00:00 -0500

While legal experts continue debating the intellectual property ramifications of the Supreme Court's decision in Golan v. Holder, I want to focus on the dog that did not bark: the treaty power argument that the government abandoned and the Court ultimately ignored.

Although the government succeeded in persuading a majority of the Court that it has the power to withdraw certain works from the public domain, it relied solely on the Constitution's Copyright Clause to do so — even though the impetus for the legislation was a trade agreement that amended the Berne Convention for the Protection of Literary and Artistic Works. This development is significant because the government had been implying — and its amici stating explicitly — an alternative ground for Congress's authority to do what it did: that the "re-copyrighting" law was a necessary and proper means of accomplishing the executive power to make treaties.

That treaty power argument was not completely out of left field, because the ruling in Missouri v. Holland, an obscure 1920 case concerning the Migratory Bird Treaty Act between the US and Canada, has long been interpreted to suggest that Congress's powers can indeed grow when necessary to implement a duly ratified treaty. According to the conventional gloss on Justice Oliver Wendell Holmes's five-page opinion in Holland, even if Congress has no enumerated power to pass, say, general criminal laws, Congress's power expands to allow such legislation if, say, a treaty with France demands that we pass it. Thus, foreign nations and the executive branch are given the power to change one of the most hotly debated and carefully crafted sections of the Constitution, the scope of Article I congressional power.

This bizarre situation led me to join Georgetown law professor Nicholas Quinn Rosenkranz in filing an amicus brief [PDF] in Golan on behalf of the Cato Institute, highlighting the problems with an expansive interpretation of the treaty power (an idea that Professor Rosenkranz had illustrated in a previous article).

We argued that, as a matter of constitutional structure, history and logic, a treaty cannot increase Congress's legislative powers. Not only is the power to "make treaties" distinct from the power to execute treaties already made, but such an expansive interpretation of the treaty power would allow Congress and the executive to circumvent the Article V amendment process. In short, Holland is a structural and doctrinal anomaly in tension with other precedent and based on a misreading of constitutional history. It should be overruled or at least reinterpreted.

In any event, whether in response to our brief or under the shear force of Justice Scalia's questioning, the government gave up on the treaty power track in one fell swoop during the Golan oral argument [PDF]:

JUSTICE SCALIA: It seems to me Congress either had the power to do this under the Copyright Clause or it didn't. I don't think that powers that Congress does not have under the Constitution can be acquired by simply obtaining the agreement of the Senate, the President and Zimbabwe. I do not think a treaty can expand the powers of the Federal government. I mean, this is either okay under the copyright clause or it is not.
SOLICITOR GENERAL VERRILLI: We completely —

JUSTICE SCALIA: It would be nice to know the reason for it, but you would still have to establish that it's within the power of the Federal government —

SOLICITOR GENERAL VERRILLI: We completely agreement with that, Justice Scalia.

That is a positive development, but it is even more remarkable that the Golan dissent likewise failed to reach the Holland issue, even though it logically should have. Since Justice Breyer, joined by Justice Alito, thought that the Copyright Clause did not give Congress the power to pass the relevant statute, he had to see whether there was other authority for it — namely, the treaty power. However, there is no discussion of this issue, or even a citation to Holland. Instead, Justice Breyer simply concluded that "the [Berne] Convention cannot provide the statute with a constitutionally sufficient justification that is otherwise lacking."

So where does that leave us? For one thing, the continuing expansive interpretation of Holland is surely in doubt. We need look no further than the the above exchange between Justice Scalia and Solicitor General Verrilli to exhibit such skepticism. Also, former solicitor general Paul Clement argued against the treaty power in the remanded case of Bond v. US — a bizarre case involving a chemical weapons treaty that the Supreme Court unanimously sent back to the US Court of Appeals for the Third Circuit last year. At oral argument, the Court seemed intrigued by, and even sympathetic to, Clement's position that the government lacked the power to use the implementation of an international treaty to prosecute the defendant for what was effectively assault.

Just as Bond may make a return visit to the Supreme Court, the Court's ruling in Golan may have provided a glimpse of where the Court will go with the treaty power when it — or some other appropriate case — gets there.

Ilya Shapiro is a senior fellow in constitutional studies at the Cato Institute and editor-in-chief of the Cato Supreme Court Review.

Watts Up? Who Killed Climate Change? by Patrick J. Michaels

Fri, 27 Jan 2012 00:00:00 -0500

Fast backward to February 24, 2009, the date President of Obama’s first State of the Union Speech. The order of battle was “energy, health care, and education”.

That’s right, climate change came before health care. Specifically, he said we should “... invest in the three areas that are absolutely critical to our economic future: energy, health care, and education. It begins with energy... to truly transform our economy, protect our security, and save our planet from the ravages of climate change... I ask this Congress to send me legislation that places a market-based cap on carbon pollution.”

Seems easy. He won by a landslide, grabbed a big majority in the House, and with the expected help of some Northeast republicans in the Senate, passage looked like a sure thing. Further, reducing carbon dioxide emissions was bipartisan. Only six months before Obama’s election, Newt Gingrich and Nancy Pelosi recorded a commercial agreeing on the need to stop global warming. Now.

Fast forward to January 24, 2012. Education comes before energy. Instead of limiting emissions, he leads off with a call for increased offshore drilling and gas drilling around the country, and finishes by saying “The differences in this chamber may be too deep right now to pass a comprehensive plan to fight climate change.”

What killed global warming as the President’s number one priority? I suspect it was a combination of responsive politics and a blogger by the name of Anthony Watts.

The great crack-up started a mere 123 days after Obama’s first SOTU speech, at 7pm on Friday, June 26, 2009, when the House of Representatives gave the President what he wished for: passage of a cap-and-trade bill cutting U.S. emissions of carbon dioxide 83% in 41 years. By 2050, the average American would be allowed the same emissions produced by a citizen in 1867.

Enviro groups jubilated. Natural Resources Defense Council doubled down, pressing the Senate for even more. The great Green Age had finally arrived!

Three days later, reality hit. On June 29, Scott Rasmussen’s presidential approval index, which is a three day average, went negative, meaning more people he polled “strongly disapproved” of the President than “strongly approved”. Obama’s index has not been positive for one day since.

Rasmussen also runs a weekly “generic congressional ballot”, in which pollsters ask what party you would vote if the congressional election were held tomorrow. The same week, it switched from generic Democratic to generic Republican, and it hasn’t been positive democratic for one week since.

Senate staffers check the daily tracking index before they go to the bathroom in the morning, so it is not surprising that there was very much hot air and very little substantive movement to pass cap and trade in the upper chamber.

The political price of cap-and-trade was paid on election day, 2010. Almost every close House race went Republican, if an incumbent Democrat had voted for it. In the Senate, which never considered it, every close race went to the Democrats.

Meanwhile, the public, which never was all that big on it, grew increasingly disenchanted with global warming. When first polled by the Pew Organization in January, 2007, 38% of respondents rated it as a “top priority” for congressional action. This month that figure is 25%, dead last among the twenty possible issues presented by Pew.

The political price was paid, and the public simply tired of the incessant gloom and doom campaign by government scientists, environmental organizations, Al Gore, the Weather Channel, Center for American Progress, every Environmental Science Department in higher education, the public schools, private schools, and Hollywood science experts (of which there are plenty—just ask!).

Standing in the way of this gargantuan effort was a weather nerd in Chico, California, by the name of Anthony Watts, the proprietor of www.wattsupwiththat.com. “WUWT” is by far the most popular climate science site in the world, sporting over 100 million hits to date. Watts tirelessly documented seemingly arcane climate science findings, the climategate emails, and promoted the healthiest debate in the world on the interaction of science and politics.

Not everything on WUWT is right, that’s for sure. But the sense of free inquiry and thought Watts has fostered on his site has shamed the climate apocalypse machine into inconsequence. David whupped Goliath, one of the most amazing achievements in the history of science communication.

WUWT publicized the two batches of “Climategate” emails detailing some pretty awful behavior by people who are not my friends. WUWT covered the disastrous UN global warming confab in Copenhagen in December, 2009 (where President Obama learned America’s place in the climate policy world was a spot called nowhere), and Watts publicized the revelation of glaring science mistakes by the UN, as well as the raging debate on why surface temperatures haven’t warmed for fourteen years.

It’s probable that the reaction to a politically unwise cap and trade bill, and tireless work of an obscure weather forecaster from the northeast corner of the Sacramento Valley killed climate change.

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

Obama's Unwelcome Mat by Mark A. Calabria

Thu, 26 Jan 2012 00:00:00 -0500

In his State of the Union address, President Obama let us know that he will be "sending this Congress a plan that gives every responsible homeowner the chance to save about $3,000 a year on their mortgage, by refinancing at historically low interest rates."

What he failed to tell us is that such a push would do nothing to turn around either the housing market or the broader economy. In fact, by continuing his trend of confusing redistribution of wealth with its creation, the effort will likely hurt both the economy and the housing market.

Let's start with the impact on the economy at large. The logic is that when you lower mortgage rates for thousands of families, reducing their monthly payments, you thereby increase disposable income and spending. That spending then increases demand and helps turn around the economy.

In other words, it's a no-cost stimulus.

The error in this logic is that it looks only at one side of the balance sheet. A mortgage is one person's liability, but it is also another's asset. Lowering rates may cut monthly payments, but it also drives down payments on mortgages and mortgage-backed securities. Since you will have made mortgage investors poorer, they will, by the same logic, reduce their spending, lowering demand.

At best, the impact on spending will be zero. But then, that's what you get when you redistribute income.

The President wants you to believe that even if he is taking from citizen A and giving to citizen B, the latter is more deserving. But for government-owned or guaranteed mortgages, about half of those outstanding, the taxpayer is the one taking the hit. Because homeowners are wealthier than taxpayers in general, the President's proposed redistribution is regressive.

For the remainder, the investor is often a pension or mutual fund. Why retirees should pay to benefit younger homeowners is far from clear.

The President implies his plan is free because it will be paid for by a tax on the largest banks. But again, nothing is free; for every economic action, there's an equal and opposite reaction. The tax would reduce bank equity, thereby reducing new lending. In effect, it would punish potential borrowers by reducing the availability of credit while also increasing its costs, simply to benefit existing borrowers.

Not to mention: The rewriting of existing contracts will reduce the willingness of lenders to provide new mortgages, exactly at a time when we desperately need private capital flowing into the mortgage market.

A mass refinancing is also sold as a cure for the weak housing market. Those looking to refinance, however, are not in the market to either buy or sell a home. In fact, by lowering their mortgage rates, you will reduce their offering price next time they look to trade up, because if the buyer faces higher rates in the future, prices will be depressed to compensate for giving up their current low-rate mortgage.

In other words, this could reduce future home prices.

The fundamental problem facing our housing market is a glut of homes, coupled with weak demand. The President's plan does not change these facts. In fact, by reducing the supply of new capital for mortgages, we run the risk of reducing the demand for housing, leading to further price declines.

It is time for Washington to understand: Underwater borrowers are not victims. They borrowed money at a particular rate and are paying back at that rate. They knew going in that to refinance, they'd need equity. If said borrowers wanted to take advantage of interest rate declines, they could have gotten an adjustable-rate mortgage. Instead, those borrowers chose the certainty of a fixed rate.

They have what they selected. That's something that cannot be said for the taxpayers who continue to pay for Washington's meddling in the mortgage market.

Finally, the President also promises a new financial fraud unit to investigate lenders. Appointing New York State Attorney General Eric Schneiderman to head it may be enough to earn his support for a settlement with the banks, but it will do little to help the housing market. In fact, by increasing litigation risk for lenders, the move is likely to further reduce the supply of mortgage credit.

Continued efforts to delay foreclosures only prolong the inevitable adjustment of the housing market. If lenders have committed crimes, then they should be prosecuted in open court, not subject to back-room shakedowns.

If we wish to turn around our housing market and broader economy, we must stop taking from Peter to pay Paul and disguising it as public policy.

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

Ma Ying-jeou's Victory Provides Respite — Not Resolution in Cross-Strait Tensions by Ted Galen Carpenter

Wed, 25 Jan 2012 00:00:00 -0500

U.S. officials and much of the East Asian business and political communities breathed a sigh of relief on January 14 when Ma Ying-jeou won re-election as Taiwan's president. Even a few months ago, that outcome seemed uncertain. A disgruntled public still blamed Ma for the country's economic recession (although a fairly robust recovery was under way), and his administration was excoriated for its bungled relief effort in the wake of Typhoon Morakot.

His strategy of trying to deepen economic and political ties with mainland China also remained controversial. True, a majority of Taiwanese had rejected the confrontational policies of Ma's predecessor, Chen Shui-bian, who pushed a vigorous pro-independence agenda that led to repeated cross-strait tensions, but a substantial portion of the public fretted that Ma was being too accommodating to Beijing. Consequently, his victory with more than 51 percent of the vote reassured those people in East Asia and the United States who worried that the election might produce a new Democratic Progressive Party (DPP) president and a return to the tensions that marked Chen's administration.

Ma's re-election does promise a continuation of stable, relatively cordial relations between Taipei and Beijing over the next four years. And Ma made it clear in his victory speech that he intended to deepen the economic links between Taiwan and the mainland. Nevertheless, it is important not to overstate the significance of the election outcome — especially over the long term.

Although Ma's victory margin was comfortable, it was hardly a landslide that would allow him to claim a strong popular mandate for closer ties to Beijing. Indeed, the DPP candidate, Tsai Ing-wen, ran a strong race, winning 46 percent of the vote. That was a dramatic improvement over the DPP's miserable performance in the last presidential election. Taiwan's persistent political divisions — especially regarding policy toward the mainland — were even more evident in the outcome of the voting for the national legislature. Ma's Kuomintang Party (KMT) won a solid majority of the seats, but that majority shrank dramatically from the last round four years ago when the DPP was virtually obliterated as a legislative force. The new legislature, while it will be generally supportive of Ma's initiatives, is not likely to be a rubber stamp.

It is not entirely clear how strong pro-independence sentiments remain in Taiwan. Tsai's candidacy may actually have blurred that issue. She was a member of the pragmatic "pale green" faction of the DPP, in marked contrast to Chen, who had been a champion of the staunchly pro-independence "deep green" faction. Whether sentiment for Taiwan's explicit, formal independence surges again will be determined in future elections and will depend heavily on whether Ma's conciliatory policies toward the mainland succeed in his second term. The impending leadership succession in Beijing later this year may also play a decisive role. A key issue is whether the new administration eases the PRC's menacing military posture and rewards Ma's approach with significant political and diplomatic concessions, or whether Beijing's policies toward the island harden. If the latter occurs, it will produce a backlash on Taiwan.

The most sobering realization is that Taiwan's election results and the prospect of continued quiescence in cross-strait relations over the next four years create little change in the long-term dynamics. Those dynamics remain worrisome. True, Beijing has responded to Ma's initiatives by easing its campaign to strangle Taiwan diplomatically. There have been fewer attempts to pressure or bribe the some two dozen governments that still recognize Taipei to switch their diplomatic relations to the PRC. But that is one of the few substantive concessions the Chinese government has made. It still tends to resist Taipei's efforts to gain membership in international organizations. And most important, China has not withdrawn the more than 1,300 missiles arrayed across the strait from Taiwan, nor has Beijing renounced the use of force to achieve Taiwan's reunification with the mainland. Indeed, eventual reunification remains Beijing's explicit goal.

But that goal is anathema to most Taiwanese. That's especially true as long as the mainland has an authoritarian, one-party political system. Public opinion polls show support for re-unification--absent China's full democratization — in the high single digits or very low double digits. Although a majority of Taiwanese did not support the previous DPP administration's provocative policies toward Beijing, it is equally apparent that there is little current sentiment for reunification with the mainland.

Attitudes regarding re-unification with a transformed, democratic China are more favorable, but still ambiguous. The KMT's rationale is that Taiwan can serve as a democratic model for the mainland, and that Ma's cautious, conciliatory approach to cross-straits relations advances that objective. But there are few signs that the mainland will become democratic in the foreseeable future, and a substantial portion of Taiwan's population opposes re-unification even with a democratic China.

The 2012 election results do little to alter those factors. That continued resistance to reunification combined with China's continued determination to achieve that goal produces a prolonged, perhaps unsolvable, stalemate. It also creates the prospect of a nasty collision in the future. Beijing is unlikely to tolerate indefinitely an upstart, de facto-independent island 100 miles off its own shores, especially as China's economic and military power continues to grow.

Ma Ying-jeou's re-election has prolonged the respite in tensions between Taiwan and the mainland. That development is welcomed in capitals throughout East Asia as well as in Washington. But the day of reckoning regarding the Taiwan's status has merely been postponed, it has not been eliminated.

That leaves the United States in a delicate and potentially dangerous position. Washington has strong economic and diplomatic incentives to maintain good relations with an emerging great power — especially one that funds so much U.S. Treasury debt. At the same time, the United States has a commitment under the Taiwan Relations Act of 1979 to assist Taiwan's defense and to regard any coercive moves by Beijing regarding the island as a grave breach of the peace in East Asia.

The good news is that, thanks to Ma's re-election, Washington probably will not have to confront that dilemma in the next four years. The bad news is that, despite the election result, a future U.S. administration will very likely have to do so. A wise approach would be to use this fortunate respite to re-assess U.S. policy on the Taiwan issue and reduce America's risk exposure before a new crisis erupts.

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.

Romney's Tax Return: Really Nothing Unusual There by Alan Reynolds

Wed, 25 Jan 2012 00:00:00 -0500

After the fuss that Republican presidential candidate Newt Gingrich made over his rival's 2010 taxes, it turns out there was nothing in Mitt Romney's return that should have caught anyone by surprise. Not that any facts could possibly discourage political interests from fishing for shadowy insinuations.

Looking around for an objective tax analyst, the New York Times settled for Bill Burton, who happens to run an Obama Super PAC.

Mr. Burton claims Romney "has access to complicated legal maneuvers involving offshore accounts and retirement savings that simply are not available to everyday Americans." That is not so.

The assets of Mitt and Ann Romney have been held in blind trusts since 1993, leaving them with no choice about how or where the money is invested. Accounts in Bermuda or the Caymans would be suspicious only if the resulting interest income was not reported on the tax return — as it obviously was.

As for retirement saving, many taxpayers roll over their company pensions into a tax-deferred IRA just as Romney did. More than 70% of my family's wealth, for example, is in two IRAs and two 401(k) plans. After turning 70 1/2, however, seniors must withdraw sizable amounts each year which are taxed at regular income-tax rates, rather than at the lower rates for capital gains and dividends.

In this respect, Romney's seemingly low tax rate is partly illusory — a temporary reprieve rather than long-term tax savings.

The other main reasons the Romney family appeared to pay a low rate are that (1) they donate $3 million to $4 million a year to charities, and (2) most of their remaining income was taxed at the 15% rate on capital gains and dividends that ends this year.

When Berkshire Hathaway chairman Warren Buffett complained that his 2010 taxes were too low, nobody accused him of taking special advantage of complicated loopholes that are not available to other taxpayers. In fact, Buffett's federal tax rate was significantly lower than Romney's and for essentially the same reasons — charitable contributions and capital gains.

In a New York Times Op-Ed last August, Mr. Buffett revealed that his federal income taxes for 2010 were only 17.4% of his taxable income, before taking account of deductions. Although the media did not report Gov. Romney's federal taxes in the same way they reported Mr. Buffett's, the Romney family also paid 17.6% of taxable income.

Both Buffett and Romney are famously frugal and generous, however, so both had extraordinarily large charitable deductions. After taking account of such deductions, Buffett paid only 11% of his gross income, while Romney paid 13.9%.

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

Reshaping Social Security and Our Society by William G. Shipman

Wed, 25 Jan 2012 00:00:00 -0500

Social Security has fundamentally changed. This is because the historical, almost sacrosanct, linkage between Social Security taxes and benefits has been severed. President Obama was able to achieve this feat with only marginal objection from supporters of the traditional system or from those who have advocated reforming Social Security to a saving-and-investment structure. This is a rather remarkable political coup in that these two factions have fought each other every step of the way on almost any suggested change to the system. But not this time, for the president framed the change mainly as a jobs program. Where this delinking ultimately leads is unknown. But there is no question that Social Security is headed in a very different direction.

It all started March 18, 2010, with the enactment of the Hiring Incentives to Restore Employment (HIRE) Act. Under this law, employers who hired new workers from Feb. 4 to Dec. 31, 2010, qualified for up to a 6.2 percent payroll-tax deduction for each new worker, essentially exempting the employer from the Social Security tax. The tax deduction had no effect on the new employee’s Social Security retirement benefits, effectively delinking the two. According to Douglas H. Shulman, the Internal Revenue Service commissioner at the time of the bill’s enactment, “These tax breaks offer a much-needed boost to employers willing to expand their payrolls, and businesses and nonprofits should keep these benefits in mind as they plan for the year ahead.” A reduction in the payroll tax was packaged as a jobs program.

The delinking morphed into a bigger role in 2011 when Congress legislated a temporary tax holiday, allowing all workers to pay just 4.2 percent instead of the previous 6.2 percent employee tax for the full year. The holiday was promoted as a way of putting more money in the hands of workers to increase aggregate demand and as another jobs program. As Sen. Kent Conrad, North Dakota Democrat, put it, “I strongly support a payroll tax holiday because [the] Congressional Budget Office has told us it is the second-most-powerful thing we can do after extending unemployment insurance to help with job creation.” As with HIRE, Social Security benefits were not reduced — a further delinking.

Toward the end of last year, both Republicans and Democrats wanted to expand the holiday, but for different reasons. The Democrats thought it unfair for the average wage earner to be hit with a $1,000 tax increase if the holiday ended, while the Republicans went along because raising taxes is anathema to their economic philosophy.

The tax cut lasts only through February but likely will be extended for the full year as both parties want. Mr. Obama summed up this bipartisan prospect quite well. “How can we not get that done? Has this place become so dysfunctional that even when people agree to things, we can’t do it? It doesn’t make any sense.”

But there never was a tax cut under HIRE in 2011 or 2012. The Republicans were duped. Although part of the payroll tax was cut, Social Security benefits were not. Therefore, other taxes go up by the amount that payroll taxes go down. This is so even though initially, Treasury issued bonds to the Social Security trust funds in lieu of the lower payroll-tax collections. Without a like reduction in spending, the bonds will have to be redeemed through higher taxes. There was no net tax cut, just a change from the regressive payroll tax to more likely the progressive income tax, thus shifting the burden to higher-income workers, an often-stated Obama objective. Think “millionaires and billionaires.”

It may be difficult to stop this train because both parties, for different reasons, want it to keep chugging along. This may embolden them to extend or lower the payroll tax further, exacerbating the delinking. If this happens, the government could then argue that workers are only entitled to lower Social Security benefits because they’re provided by the now lower payroll tax. Another outcome may be means-testing benefits, thus morphing Social Security into a welfare program. A third may be to finance Social Security benefits largely or entirely through the income tax, resulting in a significant redistribution of wealth.

It is way too early to tell the ultimate endgame. But President Franklin D. Roosevelt’s comment in 1941 was prescient. “We put those payroll contributions there so as to give the contributors a legal, moral and political right to collect their pensions and their unemployment benefits. With those taxes in there, no damn politician can ever scrap my Social Security program.” Without them, maybe they can.

Bill Shipman is chairman of CarriageOaks Partners, LLC and co-chairman of the Cato Institute Project on Social Security Choice.

Obama's State of the Union: Too Little Foreign Policy by Ted Galen Carpenter

Wed, 25 Jan 2012 00:00:00 -0500

President Obama’s treatment of international issues in his State of the Union was profoundly unsatisfying. Under the US Constitution, the president’s principal responsibility is to direct the foreign policy of the United States and to protect the country from external enemies. A State of the Union address ought to reflect that priority, but this one fell far short.

Obama did open his speech with a brief discussion of foreign affairs. There was the expected self-congratulatory passage regarding the on-schedule withdrawal of US troops from Iraq at the end of 2011. Likewise, there was the predictable praise of American military personnel for taking out Osama bin Laden and other high-level leaders of al Qaeda. Yet the overall treatment of international policy ultimately made up barely ten minutes of a sixty-five minute speech.

The emphasis on domestic issues highlights a problem in the US political system. American voters tend to elect chief executives based far more on their domestic agendas than on any expertise candidates might have in the arena of foreign policy. Incumbent presidents understand that their re-election prospects, barring a major international crisis, depend primarily on their performance regarding domestic — especially domestic economic — issues. President Obama’s State of the Union address clearly reflected that understanding.

The portion of his address that was devoted to international issues emphasized two themes: thinly-veiled economic nationalism and a sometimes strident insistence on undiminished US global leadership. The first theme ought to trouble other nations, especially China. Although the president gave perfunctory endorsement to free trade agreements, even that segment had more than a tinge of the “fair trade” caveat — with China cited specifically for allegedly unfair practices. Indeed, with one exception (Obama’s declaration that he was unwilling to cede leadership in clean energy to either Germany or China) Beijing was the only offender mentioned by name.

Moreover, a major theme in the speech — arguably the most prominent single theme — was the need to restore American manufacturing and overall economic competitiveness, thereby keeping jobs in the United States or returning jobs to America’s shores. From trade policy to tax policy, and to rebuilding America’s infrastructure, the goal of economic nationalism was paramount. For countries, especially those with export-led economies that are dependent on the US market, there is reason to be nervous about the president’s emphatic endorsement of that orientation.

The second theme — the insistence that US global leadership is undiminished and will remain so — also ought to make Americans uneasy. Obama’s stress on that point seemed to border on shrill. On one occasion, he thundered that analysts who contend that America is in decline, or even that US power has waned, “don’t know what they’re talking about.”

Such an attitude is a classic case of denial. The reality is that the United States faces chronic federal budget deficits of approximately $1.5 trillion per year, with much of the growing debt held by China, an emerging strategic competitor. Washington has proven spectacularly unable to achieve an array of major, high-profile foreign policy goals. Those include making Iraq a model of stability and democracy for the Arab world, winning the war in Afghanistan, and getting either North Korea or Iran (much less both countries) to relinquish nuclear ambitions. The notion that the United States exercises the same degree of global dominance that it did in the immediate post-Cold War decade is delusional. It is more than a little disturbing that the president seemed unwilling to acknowledge an obvious change in fortunes.

Once President Obama returned to a discussion of international affairs in the State of the Union address — following a nearly fifty minute focus on largely domestic matters — his treatment consisted of little more than generalities and sound bites. America, he proclaimed, is the “one indispensible nation” in world affairs — echoing a slogan of national narcissism once voiced by Bill Clinton’s secretary of state, Madeleine Albright.

On those policy issues that did receive some attention in his address, the president’s assessment reflected a persistent, and often vapid, bipartisan consensus. That was clearly true regarding Israel, for example. The president reaffirmed an “ironclad commitment” to Israel, just as US chief executives have done for decades.

The bipartisan consensus about Iran was also in evidence. There was no indication of flexibility regarding that country’s nuclear program. The endorsement of ever-tightening economic sanctions against Tehran, accompanied by dark hints that all options remained on the table if sanctions fail, was as prominent as under previous administrations. Indeed, Obama boasted that Iran is now more isolated than ever before. There was the tiniest of olive branches — a statement that Iran was welcome to rejoin the community of nations if it would only abandon its nuclear apostasy, but that option has been, and remains, a non-starter. Those who hoped to see some recognition that the current policy merely deepens a dangerous confrontation with a major Middle Eastern power found no reasons for encouragement.

Perhaps the most disappointing aspect of the president’s all-too-brief, perfunctory treatment of foreign policy was the list of important issues he did not discuss. Relations with the European democracies were virtually ignored. Likewise, such key powers as Russia and India were invisible in the State of the Union address. And except for the complaints about unfair trade practices, the relationship with China was snubbed. There was certainly little indication that Washington and Beijing have important security concerns — and underlying policy disagreements — in East Asia or anywhere else.

As a campaign speech that hit raw nerves among important domestic political constituencies, or as one to inspire the American people to restore the country’s economic greatness, the State of the Union was a winner. But as a speech that reflected the president’s primary role as the steward of US foreign policy, it was shallow, perfunctory, and sterile. Obama missed an opportunity, in a high-profile setting, to articulate a more sustainable and effective international policy for the United States.

Ted Galen Carpenter is a senior fellow at the Cato Institute.

A Redistributive State of the Union by Michael D. Tanner

Wed, 25 Jan 2012 00:00:00 -0500

Shortly after President Obama was elected, NBC News interviewed a young woman from Detroit named Peggy Joseph. She explained that she was excited about Obama’s election because “I won’t have to worry about putting the gas in my car. I won’t have to worry about paying my mortgage.”

In the three years since, President Obama may not have actually paid her mortgage or filled up her tank, but judging from last night’s State of the Union address, he’s still trying.

The president’s address — more campaign speech than policy platform — was long on calls for “fairness” and “opportunity,” but it really boiled down to the president’s vision of a society where government does everything for everyone — financed, of course, by higher taxes on “the rich,” who need to pay “their fair share.”

The president’s argument ignores the fact that the rich already pay a disproportionate share of federal income taxes. In fact, the much-reviled 1 percent earns 16 percent of all income in this country, but pays 36.7 percent of all federal income taxes. One might conclude that this group is already paying its fair share.

Take, for example, the president’s renewed push for a so-called “Buffett rule,” based on the idea, in Obama’s oft-cited formulation, that investors such as Warren Buffett should not pay a lower effective tax rate than their secretaries. He even had Buffett’s secretary, Debbie Bosanek, sitting in the presidential box.

Buffett makes most of his money from investment income (capital gains and interest), and he pays a capital-gains tax rate on that money. That tax rate could theoretically be lower than the tax rate that Ms. Bosanek pays on her wage-based income, although only if Ms. Bosanek’s income is fairly high and she took few deductions. However, the president’s narrative ignores the fact that Buffett’s income had already been taxed at the corporate level. When the effect of both taxes is combined, the real effective tax rate is closer to 45 percent. That is quite a high rate on an inherently risky activity — investing — that our tax code should encourage.

And significantly, note that the president’s solution to this supposed problem is not to reduce taxes on Ms. Bosanek, but to raise them on Mr. Buffett.

That is because the president sees the Buffett rule and his complaints about other tax loopholes as simply a tactic, the camel’s nose under the tent, in his desire for more money for the federal government. That is why his actual tax proposals, hidden behind rhetoric about “millionaires and billionaires” and the “wealthiest 1 percent,” would actually raise taxes on people earning as little as $200,000 per year, as well as many small businesses. And many of his proposals will probably hit people with incomes even lower.

And he wants that money so that he can spend it.

The president might have given lip service to the need to reduce deficits and the debt, but most of his speech was a laundry list of government programs to spend more money doing more things for more people. From health care to housing, from worker education to industrial policy, from “green energy” to college loans, the president sees the government as both the engine of our prosperity and the guarantor of fairness.

The president’s vision of the state of the union is a zero-sum one in which, if some people get rich, it must make other people poor. If Warren Buffett makes money, then Peggy Joseph won’t have gas for her car. The only alternative is for the government to step in and make Mr. Buffett pay for Ms. Joseph’s gas.

Of course there is another option.

We all seek a society in which every American can reach his or her full potential, in which as few people as possible live in poverty, and in which no one must go without the basic necessities of life. More important, we want a society in which every person can live a fulfilling life. But the evidence is now inescapable that the best way to achieve that goal is not through welfare-state redistribution of wealth, but through the creation of more wealth. We should judge the success of our efforts not by how much charity we provide to the poor, but by how few people need such charity.

Would it not be a better America if we could make it possible for Ms. Joseph to get a better job so that she could afford her mortgage and her gas? For that matter, wouldn’t we like a country where she could afford a bigger house and a second car? Nothing that the president has proposed would help bring that about.

Poverty, after all, is the natural condition of man. Indeed, throughout most of human history, man has existed in the most meager of conditions. Prosperity, on the other hand, is something that is created. And we know that the best way to create wealth is not through government action, but through the power of the free market. Last night, President Obama said, “This nation is great because we worked as a team [and] have each other’s backs.” Others might suggest that this nation is great because we are free.

We will probably spend the next year debating these two visions. Last night’s speech was the start.

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.

Why There Is No Human Progress without Capitalism by Jim Powell

Tue, 24 Jan 2012 00:00:00 -0500

President Obama is on the warpath, attacking capitalism, but Republican candidates haven’t offered much of a counter-attack. This is a bit of a mystery, since the case for capitalism is overwhelming.

For thousands of years, there was virtually no such thing as human progress. The great French historian Fernand Braudel observed, “Peasants represented immense numbers of people, the vast majority of human beings... constant poverty... For century upon century, clothing remained unchanged... the general rule was changelessness.” In Europe, peasant possessions were generally limited to little more than a shirt, a pair of pants, perhaps a simple jacket, a bench, a table and a straw-filled sack that served as a mattress. In India, there were hardly any chairs or tables to be found. There were few chairs in Islamic lands. Multitudes perished because of famines — France alone had hundreds of famines before 1800. Famine undermined the ability of people to resist common deadly diseases like typhoid fever, purple fever, whooping cough, sweating sickness, diphtheria, smallpox, influenza, syphilis and the plague.

Capitalism, as economic freedom is often called, has changed the world for the better by harnessing individual self-interest — the most reliable motivator there is. In markets, functioning without subsidies, special favors or bailouts, entrepreneurs have had powerful incentives to provide what consumers want.

Markets, cities and civilization arose along trade routes where it was convenient for people to gather, such as on rivers or a coast. “Markets,” Braudel declared, “endlessly worked on economies, stirring them up, bringing them to life.” Historian Will Durant added that “Trade was the great disturber of the primitive world.”

In many places, local people used common property for grazing, but they didn’t have any incentive to improve common property, since somebody else would gain at least part of the benefit. Then in England during the 1700s, higher grain prices led property owners to begin enclosing common property. In many cases, local people received cash settlements. In other cases, common property was enclosed by act of Parliament, and the affected local people were often angry. But once land was enclosed, owners had incentives to improve it, because they would benefit. They drained marshes, grew more crops, built walls and erected buildings including houses for laborers who worked on their property. Agricultural output went up, helping to banish famines.

Meanwhile, the Industrial Revolution gained momentum with the development of English textile mills. Entrepreneurs produced not luxuries for the rich but cheap cotton clothing for the multitudes. This made possible improved sanitation, since people could wear one set of clothing while they washed the other set. Most important, England’s population was increasing rapidly, and without the Industrial Revolution, millions would have starved, as happened in rural Ireland during the 1840s. “England was delivered, not by her rulers,” historian Thomas S. Ashton wrote after World War II, “but by those who, seeking no doubt their own narrow ends, devised new instruments of production. There are today on the plains of India and China people plague-ridden and hungry, living lives little better, to outward appearance, than those of the cattle that toil with them by day and share their places of sleep by night. Such Asiatic standards, and such unmechanized horrors, are the lot of those who increase their numbers without passing through an Industrial Revolution.”

But aristocratic landowners weren’t happy, because textile mills created jobs that attracted large numbers of people away from farm work on their estates. The original smears against capitalist factories were made during the 1800s by English aristocrats and later picked up by socialists, much as we are now beginning to see Obama campaign strategists relish the prospect of exploiting recent Republican swipes at capitalism.

Capitalist entrepreneurs created stupendous numbers of jobs that were productive, because they helped provide what consumers wanted. During the early years of the 20th century, when millions of immigrants landed in America, the unemployment rate dropped as low as 1.6 percent. Not only that: economist Thomas Sowell reported: “Immigrants begin economically below the level of existing members of their own ethnic group already in the country, but eventually they surpass them.”

Many immigrants launched what became giant business enterprises. Notable immigrant job creators included John Jacob Astor, Adolphus Busch, William Colgate, Alexander Graham Bell, Samuel Goldwyn, Louis B. Mayer and Helena Rubenstein.

Of course, there have been countless failures when entrepreneurs and their employees weren’t able to keep up with changing markets. Since consumers always want the most for the least, competition tends to drive down prices. Consequently, costs must be minimized, which can mean reducing head count — payroll is the largest cost for most businesses. Fortunately, if government doesn’t have excessive taxes, regulations or other obstacles to enterprise, capitalism achieves the highest growth rates of any economic system, creating more and more new jobs.

Capitalists have done far more than serve consumers. In addition, many supported charitable enterprises that helped relieve human suffering. Such private individuals could take action much more quickly than government officials who had to cultivate political support for appropriations. It was no coincidence that great charitable enterprises developed along with great business enterprises during the nineteenth century, before there was a welfare state... For instance:

* In 1833, New York silk merchants Lewis and Arthur Tappan joined Boston abolitionist William Lloyd Garrison to help form the American Anti-Slavery Society. The Tappans lost their business during the Panic of 1837, but they subsequently developed America’s first credit reporting service that became Dun & Bradstreet. Meanwhile, Lewis Tappan worked to free enslaved Africans who were jailed in New Haven after they had seized control of their ship, the Amistad — the case went to the U.S. Supreme Court (1841), and the Africans were acquitted. Lewis Tappan was also a major benefactor of Oberlin College that enrolled women as well as men, blacks as well as whites.

* George Williams was an English farm boy who went to London and got a job working for a cloth merchant. He observed how easy it was for young men to get into trouble — they commonly spent their spare time in taverns and brothels. Williams started what became the Young Men’s Christian Association (YMCA) in 1844. Before long, it was opened to men, women and children of all races, religions and nationalities. Increasingly, YMCAs promoted physical health through sports. Basketball, football and racquetball all originated at YMCAs. Branches have opened around the world.

* In 1859, Geneva-born businessman Henri Dunant was horrified to arrive in Solferino, Italy after French and Italian forces had fought the Austrians. The battlefield was littered with some 38,000 bodies, and nobody was taking care of the wounded. In 1863, he helped found the International Committee of the Red Cross, and he helped establish Red Cross organizations in other European countries. In 1901, Dunant was awarded the first Nobel Prize.

* In 1865, William Booth, an English Methodist lay preacher, together with his wife Catherine, established the Christian Revival Society in London’s impoverished East End. The Booths held nightly meetings aimed at inspiring alcoholics, prostitutes and thieves to take responsibility for their lives and do good. The Booths recruited neighborhood people to help open soup kitchens for feeding the poor. By 1878, their operations had expanded considerably, they changed the name of their organization to the Salvation Army. Branches were opened in 58 countries and colonies during Booth’s lifetime.

* One of the most remarkable cases of private sector charity involved the fabled investment banker Jacob Schiff and nurse Lillian Wald who was the daughter of German-Polish-Jewish immigrants. She had taken care of many poor, sick people in Manhattan’s Lower East Side slums. Wald and another nurse, Mary Brewster, started what became the Visiting Nurse Service of New York, and Schiff provided financial backing for 27 years — until he died.

* In the Old World, art collections were often built up from plunder, but in the New World art has been a byproduct of capitalism — long before the National Endowment for the Arts existed. Without the wealth entrepreneurs created, many people who had artistic talent might have been tilling fields. Museums were born during the Industrial Revolution. Entrepreneurs and their heirs like the Rockefellers, Guggenheims, Havemeyers and Mellons supported museums. Unlike European museums that catered mainly to artists and scholars, American museums aimed to educate the public. As Joseph Choate, a founder of New York’s Metropolitan Museum, put it in 1880: “the diffusion of knowledge of art in its higher forms of beauty would tend directly to humanize, to educate and refine a practical and laborious people; that through the great masterpieces of painting and sculpture...could never be within their reach, yet it might be possible in the progress of time to gather together a collection of works of merit, which should impart some knowledge of art and its history to a people who were yet to take almost their first steps in that department of knowledge.”

In the heyday of laissez faire capitalism, before public schools were widespread, parents assumed more responsibility for educating their children, and America became a highly literate country. Best evidence of this: the amazing number of books, particularly children’s books. In 1840, Cincinnati, the smallest center of the U.S. book trade, issued an estimated 2 million books. In 1855, the American Publisher’s Circular reported that more books were sold in the United States than in Great Britain, a much more prosperous country. An estimated 30 to 40 percent of what U.S. publishers issued were textbooks. The New England Primer, a catechism, sold 500,000 copies. By 1859, Noah Webster’s spelling book had sold an incredible 30 million copies — this was approximately equal to the U.S. population at the time. The most popular American textbooks, the Readers developed by William Holmes McGuffey, sold an amazing 125 million copies. Peter Parley sold over 7 million copies of his books — Peter Parley’s Tales of America (1827), Parley’s Winter Evening Tales (1828), Parley’s Juvenile Tales (1830) and Parley’s Geography for Children (1840). Anna Sewall’s Black Beauty, initially published in London, sold 3 million copies in the United States. James Fenimore Cooper’s Last of the Mohigans sold over 2 million copies. Books like She, Heidi, Little Women, Treasure Island, Little Lord Fauntleroy, Uncle Remus, Peck’s Bad Boy and The Adventures of Tom Sawyer were also among the children’s bestsellers.

The most successful 19th century entrepreneurs didn’t have much formal schooling, but they had a keen appreciation of learning. This was decades before there was a federal Department of Education. In 1881, Andrew Carnegie created an endowment that over the years spent some $55 million to build more than 1,600 libraries across America. In 1895, New York Public Library was formed by consolidating the private libraries of furrier John Jacob Astor, real estate entrepreneur James Lenox and railroad and mining attorney Samuel Tilden. New York Public Library now has some 206,000 prints, 400,000 sheets of music, 6.5 million books and 13.5 million manuscripts.

During the 19th century, successful entrepreneurs funded great colleges and universities before there was a permanent income tax to encourage deductible philanthropic contributions. In 1861, about 20 Boston scientists and entrepreneurs contributed $100,000 to start the Massachusetts Institute of Technology. In 1868, Western Union investor and land speculator Ezra Cornell started the university that bears his name. In 1873, Baltimore grocer and railroad investor Johns Hopkins died, leaving $7 million to help fund a major university that opened three years later. Railroad entrepreneur Leland Stanford started his university in 1885 as a memorial for his son and operated it on his farm. John D. Rockefeller gave $35 million to help establish the University of Chicago.

Decades before women had the vote, entrepreneurs supported education for women by launching women’s colleges like Mount Holyoke (1837), Vassar (1861), Smith (1871), Wellesley (1875), Radcliffe (1879), Bryn Mawr (1885) and Barnard (1889).

Moreover, the Industrial Revolution, in the United States as well as Europe, made life easier for women in countless ways. Mass-produced soap, clothing, cosmetics, canned food and myriad other things meant that women didn’t have to spend huge amounts of time making everything they needed. During the 19th century, kerosene lamps replaced troublesome whale-oil lamps, and gas lights and later electric lights replaced kerosene. With so much labor saved, women began to have leisure time, and many used it to start clubs. A large number were for self-improvement. They encouraged the study of literature, history, science, current affairs and foreign languages. There were circulating libraries for members. Such clubs helped women with little formal education to gain more knowledge about the world. Professional women formed clubs to discuss their mutual concerns. While government officials suppressed information about and access to birth control methods, large numbers of women obtained both from private businesses like Sears, Robuck.

Capitalism created opportunities for women to gain financial independence. Initially, women earned money outside the home mainly by performing domestic service, as maids, cooks and cleaning women. Then during the 19th century, factory jobs provided new opportunities. Factory owners didn’t care what the proper role of women was supposed to be. They hired women because they were willing to work for less than men, and they were often more conscientious workers than men. The invention of the telegraph, typewriter and telephone created nicer office job options for millions of women. Women got ahead more rapidly in business than in licensed professions and much more rapidly than in politics.

We need to understand how far we have come and how we got here. As historian Braudel reminds us, “Wherever the market is absent, or insignificant, one is certain to be observing the lowest plane of human existence.”

After the “progressive” expansion of political power during the past century, America still has the Constitution and enough of a market economy left that it could be restored.

Capitalism is worth defending. Hopefully, the presidential candidates will learn how to do it.

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.

One Size Does Not Fit All by Neal McCluskey

Tue, 24 Jan 2012 00:00:00 -0500

The best way to look at education is not as a private or public good, but from the perspective of reality: All people are different, and diverse people cannot be equally served by a single school system. Some parents want their children to learn that Columbus was good, some bad. Some kids are ready for algebra in eighth grade, some as sophomores. Some students respond well to zero-tolerance discipline, others don't.

Once you acknowledge reality, there's no question that a monolithic system will be hopelessly inefficient. Worse yet, it will foster incessant conflict as people try to get the schools to teach the things they — not somebody else — want.

The law in New Hampshire is one way of dealing with reality. It is an effort to allow parents or children who want or need something different to get it. It's a nearly immovable escape hatch — parents would have to pay to develop their preferred curricula, while schools could potentially face overwhelming demands to furnish personalized learning — but it at least acknowledges that one size does not fit all.

A far better option is to move to a system that functions naturally and smoothly with diversity — school choice. Let parents control education funding, and give educators freedom. Then numerous schools will spring up and parents will be able to pair with educators who share their views, or whose schools focus on the specific needs of nonuniform children.

But what about the public good? Aren't there some things that we agree every child must learn?

If we all agree, then freedom is no threat; parents will choose schools that teach those things. And if we don't?

Look no further than endless warring over evolution to see what happens when we ignore reality in service of the perceived public good. As Michael Berkman and Eric Plutzer recently documented, even when state standards call for the teaching of evolution, big percentages of high school biology teachers skip it. Why? To avoid conflict with objecting parents and students.

In other words, by trying to force evolution instruction on everyone, even those who want it often miss out. But that's what happens when you ignore basic reality.

The 'Hitler of Africa' Still Rules by Nat Hentoff

Tue, 24 Jan 2012 00:00:00 -0500

Our planet abounds in horrific dictators, most of whom eventually are erased from power by their suffering, mutinous subjects. But one of them — Robert Mugabe — continues his despotic reign as president of Zimbabwe.

This land, once "the breadbasket of Africa," is now a place where hardly anyone feels safe.

In Peter Godwin's book, "The Fear: Robert Mugabe and the Martyrdom of Zimbabwe" (Little, Brown and Co., 2011), he distills this hell during three decades of President Mugabe's "smart genocide":

"There's no need to directly kill hundreds of thousands, if you can select and kill the right few thousand... It is as if he has taken an entire nation hostage, using them as human shields."

In the Oct. 31, 2011, edition of The Weekly Standard, David Aikman describes the impact of this tyrant:

"With desperate hyperinflation, a drop in male life expectancy from 62 in 1990 to 44 today, widespread cholera, and desperate malnutrition, Zimbabwe is a dying state presided over by an 87-year-old mafioso."

The United Nations, as usual, has been useless in rescuing these utterly helpless people. South Africa and a few other African nations have murmured their displeasure — fruitlessly — at this monster who has actually likened himself to Hitler.

In one of my many ineffective columns about Mugabe's terror ("Mugabe's Victims, Mostly Black," Village Voice, May 6, 2003), I quote his self-appraisal from March 21, 2003:

"I am still the Hitler of the time. This Hitler has only one objective, justice for his own people, sovereignty for his people, recognition of the independence of his people, and their right to their resources. If that is Hitler, then let me be a Hitler tenfold. Ten times Hitler, that is what we stand for."

That self-adulatory tribute was in response, as Mugabe noted, to his having been compared to Hitler by the British press. Soon after the speech, the United States "accused Zimbabwe's government of unleashing a new wave of violence against the opposition, which it said was incited when President Robert Mugabe compared himself to Adolf Hitler" ("US slams Mugabe's 'black Hitler' speech," The Mail & Guardian Online, Sapa-AFP, March 25, 2003).

Further along in the story, it was reported that President George Bush, responding to the violent crackdown, froze "the assets of Mugabe and 76 other government officials, charging they have undermined democracy."

But the Hitler of Africa was not intimidated by the president's reaction.

As I wrote six years later, "the BBC's Mike Thomson, in a series of reports from Zimbabwe... spoke to 'a Zimbabwean mother and (13-year-old) daughter who are still too afraid to return home after being abducted and repeatedly raped by militiamen from President Robert Mugabe's Zanu-PF party a year ago.'... Their fear has not lessened despite the new alleged 'power-sharing' coalition between Mugabe and the Movement for Democratic Change's Morgan Tsvangirai" ("No One Feels Safe in Zimbabwe," Cato Institute, July 3, 2009).

This so-called "coalition" has not been allowed by Mugabe to actually function, as reported by Celia W. Dugger in The New York Times ("Robert Mugabe Hounds Rivals in Zimbabwe, Parties Say," April 18, 2011):

"More than a quarter of President Robert Mugabe's opponents in Parliament have been arrested since agreeing to join the government in a shaky power-sharing arrangement, part of an intensifying campaign of harassment intended to drive them out of office, officials from both sides say."

This is why one member of the targeted Movement for Democratic Change was arrested: "The police accused Moses Mzila Ndlovu, co-minister for national healing (that is not a typo) of attending a meeting held without their authorization."

His crime, Dugger reported, was attending "a memorial prayer service for the thousands of civilians from the Ndebele minority slain in the early years of Mr. Mugabe's 31-year rule."

But alleged elections continue in Zimbabwe and this Hitler is ready. Last summer, the Times' Dugger quoted a high-ranking general in the Zimbabwe army, Douglas Nyikayaramba, who said this to a state-run newspaper:

"President Mugabe will only leave office if he sees fit or dies. We will die for him to make sure he remains in power" ("General Says Mugabe Rival Is a Threat to Zimbabwe," June 23, 2011).

The military, Dugger reports, will be ubiquitous during the forthcoming elections (as always) because the president's opponent, Prime Minister Morgan Tsvangirai, is, according to the general, a "'major security threat' who 'takes instructions from foreigners.'"

However, this "security threat" has "survived arrests, a police beating, assassination attempts and a treason trial over the past decade" ("Robert Mugabe Hounds Rivals in Zimbabwe, Parties Say," April 18, 2011).

Thankfully, he's not quitting the government and will campaign for the presidency to free the people of Zimbabwe from Mugabe's shackles.

Next week we will meet Patience Mhlanga, born and raised in Zimbabwe. She will tell us how she escaped and is now a student at Fairfield University in Connecticut while also volunteering in such organizations as the Gospel Mission's orphanage in southeastern India. Patience's calling is to help the abandoned wherever she can.

This witness against the Hitler of Africa has a lot to tell us from personal experience.

And during this next "election," how many members of the American media will be there as our witnesses to the hell that is Robert The United Nations, as usual, has been useless in rescuing these utterly helpless people. South Africa and a few other African nations have murmured their displeasure — fruitlessly — at this monster who has actually likened himself to Hitler.

In one of my many ineffective columns about Mugabe's terror ("Mugabe's Victims, Mostly Black," Village Voice, May 6, 2003), I quote his self-appraisal from March 21, 2003:

But the Hitler of Africa was not intimidated by the president's reaction.

His crime, Dugger reported, was attending "a memorial prayer service for the thousands of civilians from the Ndebele minority slain in the early years of Mr. Mugabe's 31-year rule."

"President Mugabe will only leave office if he sees fit or dies. We will die for him to make sure he remains in power" ("General Says Mugabe Rival Is a Threat to Zimbabwe," June 23, 2011).

Thankfully, he's not quitting the government and will campaign for the presidency to free the people of Zimbabwe from Mugabe's shackles.

This witness against the Hitler of Africa has a lot to tell us from personal experience.

And during this next "election," how many members of the American media will be there as our witnesses to the hell that is Robert Mugabe's merciless occupation of Zimbabwe?

Nat Hentoff is a senior fellow at the Cato Institute.

"Wrong" Speech Is Also Free Speech: Citizens United at Two by Trevor Burrus

Tue, 24 Jan 2012 00:00:00 -0500

In the past week, many commentators have used the second anniversary of the Supreme Court's decision in Citizens United v. Federal Election Committee to reiterate their critiques of the controversial decision. Rep. Bernie Sanders (I-Vt.) and Public Citizen's Robert Weissman, for example, write that the decision "poisoned our political process" and ask whether the "merits or the money" will now "tip the balance when an issue comes before Congress."

I sympathize with Rep. Sanders and Mr. Weissman. We all hope that our nation's policies are chosen due to merit rather than some other influence. But our valuation of a policy's merit is intertwined with our ideological commitments. Rep. Sanders and Mr. Weissman make this clear when they list policies that they believe would be in effect if corporate speech were suppressed, that is, if "merit" won out over money. Among these: a national health care program, rectifying the "collapse of the middle class," fixing the high price of prescription drugs, and ending gratuitous military spending.

Rep. Sanders and Mr. Weissman thus demonstrate a crucial fact: many who oppose Citizens United do so because they want to silence speech that promotes policies they oppose. They want to silence it because they think it is bad speech that gives a disproportionate influence to bad ideas. Yet there can be no greater violation of the First Amendment than to act with this motive.

Critics of the decision cite the "undue influence" corporations can have on elections through such mechanisms as "drowning out [candidates'] messages" with "misleading negative ads." Sean Siperstein writes about a new campaign by Public Citizen to expose the "mega-corporations" that are most "responsible for greedy, disastrously short-sighted policies, to the detriment of the rest of us."

These critiques blur the line between one type of influence that the Supreme Court has acknowledged should be stopped--outright candidate bribery--and other types of influence that are strongly protected by the First Amendment--such as affecting the national debate or influencing candidates' policies by making both them and the public aware of issues. Critics of Citizens United often conflate these two types of political spending, regarding all corporate spending as either corrupting the national debate through disproportionate influence, or corrupting politicians through something tantamount to bribery.

But tellingly, their critiques are one-sided. Missing from any of the articles linked above is any discussion of the "disproportionate" effect that unions have on the American political landscape. Although it is rarely acknowledged, Citizens United permitted both unions and corporations to make independent campaign expenditures. And make no mistake about it, unions are significant moneyed interests in American politics, comprising nine of the top 15 "heavy hitter" campaign spenders over the last 22 years, according to OpenSecrets.org. It is striking, to say the least, that those who rail against disproportionately loud voices and the "undue influence" of political speech are so silent when it comes to the effects of union spending. Perhaps it is more difficult to be critical of the undue influence of speech that one believes is meritorious. If you agree with the speaker, why not buy him a megaphone?

The omission of any discussion of union money in essentially every critique of Citizens United published in the past month is glaring. A dispassionate assessment of the effects of money in politics demands attention to union spending. But an ideologically committed assessment would tend to view the ideas that one finds convincing as being the result of merit, while viewing the ideas one believes unconvincing and harmful to the nation to be the result of "undue influence." This predilection is not because of any inadequacy on the part of Citizen United's critics, it is a result of human nature.

Yet I do not want to unjustly besmirch Rep. Sanders and the other critics of the decision. Perhaps they believe that union spending should also be curtailed. If so, I wish they would make more of a fuss about it. Otherwise, they demonstrate bias that is extremely harmful to their argument. They also underscore my broader point: it is difficult, if not impossible, for any ideologically committed person to assess which speech, if any, is "unduly influential."

The reasons for this are rooted in human psychology. It can be difficult to explain to ourselves why people disagree with us. This observation is simultaneously mundane and profound. On some level we expect disagreement, but on another level, we scratch our heads at how others can believe in ideas that are so obviously, well, wrong. This is more true for the ideologically committed who have devoted their lives and careers to pushing for a society that they believe would be happier and more just, a category of people to which I fully belong.

There are many possible explanations available to us for why there is opposition to our views. Perhaps those who oppose us are evil. Maybe they're selfish and only care about themselves. But the hardest explanation to accept is that your opponents are honest, well-meaning, informed people who have rational reasons for their views. It's easier, and more self-rewarding, to believe that your opponents are being misinformed by speakers who shout the loudest and actively spread lies.

This last explanation has become a crucial part of the modern debate over campaign finance reform. Understandably so. After all, why should we let liars and shouters stand in the way of a better world?

The First Amendment, that's why.

The First Amendment does not allow anyone to pursue his vision of a better world through censorship. Although we'd all love the liars and shouters to be silenced, the First Amendment forbids such censorship precisely because there is no way to agree on who is a liar and who is "too loud." Those determinations are too intertwined with our ideological commitments.

Although I agree with Rep. Sanders and Mr. Weissman that money may have too much influence on politics, perhaps we should address this problem by creating a government that lacks the power to reward undue influence — that is, a limited government that cannot determine whether someone succeeds or fails in life — and not by stifling free speech.

Trevor Burrus is a legal associate at the Cato Institute's Center for Constitutional Studies.

Gingrich Rise Is Triumph of Style over Substance by Gene Healy

Tue, 24 Jan 2012 00:00:00 -0500

On the eve of Newt Gingrich's landslide victory in the South Carolina primary, CNN's Erin Burnett let the former speaker expound on the success of his "kick the moderator" debate strategy.

"I think there's something going on here that's very deep," Gingrich said. "People want a leader who's forceful... Part of it is, you know, if I'd said 'The color is blue!' — it's the forcefulness... That delivery, that clearness is as important as the specific topic," he explained.

Watching the interview, I had a disturbing thought: Has Newt Gingrich become self-aware?

I've never heard a better explanation for the former speaker's ability to cloud conservatives' minds. How, after all, did a man who's the very model of a Beltway-consensus influence-peddler convince Tea Party voters he represents "real change"? It's the "forcefulness," stupid!

Unfortunately, what's going on here is not "very deep." Gingrich's rise represents the triumph of rhetorical style over substance. In a way, it's the ultimate tribute to Barack Obama.

The Washington Post's Ezra Klein asked a good question on Sunday: "What are Newt Gingrich's big ideas?" "I'm at a loss to name even one," he admitted.

Gingrich has an enviable rep as a one-man think tank, but in his wilderness years, he made a sweet living as a "forceful" pitchman for utterly conventional center-left policies: Medicaid expansion, the individual mandate, cap and trade, "clean energy" subsidies, and the like. Newt does a great impression of a red-state firebrand, but when it comes to policy, "the color is blue."

That's not to say that Gingrich has never had an unconventional idea. This is a guy who bragged in a 2005 GQ interview that "I first talked about [saving civilization] in August of 1958" — when he was a rising sophomore in high school.

Some of Gingrich's big ideas are charmingly batty. Given his worries about global warming, Newt has probably abandoned his 1984 plan for "a mirror system in space" that "could affect the earth's climate by increasing the amount of sunlight."

But the Trekkie zeal remains, judging by one of my favorite recent headlines: "Gingrich Said Freddie Mac Could Be Good Model for Mars Travel" (Bloomberg, Dec. 2, 2011).

Some of Gingrich's other fancies are less charming. The candidate who's warned of a "gay and secular fascism" sweeping the country has an impressive authoritarian streak of his own.

As Klein notes, in 1996, Gingrich had the "big idea" of instituting the death penalty for anyone who brought more than 2 ounces of marijuana into the United States.

Today, Gingrich condemns the Stop Online Piracy Act as censorship, but in 2006 he supported empowering "federal judges who've served in combat" to shut down "jihadist" websites.

This December, he advocated sending U.S. marshals to arrest activist judges who rule against religious displays in public schools (maybe combat-hardened jurists will get a pass).

Say what you will about Gingrichian authoritarianism — at least it won't be "gay and secular"!

At this writing, Gallup has Gingrich neck and neck with Romney for the Republican nomination. If he gets the nod, no doubt he'll send a thrill up many a leg in the debates. But his odds of actually winning the presidency are slim indeed.

Recall that in 2004, after Obama's GOP opponent for the U.S. Senate, Jack Ryan, imploded in a sex scandal, the party nominated Alan Keyes: another "forceful" debater with a weakness for loopy ideas. How'd that work out?

Keyes went on to run a short-lived cable talk show (the somewhat defensively titled "Alan Keyes Is Making Sense") and a role as lead plaintiff in a birther lawsuit. Obama went on to the U.S. Senate and, in short order, the presidency.

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 Falklands And Other Dangerous Disputed Territories -- A Market Solution by Steve H. Hanke

Tue, 24 Jan 2012 00:00:00 -0500

As soon as "The Iron Lady" hit the silver screen, it brought back remembrances of the Falklands War — a war that officially commenced on 2 April 1982, only three short years after Margaret Thatcher assumed the reins as Prime Minister of the United Kingdom. Since 1833, Britain has been able to maintain its colonial settlement of the Falklands against the objections of Argentina. The Falklands? Well, even Samuel Johnson had something to say about the Falklands. This is what he wrote in 1771:

What, but a bleak and gloomy solitude, an island thrown aside from human use, stormy in winter, and barren in summer; an island which not even southern savages have dignified with habitation; where a garrison must be kept in a state that contemplates with envy the exiles of Siberia; of which the expence will be perpetual, and the use only occasional; and which, if fortune smiles upon our labours, may become a nest of smugglers in peace, and in war the refuge of future Buccaniers.

When Margaret Thatcher took over from Jim Callaghan, her government was given a brief on the festering Falklands sore. As Sir Lawrence Freedman summarized in his authoritative two volume The Official History of the Falklands Campaign:

The briefing note prepared for the incoming Government described the problem. A remote set of islands, with a dwindling population and limited economic prospects, was reliant for communications and supplies upon a neighbouring country. This country claimed sovereignty, and if it acted on this claim with armed force then the small RM garrison would provide scant defence, and a subsequent effort to retake the Islands would involve a major amphibious operation. The sovereignty claim might be 'unsound' but it still cast a shadow over relations with Argentina and caused Britain difficulty in the UN. Any long-term development of the Islands required a solution to this problem but efforts to find a negotiated settlement had not got very far. The islanders had been given an undertaking that only solutions that they supported would be brought to Parliament, but no proposals that were of interest to Argentina appealed to them.

The Thatcher government did not realize that danger was lurking, as is always the case when disputed territories are in the picture. Indeed, Britain's intelligence about what Argentina's military government was up to was wanting. When the Galtieri government struck, Britain was caught off guard and the Falklands War ensued, resulting in more than 900 casualties. And, as they say, what goes around comes around. As the preparations for the 30th anniversary of the War proceed, tensions are on the rise, yet again. Last December, British Prime Minister David Cameron was angered by reports that Argentine naval vessels had intercepted Spanish fishing boats in "Falkland waters." Argentina's President Cristina Fernández brushed this off and ratcheted things up by claiming that the Falklands were a global issue. In addition, she obtained an agreement with countries in the Mercosur trade pact that ships flying the Falklands flag would not be permitted to enter Mercosur ports.

Before we have more nationalistic posturing, sanctions, protracted skirmishes, a new war, and only then a "solution," let's move the Falklands dispute out of what is mucha teología (many theological arguments) territory, try to think creatively and design market-based treaties applicable to dangerous disputed territories (see the accompanying table). For the Falklands, the governments of the United Kingdom and Argentina would agree that those Falklanders who were qualified to vote would be allowed to do so in a referendum. The referendum would allow the settlers — who are English-speaking and English by custom, institutions and loyalties — to vote on whether they prefer the status quo, or whether they would agree ("yes") to an Argentine take-over. A super-majority "yes" vote, of say 80%, would be required by the Falklanders to allow Argentina to claim sovereignty.

This is where markets come in. The Falklanders would have to be compensated by Argentina. The referendum would be designed so that Argentina could offer a cash incentive. Before the referendum, Argentina would deposit an amount (let's say USD $500,000) in escrow, in Swiss bank accounts for every man, woman and child who had proven their Falklands residence prior to the referendum.

If the referendum went in Argentina's favor (over 80% of eligible voters casting a "yes" vote), then the funds in escrow would be transferred and Argentina's unambiguous sovereignty over the Falklands would be established. Argentina's cost, in this hypothetical, would be about USD $1.6 billion.

A transparent market solution for the Falklands and other disputed territories would be a cost-effective way to unambiguously establish sovereignty — a way that avoids blundering into unwanted wars and spilling blood, sweat and tears.

Steve H. Hanke is a Professor of Applied Economics at The Johns Hopkins University and a Senior Fellow at the Cato Institute.

Give Okinawa back to the Okinawans by Doug Bandow

Mon, 23 Jan 2012 00:00:00 -0500

The U.S. is overextended and overburdened, but Washington policymakers are determined to preserve America’s dominant military presence around the globe. Financial pressure is forcing the administration to finally slow a massive, decade-long increase in military spending, but American garrisons overseas remain inviolate. Former Defense Secretary Robert Gates declared: “The U.S. remains committed to maintaining a robust forward presence in East Asia.”

That means preserving multiple bases in Okinawa, which have burdened island residents since the U.S. defeated imperial Japanese forces there in mid-1945. Nearly seven decades later Washington refuses to take any meaningful steps to lighten the load. Indeed, Administration pressure in 2010 helped force the resignation of Japanese Prime Minister Yukio Hatoyama over the issue.

The American government insists that it is and always will be the senior partner in any alliance. Washington will protect you, but only on its terms. In this case, the U.S. wants bases in Okinawa, and wants them forever. Nearly 30 Okinawans, ranging from elected officials to students, are visiting Washington, D.C. this week to tell Americans about the resulting burden on the people of Okinawa.

Okinawa’s travails have a long history. The Ryukyu Islands, of which Okinawa is the largest, were independent throughout most of their history. Only late was the territory conquered by imperial Japan. Okinawans were never fully trusted by Tokyo and suffered horribly in the closing stages of World War II.

The so-called “Typhoon of Steel,” as the American invasion campaign was called, ran from April through June in 1945. Combat was brutal. Estimated civilian casualties ran up to 150,000. The U.S. occupied Japan after the war and turned Okinawa into a veritable colony. Only in 1972, 27 years after the conclusion of the war, was the island turned back to Japan.

However, the U.S. military continues to control much of the island, roughly 20 percent of the land mass. Long fences separate residents from property owned by their ancestors. Air bases crowd civilian neighborhoods. Prime beaches remain under U.S. military control. Thousands of young, aggressive foreign men transform local life—and often not for the good.

Frustrated Okinawans have been asking for relief for years. Anger exploded in 1995 after the rape of a teenage girl and insensitive comments of the U.S. military commander. But nothing changed, despite large demonstrations. Okinawans faced a hostile partnership between the American and Japanese governments.

The U.S. military likes Okinawa because of its central location. Nor does the Pentagon want to pay to relocate the Marine Expeditionary Force. Inconvenience for Okinawans is not a concern in Washington, other than the extent to which it complicates the U.S.-Japan relationship. Gen. Burton Field, commander of U.S. forces in Japan, dismissed the “resistance in Okinawa” with the observation that “the sooner we are able to build a better place for the Marines to operate, the sooner we will put some of this animosity behind us.”

However, the real author of the Okinawans’ distress is Tokyo. The U.S. government negotiates with the national Japanese authorities, not the Okinawan prefectural government. From Washington’s perspective, responsibility to accommodate local preferences lies with Tokyo, not the U.S.

But the Japanese government also favors concentrating bases in Okinawa because of its location—its distance from the rest of Japan. Roughly three-fourths (by area) of U.S. military facilities, with half of American military personnel are located in Japan’s most distant and poorest prefecture, making up just .6 percent of the nation’s territory. Although nearly six of ten Japanese is critical of the resulting burden on Okinawa, none of them wants another U.S. base near their neighborhood.

Proposals abound for tinkering with the American presence. In 2006 after a decade of negotiation the Japanese government agreed to pay to help move some Marines to Guam and relocate Futenma airbase to less populous Henoko elsewhere on the island. The initiative was designed to satisfy no one. Inconvenient to the U.S., expensive to Japan, and unhelpful to Okinawa. In Japan’s 2009 election the opposition Democratic Party of Japan opposed the proposal. After taking office, DPJ Prime Minister Hatoyama declared. “It must never happen that we accept the existing plan.”

The new government’s intentions were good, but it did not expect the Obama administration’s unyielding refusal to reset Washington’s military relationship with one of its closest allies. The DPJ had spoken of creating a more equal partnership, but that is not how America conducts alliances. Nor were Japanese policymakers—and people—ready to challenge the relationship. The first DPJ government collapsed under U.S. pressure.

Yet the Futenma plan appears to be no more viable than the Hatoyama premiership. The Government Accountability Office figures that relocating the Marines to Guam likely will cost more than $29 billion, nearly triple the initial estimate. Congress cut all money for the project this year. Senators Carl Levin (D-Mich.), John McCain (R-Ariz.), and Jim Webb (D-Va.) called the proposal “unrealistic, unworkable and unaffordable.”

Japan also slashed 2012 financial support for the move. Tokyo is inclined to simply kick the can down the road, so to speak. Doing so “worked” after the 1995 rape; protests eventually died down. Large demonstrations erupted again in 2010 but then ebbed.

Japanese leaders hope that doing nothing will work again, at least in the short-term, since Okinawans still have little clout in Tokyo. Prime Minister Naoto Kan last year told island residents that “We have reviewed [moving operations out of Okinawa] from every angle, however, and the current situation would not allow it.”. For years Tokyo has attempted to simultaneously bribe and browbeat local residents into submission.

Civil disobedience is a potential game-changer. In May 2010 17,000 Okinawans created a human chain surrounding Futenma. More recently roughly 200 demonstrators delayed delivery of an environmental impact report on a new runway from the defense ministry to the prefectural government. Using force against protestors would threaten a future Japanese government’s survival and embarrass Washington.

Rather than resist Okinawan demands, the U.S. should voluntarily reduce its military presence on the island. Jeffrey Hornung of the Asia-Pacific Center for Security Studies observed. “Given how much problems this is causing in Okinawa, it’s finally time to rethink things.”

But American military facilities are a symptom, not a cause. The bases exist to support the defense of Japan. The MEF also is available for deployment elsewhere, most obviously in a war on the Korean Peninsula.

It is unreasonable to expect Washington to defend Japan without bases in Japan. But the U.S. should end its security guarantee and then remove, rather than relocate, its military facilities in Okinawa and elsewhere in Japan. Indeed, instead of augmenting its forces elsewhere in East Asia, such as in Australia, Washington should withdraw and demobilize troops and close bases throughout the region. World War II ended 67 years ago. America no longer need guarantee the security of its many prosperous and capable allies.

Japan should endorse this step as the only way to escape its status as an American protectorate. Tokyo has essentially relinquished control over its own territory to comply with U.S. demands. Although the Obama administration frustrated the 2009 DPJ campaign pledge to create a more equal security partnership, Japanese citizens will inevitably raise more questions about the bilateral relationship as they debate security issues.

Prof. Kenneth B. Pyle of the University of Washington argued that “the degree of U.S. domination in the relationship has been so extreme that a recalibration of the alliance was bound to happen, but also because autonomy and self-mastery have always been fundamental goals of modern Japan.”. Even as Prime Minister Hatoyama was beaten by Washington he looked to the future, observing. “Someday, the time will come when Japan’s peace will have to be ensured by the Japanese people themselves.”

That many Japanese still look to America for their defense is hardly surprising. Relying on a friendly superpower for protection frees domestic resources for other purposes. The alliance also eases Tokyo’s diplomatic burden, which otherwise would include reassuring neighbors still obsessed with Imperial Japan’s military depredations.

More curious is Washington’s determination to keep paying for Japan’s defense. The U.S. government is broke, having run deficits exceeding $1 trillion three years running. Unfunded liabilities for Social Security and Medicare alone exceed $100 trillion. A potpourri of other financial obligations account for another $100 trillion. Yet most U.S. policymakers presume the necessity for a permanent, even enhanced American military presence in East Asia.

There are two different rationales for Washington’s paternalistic role. The first is to contain China. Pointing to the People’s Republic of China, Gen. Field declared. “Most of the countries in this region want to see this remain a secure and stable region.”

Exactly how the Marines help contain Beijing is not clear. As Robert Gates observed, U.S. policymakers would have to have their heads examined to participate in another land war in Asia. If a conflict with China improbably developed, Washington would rely on air and naval units.

Moreover, despite persistent fear-mongering about Beijing, the PRC is in no position, and for many years will not be in position, to harm the U.S. Chinese military spending remains far behind that of America. Beijing is working mightily to deter the U.S. from attacking China, not to attack America.

Japan and its neighbors have greater reason to worry, being closer to and weaker than the PRC. However, it is up to them, not Washington, to assess the risk and respond accordingly. They should take whatever steps they deem necessary to ensure that their region remains “secure and stable,” as Gen. Field put it. Just as China is seeking to deter the U.S., they should seek to deter Beijing.

Japan already has constructed a capable military, called a “Self-Defense Force” to get around a constitutional prohibition originally enacted at the insistence of Washington during the American occupation. But Tokyo has never invested resources commensurate with its capabilities; in fact, the government recently announced that it was reducing SDF outlays. If Japan believes itself to be threatened by China, as well as ever-unpredictable North Korea, then Tokyo should do more.

There also is good reason for Japan to work more closely with like-minded states such as the Republic of Korea. This bilateral relationship, like others involving Tokyo, remains tainted by history. But so long as Washington essentially smothers the region with its security blanket, allied states have little incentive to eschew taking domestic political advantage of nationalistic sentiments and work through historic difficulties. Take away the American guarantee, and other states have a much greater incentive to cooperate.

Indeed, in recent years Beijing has exhibited sharp elbows in its relationship with other states over territorial claims. The response has been to exacerbate regional concerns over Chinese behavior and spark increased military spending, and in particular naval procurement programs. That is far better than expecting Washington to build more ships to deploy to the region.

Some policymakers talk more broadly about promoting regional stability, but it’s hard to imagine a contingency requiring deployment of the Okinawa-based MEF. Manpower-rich South Korea doesn’t need a few thousand Marines if the North invades. Even if “something,” whatever that might be, happened in Fiji, the Solomon Islands, Indonesia, Burma, or Cambodia—among the least stable states in the region—it is hard to imagine why the U.S. would consider intervening with ground troops. Not every geopolitical problem warrants an automatic American military response. Then-Air Force Chief of Staff Gen. Ronald Fogelman admitted that the Marines “serve no military function. They don’t need to be in Okinawa to meet any time line in any war plan.”

The second purpose of the U.S.-Japan alliance is to contain Tokyo—or as Maj. Gen. Henry Stackpole famously but inelegantly put it, to maintain “the cap in the bottle” preventing “a rearmed, resurgent Japan.”. It is a claim that even Japanese officials have used on occasion to protect us, since surely you don’t want the Imperial Japanese navy wandering the Pacific again.

But the “stop us before we aggress again” argument has grown thin after decades of peace and democracy. While there are no certainties in life, there is no evidence of resurgent militarism among more than a fanatic few. Deploying even a few peace-keeping troops has proved to be highly controversial for Tokyo. The Japanese should not be treated as if they possess a double dose of original sin.

Moreover, Washington could help ease regional concerns by promoting military transparency and multilateralism. Tokyo should adapt its forces and relationships to defense and deterrence against a superior power. Without a large army, Japan could not occupy anyone even if it wanted to.

But whether Tokyo does more and, if so, precisely what it does, and with whom, should be up to the Japanese people. It is not America’s place to dictate.

Dropping the U.S.-Japan military alliance would not mean abandoning the U.S.-Japan relationship. Economic, family, and cultural ties would remain strong. Moreover, the two countries should cooperate militarily. Shared intelligence, emergency base access, training maneuvers, pre-positioned materiel, and other forms of cooperation would remain appropriate. The U.S. could act as an “off-shore balancer,” ready to aid allied states such as Japan if threatened by a potential hegemon. But Washington no longer would attempt to micro-manage regional disputes of lesser consequence.

Adopting such a stance would be in the interests of the American and Japanese people. And especially in the interest of the Okinawan people. The U.S. should begin transforming its alliance relationships. Now is a good time to do so with Japan.

Doug Bandow is a senior fellow at the Cato Institute. A former special assistant to Ronald Reagan, he is the author of Foreign Follies: America's New Global Empire (Xulon).

We Should Have Left Iraq Far Sooner by Christopher A. Preble

Mon, 23 Jan 2012 00:00:00 -0500

Leaving Iraq was a wise decision; we should have left far sooner. The United States has gained little from the war, and the benefits will never approach what we expended in blood and treasure. Indeed, the war likely undermined American security, and would continue to do so if we had left our troops there for another decade, or more, as some of the most fervent advocates for war wanted us to do.

Of course, the United States should never have invaded Iraq in the first place. The war was sold on false pretenses, but the most serious flaw in the war advocates' case was their reckless cost estimates. Some claimed that the war would be cost-free, paid for by revenues from Iraqi oil. Others ventured guesses ranging between $50 billion and $200 billion. These absurdly low estimates were sustained by the belief that Iraqi citizens would embrace a foreign military presence. They didn't.

The direct costs of the war totaled nearly $1 trillion, and the costs to care for those injured in the war is likely to exceed $2 trillion. The final tally won't be known for years. We could have spent this money elsewhere—at home, or in the hunt for al Qaeda and other terrorists in countless other places. Withdrawing from Iraq allows us refocus our attention and resources on building our nation here at home, and on addressing the few legitimate security challenges we face.

The troops and their families have paid the dearest price. Over 4,400 Americans were killed in Iraq; nearly 32,000 more were wounded. Many more will carry psychological and emotional scars that don't show up in the official casualty statistics. We do not honor their sacrifice by clinging to the fiction that this mission was vital to U.S. security. It wasn't, but that is the fault of those who sold the war, not of those tasked with fighting it.

No amount of additional sacrifice by our brave men and women in uniform would change the final fundamental truth about Iraq: The Iraqis wanted their country back. Now they have it. I wish them well.

Merchants of Misinformation by Richard W. Rahn

Mon, 23 Jan 2012 00:00:00 -0500

Last week, ABC News ran a story that led with the statement, “Mitt Romney has millions of dollars of his personal wealth in investment funds set up in the Cayman Islands, a notorious Caribbean tax haven.” What the reporters failed to mention was that ABC, a unit of the Disney Corp., also has millions of dollars in Cayman-registered funds. Probably most employees at ABC, including the reporters who wrote the story, have some of their money in Cayman-registered funds, as probably do many of you reading this column, even though you don’t know it.

This is how the real world works. Most large — and midsize companies, unions, universities and other nonprofit organizations, including environmental organizations and state and local governments, have pension plans for their employees. Most often, the plan administrators allocate the funds among corporate stocks, bonds and various types of hedge funds and venture capital. They typically hire expert firms to manage pieces of the portfolio. Some specialize in growth stocks, utilities and government and corporate bonds, and some specialize in funding high-risk ventures, such as new companies or companies that are in trouble and need “turnaround” experts.

The fund administrators properly diversify the risk of the pension monies and maximize the return by allocating portions of the funds to the various types of fund managers. Mr. Romney’s Bain Capital is an example of the type of firm that specializes in new companies and troubled companies. Those are high-risk businesses and take great expertise. If they succeed, the firms are well-compensated, but if they fail too often, they will go out of business. Anyone who has any interest in a pension, university endowment or reserve funds of both for-profit and nonprofit organizations benefits by having skilled and successful investment managers.

I have a friend who runs a very successful investment management company — in the $20 billion range. He and his colleagues have been able to produce much-higher-than-average returns for all of those who are directly or indirectly invested with them, which include many different types of pension funds, university endowments, corporate funds, etc. My friend determined that more than 100 million people are beneficiaries in some form of the funds his firm manages. When my friend’s firm delivers a higher return, it means individuals will get higher pensions (or have to contribute less), or the cost of school tuition is reduced for their children if a university’s endowment performs well, and companies that have invested their reserves will have more money to hire new workers, giving everyone greater job opportunities.

Bain Capital is larger than my friend’s firm, so it reasonably can be assumed that more than 100 million people also have benefited in some form from the highly successful and hard work of Mr. Romney and his colleagues. In fact, if one properly accounted for all of the jobs that were directly or indirectly created by Bain, by providing superior rates of return to all their millions of indirect investors, it would be far higher than the 110,000 direct jobs the campaign is claiming. The Romney campaign should make an estimate of the indirect number of jobs Bain has created and publicize it.

Mr. Romney probably has no idea of how much of his own money is in Cayman-registered funds because most of his money is held in a blind trust. I expect that all of the other major candidates and even President Obama also have some of their money in Cayman-registered funds (through their blind trusts) even though they may not know it because their money managers are likely to have allocated some of their investments into Cayman-registered funds, which is the responsible thing to do.

For Americans, income from Cayman-registered funds is fully taxable, and there is no evidence that Mr. Romney, Mr. Obama or any of the other candidates have not paid all of the taxes due on such funds. The Cayman government has an information-sharing agreement with the Internal Revenue Service, so one would be ill-advised to try to avoid taxes by using Cayman. As Cayman expert Andrew Morriss, who is a professor of law and economics at the University of Alabama, has noted: “Many investors in Cayman funds are tax-exempt organizations (charities, for example). Since these entities owe no taxes, they aren’t in Cayman to evade taxes but for some other reason. What could that reason be? Cayman has a sophisticated and cheaper-to-comply-with regulatory structure than the U.S for hedge funds. Cayman laws are better suited to hedge-fund oversight than U.S. retail-oriented regulation.”

As a result, Cayman registers a very large percentage of the world’s hedge funds. Under the Cayman regulatory system, Ponzi scams like Bernard L. Madoff’s and the commingling of clients’ money with the firm’s money, as in Jon Corzine’s company, would be very difficult, if not impossible. Arguably, the Cayman regulatory system gives far better investor protection than the Securities and Exchange Commission or Commodity Futures Trading Commission at a fraction of the cost and bureaucracy.

If I were advising Mr. Romney, I would tell him to stop being defensive about being rich and challenge the other candidates and members of the news media to prove that they have no money directly or indirectly in Cayman-registered funds, insurance companies or trusts — a test most almost certainly would fail — for good reason. Cayman prospers, in part, because of the failure of the United States to provide a nondestructive financial regulatory and tax system. Without Cayman and the other international financial centers, we would all be poorer and there would be fewer U.S. jobs. All of the candidates should say so and explain what they would do to make the U.S. financial regulatory and tax systems more like Cayman’s rather than vice-versa.

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

Should Everyone Be Required to Have Health Insurance? by Michael F. Cannon

Mon, 23 Jan 2012 00:00:00 -0500

When Washington begins penalizing people for not purchasing health insurance in 2014, it will mark the first time in history the federal government has required nearly all Americans to buy a private product as a condition of lawful residence in the U.S. No part of the health-care law is less popular, or more essential to preventing it from crumbling like a house of cards, than this individual mandate.

Even if the mandate were popular and constitutional, it would still be a bad idea. It will increase premiums, cost shifting and government rationing, while promoting irresponsibility. Indeed, its entire purpose is to enable supporters to avoid responsibility for their decisions.

Let's start with premiums. The mandate will increase premiums for households who currently do not purchase coverage, and tens of millions more (including at least half of employer-sponsored plans) who will have to purchase additional coverage to satisfy the mandate. A study issued by the left-leaning Commonwealth Fund estimates the law has already increased premiums 1.8% on average. That will rise as the mandate takes full effect. Some of the increase will reflect the cost of additional coverage—but if consumers valued that coverage, they would have bought it already.

Magnified Effects

True, the law will force insurers to reduce premiums for the sick, and the mandate will magnify that effect. But those same government price controls will increase premiums for healthier customers—and the mandate will magnify that effect, too. (Economist Jonathan Gruber, one of the law's biggest proponents, projects that for some who buy policies in the individual market, premiums will more than double.) At best, those two effects cancel each other out. But these provisions also create incentives for healthy people to drop coverage, driving average premiums higher still.

Then there's how a mandate leads to government rationing. Like President Obama, ex-Massachusetts Gov. Mitt Romney tied a mandate to subsidies that help people buy the mandatory coverage. The higher-than-projected cost of those subsidies, plus the premium increases caused by the mandate, are leading desperate state officials to reduce those costs by rationing care.

Officials have imposed price controls on premiums, which force insurers to limit services. They are pushing price controls on providers, which could exacerbate Massachusetts' already long waits for care. And they hope to impose Canadian-style "payment reforms" that would financially reward providers for limiting services. (An early experiment has delivered zero savings and in some cases increased spending, yet it may still be denying care to people.)

Though supporters claim the mandate will reduce cost shifting from uninsured free riders to the insured, the latter will see no savings. Researchers at the left-leaning Urban Institute estimate that in 2008, such cost shifting amounted to just $56 billion, or 2% of total health spending, and increased premiums by "at most 1.7 percent." For comparison, the Dartmouth Institute for Health Policy and Clinical Practice estimates we waste more than 14 times that amount on unnecessary care. More important, the Commonwealth Fund study shows the federal law has already increased premiums by more than the mandate could reduce them by eliminating free riding.

The federal law actually promotes free riding and cost shifting. My colleague Victoria Payne and I calculated that individuals could save up to $3,000 a year—and families of four could save as much as $8,000—by dropping their health insurance, paying the penalty, and waiting until they are sick to purchase coverage. Massachusetts reported a nearly fivefold increase in such free riding after its mandate took effect. The federal law also offers $1 trillion in subsidies to tens of millions of Americans—shifting $1 trillion of the cost of their health care to taxpayers.

Personal Responsibility

The mandate's greatest pretense is the idea that it promotes personal responsibility. If that were the goal, Congress need only have enhanced the courts' ability to collect medical debts. Supporters instead demanded a mandate precisely because it lets them avoid responsibility for their decisions.

Here's how. The federal law promotes irresponsibility by allowing healthy people to wait until they get sick to buy coverage. It creates that free-rider problem, which has been known to make insurance markets collapse. Supporters of the law could have taken personal responsibility for this instability they introduced into the market—say, by volunteering to pay the free riders' premiums. Instead, they imposed a mandate, which attempts to stabilize the market by depriving others of their money and freedom.

Forcing others to bear the costs of your decisions is the opposite of personal responsibility. It is selfishness, not altruism.

The mandate is not a conservative or free-market idea. Some Republicans who were for it are now against it, just as some Democrats once against it are now for it. A majority of conservatives and the overwhelming majority of libertarians always opposed it. It's snake oil, no matter who prescribes it.

Free markets—which no living American has seen in health care—would make health care better, more affordable, and more secure. The mandate makes such progress impossible.

If the public understood the rest of the health-care overhaul as well as it does the mandate, the law would already be history.

Michael F. Cannon is director of health policy studies at the Cato Institute.

President Obama's Chance to Fix Deteriorating Economic Relations with China by Daniel J. Ikenson

Sun, 22 Jan 2012 00:00:00 -0500

Last month, the U.S. Court of Appeals for the Federal Circuit ruled that it is illegal for the executive branch to apply the U.S. countervailing duty law to imports from countries considered to be “non-market economies” under U.S. antidumping law. That may sound legalistic and technical, but how policymakers in Washington respond over the next couple of weeks will weigh heavily on the tenor and direction of the U.S.-China economic relationship for years to come.

The ball is currently in President Obama’s court and, nominally, he has some alternatives. First, he can accept the CAFC’s decision, which would require his rescinding 24 U.S. CVD measures already in effect, terminating five pending CVD investigations, not acting upon two recent case filings, and forbidding his agencies from initiating any new CVD investigations on NMEs henceforth. (That would be my preferred option.) Second, he can appeal the decision to the U.S. Supreme Court or request an en banc judicial ruling from the CAFC, hoping for a reversal from either body. The likelihood of either the CAFC granting en banc consideration or the Supreme Court granting a writ of certiorari is considered by legal experts to be small. Or third, he can seek changes in the law to make it expressly Congress’s intent that it apply to non-market economies. (That would likely spark harsh reprisals from Beijing in the form retaliatory tariffs and other market restrictions, as the U.S. measures are perceived as a direct affront to Chinese exporters. Yes, Vietnam is the other remaining NME of economic significance, but the firestorm over the CAFC decision is all about China.)

The arrival of election season and, with it, incessant peddling by politicians of the vacuous “Us-versus-Them” narrative about U.S.-China trade stacks the deck in favor of this third alternative, which is the one most likely to cause already-strained relations to deteriorate further. Indeed, last week, Commerce Secretary John Bryson and U.S. Trade Representative Ron Kirk sent a letter to the chairmen and ranking members of the congressional trade committees, seeking a quick legislative fix to the “problem” created by the CAFC decision. The real problem though is that domestic unions, the steel industry, and their trade lawyers in Washington insist on having their cake and eating it too. They want to subject imports from China to the U.S. countervailing duty law, as well as to the most punitive calculation methodologies available under the U.S. antidumping law. Their narrow interests should not be the cause of most Americans, who have much to lose in this growing trans-Pacific acrimony.

The president is aware of the stakes, the calculus, and the scope for compromise. Should he be inclined to focus his gaze beyond short-term political calculations and do what’s right for the country, there is a fourth alternative available. That course does not require legislative action, would permit Commerce to simultaneously apply the CVD and antidumping laws to imports from China, and would be considered a gesture of goodwill by the Chinese government, thereby defusing tensions and opening the door to greater cooperation resolving legitimate market access concerns confronting American companies in China.

That fourth alternative is for the president to designate China a “market economy” for purposes of the antidumping law — something that the United States is obligated to do under international treaty by no later than December 11, 2016, anyway. Yes, there will be opposition from the interests cited above — labor unions, certain import-competing industries, like steel, and trade lawyers who make their living arguing for measures that would restrict the ability of Americans to trade. But the president should do what he can to avoid a potentially serious fallout with Beijing over trade.

To appreciate the magnitude of the CAFC decision and how it leaves the president with the four alternatives, some background is necessary. (Links to other analyses might be substituted for potentially oppressive details to make this post tolerable reading without compromising expression of the crucial points.)

My former colleague, occasional co-author, and trade lawyer Scott Lincicome already crafted an excellent primer on the issue that was before the CAFC, and that court’s justification for its more expansive ruling. So I will only revisit a few details of his analysis.

The question before the CAFC was whether simultaneous application of countervailing duties (i.e., anti-subsidy duties) and antidumping duties to the same imports from countries deemed non-market economies results in a double-counting of the value of the subsidy, thus constituting an illegal double taxation on imports. The answer would have been an emphatic “Yes,” had the CAFC actually ruled on that narrow question. At least, that was the determination of the Appellate Body of the World Trade Organization when the question arose in a different case involving imports of Chinese coated paper. And that should be the conclusion of anyone susceptible to logic, fairness, and the laws of arithmetic. Here’s why.

First, the U.S. Antidumping law provides “relief” in the form of import taxes to U.S. industries that can demonstrate that they are injured by imports priced at “less-than-fair-value.” The U.S. Countervailing Duty law provides the same kind of “relief” to U.S. industries deemed injured by imports found to be unfairly subsidized by a foreign government. Under both laws, the administering authorities only consider the well-being of the petitioning industry, and are precluded statutorily from considering the financial and economic burdens those taxes might impose on downstream industries, consumers, or the broader economy. (But that is rather beside the main point of this post, so look here and here for more on that problem.)

Under its normal “market-economy” methodology, the U.S. Commerce Department calculates dumping as the amount by which the foreign producer’s price in his home market exceeds his price in the U.S. market. The lower the U.S. price or the higher the foreign price, the larger the “margin” or amount of dumping and the larger the duty imposed on imports. (Look here for the nuts and bolts of AD calculation methodology.)

Under the non-market economy methodology, however, Commerce doesn’t consider the foreign producers’ home market prices at all. Transaction prices in the NMEs are considered by the Commerce Department to be unreliable reflections of true supply and demand conditions and influenced by de facto or de jure control of resources by the central, provincial, and local governments. Instead of using actual prices, then, Commerce assumes its own omniscience and “determines” what the home market price would be if the home market country were, in fact, a market economy. Commerce does this by endeavoring to consider all of the factors of production necessary to make the product (the various materials, labor, electricity, water, and other overhead) and valuing those inputs by reference to their prices in another country. As if that weren’t fiction enough, Commerce then estimates all of the expenses it assumes are necessary to sell the product, by reference to the selling expenses incurred by chosen firms in a similar industry in the other country. Then, Commerce prescribes a proper amount of profit that firms selling the subject product in the non-market economy should be earning, if they were operating in a market economy, again by reference to the profit experience of chosen firms in a similar industry in the other country. Finally, those estimated cost components are combined with the estimated selling expenses and topped off with the estimated profit to produce the home market price that would obtain if the country were a market economy. And THAT concoction is the benchmark — the “Normal Value” — to which the exporters’ U.S. prices are compared to determine the existence and measure the extent of dumping. (Look here for details on NME methodology.)

As ridiculous as it would be to expect the result of that constructed normal value calculation to accurately (even remotely) estimate the real market price in the non-market economy, the Commerce Department’s rationale for its often arbitrary and capricious decisions concerning the estimates to include or exclude in that calculation is always earnestly couched in terms of the agency’s fealty to precision. Precision! What a hoot. Nonetheless, the benchmark that is produced is officially the Commerce Department’s best estimate of a non-subsidized, market price — the “fair,” undumped, unsubsidized price.

Accordingly, the amount by which the foreign exporter’s U.S. price is lower than that “fair” benchmark represents the amount of dumping AND the value of the benefit of the subsidy. In other words, the margin of dumping in a NME case-where Commerce constructs these normal value benchmarks-also capture the benefit of any subsidies accruing to the exporter. Thus, applying CVD duties and antidumping duties against imports from NME countries double counts the amount of the subsidy and results in a double tax on imports.

So, there is a fundamental incompatiblity to applying simultanously CVD duties and antidumping duties generated from the NME methodology. To the extent that unions and domestic industries want to continue to use the CVD law against imports from China and not violate U.S. WTO obligations, granting China a market economy designation solves the impasse. The Chinese government wants its exporters to be treated like other countries’ exporters and the United States is obliged to grant that status by 2016. Why not do it now? Chinese exporters would be subject legally to both the antidumping and countervailing duty laws and they’d actually be happy enough about the change that the crucial bilateral relationship gets a much-needed boost.

Can and will President Obama do the right thing?

Daniel Ikenson is associate director of the Herbert A. Stiefel Center for Trade Policy Studies at the Cato Institute in Washington, DC.

Europe Delays the Inevitable by Deepak Lal

Sat, 21 Jan 2012 00:00:00 -0500

With the recent downgrading by Standard & Poor's of the sovereign debt of France and Austria, and the further discounts of the debt of the Club Med countries, the euro crisis could be reaching its denouement. This could be triggered fairly soon by the impasse on the "haircut" on Greek debt, which needs to be rolled over in late March. Or this slow-motion train crash of the euro zone could go on for some time, as its politicians continue to seek various palliatives without recognising the basic design flaw in the euro.

A lecture I gave in 1999 before the launch of the euro on "EMU and Globalisation" (Policy Series No. 17, Politiea, London; reprinted in my Lost Causes [in press]) emphasised how this was a misguided project, since the euro zone was not a natural "optimum currency area" and without a fiscal-cum-political union, a monetary union of such economically and culturally diverse countries was unsustainable. I had argued that its future depended on a contest between the "dinosaurs", who saw the euro as a means of maintaining the unreformed labour markets and generous welfare states of the "social market economy", and the "modernisers", who saw the need to create flexible labour markets and to curb the excesses of their burgeoning welfare states. Germany turned out, par excellence, to be a moderniser; the Club Med countries and France continued to be dinosaurs.

With the pre-financial crisis worldwide boom, and its reformed labour markets, Germany's real wage fell relative to those in the Club Med countries. Denied their traditional route of devaluation to regain competiveness, the Club Med countries ran trade deficits financed by the growing trade surpluses of Germany. This inflow of capital, in turn, fuelled a boom in non-traded services — particularly housing and banking — as their real exchange rates rose, and allowed their "entitlement economies" to flourish. With the global financial crisis of 2008, the unsustainability of the public and private debt accumulated during the earlier boom became manifest. The Club Med countries have found themselves in an actual or incipient sovereign debt crisis.

There is little hope that they can grow themselves out of the crisis, even if the private and public holders of their debt take sufficient haircuts. That is because, without devaluation, they cannot attain competiveness. The alternative they have been forced to accept, in order to keep the euro project alive, is an internal devaluation through massive and prolonged deflation to lower their real wages below those of their northern European peers, particularly Germany. This seems politically unviable as the riots in Greece (and their likelihood in Italy as signalled recently by Monti) attest. The break-up of the euro zone is imminent, unless the Germans and the other northern Europeans are willing to continually subsidise their southern neighbours — an equally unlikely prospect

In the mid-1960s, when I was a lecturer at Christ Church, Oxford, my senior PPE colleague was Roy Harrod. At lunch, after giving the last lecture before retirement of his "Currency and Credit" course, he said that he had spent the entire lecture attacking Britain's desire to join the European Economic Community (EEC). He saw the European project as a disguised attempt by Germany to establish the European hegemony it had failed to achieve through two World Wars. He asked rhetorically how he would be able to look upon the graves of his many friends and colleagues who had tried to prevent this outcome during the two World Wars.

With the euro zone moving towards some form of quasi-fiscal union to deal with the sovereign debt crises facing its southern periphery, this outcome is possible. But it would imply Germany accepting the continuous subsidisation of its southern neighbours for the political end of achieving a united Europe, with Germany as the hegemon and the Club Med countries (including France) as its vassal client regions. It is equally likely that southern nationalism will derail this project, as they realise their loss of fiscal sovereignty and become like Italy's Mezzogiorno — increasingly dependent on handouts. This could lead to the destruction of the euro — or an exit by the northern Germanic currencies around a new "hard" deutschmark (or perhaps a new "bismarck"?), leaving a southern-Med-euro zone, which could maintain the undervalued euro they need to regain competitiveness and thus growth.

But what of Britain? For nearly two centuries, it has sought to prevent any continental power securing mastery of Europe. But with the end of its Empire, the defeatist British establishment felt that if it could not prevent European integration under Franco-German hegemony, it should try and balance these old enemies within the EEC. In the referendum to join the EEC in the mid-1970s, the electorate were told that they were voting for Britain to be part of a competitive and integrated European common market of sovereign nation states. As, instead, the federalist ambitions of the eurocrats to create a United States of Europe were revealed, with Jacques Delors' push for European Monetary Union (EMU) in the 1980s, the lie behind the referendum claims was exposed, and Europe has since been a toxic divide in British politics.

However, Gordon Brown's refusal to join the euro will be seen as his greatest contribution to British prosperity. The fiscal mess he left his successors is worse than that of many Club Med countries; however, unlike them, with exchange rate flexibility and the ability to follow an independent monetary policy tailored to its needs, it should be able to complete reining in its entitlement economy and the accompanying fiscal excesses without damaging growth. This explains why British sovereign debt retains its triple-A rating — much to the chagrin of the less indebted French. David Cameron's refusal to join the quasi-fiscal union being promoted by Europe's new Iron Lady will hopefully begin to reverse the fatal mistake that post-imperial Britain made in the 1960s (see my column "Shrinking Albion", Business Standard, August 2010), when it chose to break its long cultural, commercial and familial links with its thriving ex-colonies grouped in the Commonwealth, to join an increasingly sclerotic Europe.

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

How Sunday's NFL Cities Became Champs by Steve H. Hanke, Stephen J.K. Walters

Sat, 21 Jan 2012 00:00:00 -0500

This Sunday's NFL championship games have it all: future Hall-of-Famers in abundance, jet-fueled offenses, bone-crushing defenses, and even a pair of coaches vying to bring a sibling rivalry to Super Bowl Sunday in two weeks.

And if you're a fan of cities more than their sports teams, you know that these games feature genuine superstars: Boston, New York and San Francisco are magnets to residents and employers, engines of prosperity, and league leaders on any quality-of-life measure.

Then there's our hometown. Baltimore is in need of a strategy for urban revival the type of elixir that turned the other three cities around.

Some historical perspective is in order. Three decades ago, none of these cities worked very well and all were losing residents. Between 1950 and 1980, New York's population declined 10%, San Francisco's 12%, Baltimore's 17% and Boston's an astounding 30%.

These losses were accompanied by steady erosion of each city's job base, rising crime, declining school quality, and a sense that cities themselves might be passé. Many embraced the notion that the post-World War II exodus from core cities was a result of racism (fueling "white flight") or Americans' unfortunate taste for detached homes and expansive lawns.

Then, around 1980, some cities that had been in decline enjoyed dramatic reversals of fortune. Between 1980 and 2010, Boston's population grew 10%, New York's 16%, and San Francisco's 19%. But Baltimore continued its descent, losing another 21% of its residents.

Did those in turnaround cities magically discover the virtues of racial diversity or high-density living? Or did their leaders heed the lessons of previous decades and correct policy errors that had contributed to urban decay?

Neither. There was no sudden change in the cultures of the cities that would become superstars, and no real awareness among their governing elites that they were doing anything wrong. But their most damaging policy reflexes were, in fact, altered-against their will.

All these cities had long pursued progressive political agendas with pride. But the problem with redistributive policies at the local level is that the donor classes might move out as fast as beneficiary classes move in-or, as the population figures cited earlier show, even faster. Robin Hood may seem a heroic figure, but once his rich victims flee Nottingham, even that city's poor might question his effectiveness.

San Francisco and Boston were rescued from their folly by statewide tax revolts. California's Prop 13, passed in 1978, capped property taxes in that state at 1% which slashed San Francisco's rate by almost two-thirds. Massachusetts followed suit in 1980 with Prop 2½, which mandated that municipalities could not increase their total property tax receipts by more than 2.5% annually. New York City taxpayers did not revolt, but state legislators rationalized the Big Apple's chaotic property tax system in 1981; it now enjoys property tax rates that average about one-third of those in its surrounding suburbs (though its other taxes are certainly punishing).

While no single factor explains any city's destiny, it is not a mere coincidence that Boston, New York and San Francisco reversed their declines at the exact moment they became favorable environments for private investment in residential and business capital.

Every time a city raises the tax rate on residential and business property, its owners suffer a capital loss (which economists refer to as "tax capitalization"). In effect, tax hikes are incremental expropriations; owners flee not just because of short-term wealth losses but in fear of future damage to their property rights. Tax caps not only improve the immediate cash flow on investments in real property but perhaps more important secure it against further expropriations.

Baltimore has blithely ignored basic property-rights theory. When high property taxes chased many residents and business owners to the suburbs, the city raised rates further. When grandiose slum-clearance and transit plans destabilized neighborhoods, Baltimore's one-party establishment arranged eminent-domain seizures and pushed even more "big footprint" renewal projects.

The results leave no doubt about which strategy is more effective. Baltimore's real, median household income has been stagnant for the last three decades. New York's has risen 22% while Boston's and San Francisco's have soared by half. Baltimore's 2009 homicide rate was 4.7 times Boston's and 6.7 times New York's and San Francisco's.

Even Baltimore's sports facilities, which many assume have contributed mightily to our mythical renaissance, carry a lesson. Boston, New York and San Francisco have all declined to build their football teams new, lavish, government-financed stadiums within city limits. They've nevertheless thrived.

Maryland taxpayers, on the other hand, gifted Baltimore wonderful football and baseball stadiums near our Inner Harbor, on the theory that "stimulating" downtown development would be a game-changer that inevitably spread prosperity throughout the city. They're still hoping for that change.

In this, Baltimore is no different from other cities wedded to policies that repel investment. All try to make up for this deficiency via capital allocation by government and all show disappointing results. As this weekend's championship cities demonstrate, greater respect for private capital and some protections for the property rights of its owners can have miraculous effects. Someday, even Baltimore might call that play.

Steve H. Hanke is a Professor of Applied Economics at The Johns Hopkins University and a Senior Fellow at the Cato Institute. Stephen J. K. Walters is a fellow at the university's Institute for Applied Economics, Global Health, and the Study of Business Enterprise.

Regaining Our Balance: The Pentagon's New Military Strategy Takes a Small Step by Charles Knight, Christopher A. Preble

Fri, 20 Jan 2012 00:00:00 -0500

President Obama wisely invoked the words of President Eisenhower from nearly 51 years ago when he presented the Pentagon's new strategic guidance last week. In his famous farewell address, Eisenhower advised his countrymen to "maintain balance in and among national programs."

"After a decade of war," President Obama said, "as we rebuild the sources of our strength at home and abroad, it's time to restore that balance."

Balance depends on what you are standing on. With respect to our physical security, the United States is blessed with continental peace and a dearth of powerful enemies. Our military is the best-trained, best-led, and best-equipped in the world. It is our unstable finances and our sluggish economy that make us vulnerable to stumbling.

Unfortunately, the new strategy does not fully appreciate our strengths, nor does it fully address our weaknesses. In the end, it does not achieve Eisenhower's vaunted balance.

Hawks are attacking the strategic review, which will inform the Pentagon's budget for the coming years. House Armed Services Committee Chairman Buck McKeon slammed it as a strategy that "ensures American decline." The Weekly Standard's William Kristol said that the cuts being contemplated "would decimate our military."

Don't believe it. True, the sharply rising budgets of the decade following 9/11 are over. The services won't be able to afford everything they want. Tighter budgets will force the military to prioritize and economize, just as the rest of us have done. But that hardly constitutes "decimation," and smart strategic adjustment is more likely to prevent "decline" than to herald it.

The Pentagon's base budget, adjusted for inflation, is likely to stay above its 2008 level. The United States will remain — by a large margin — the dominant military power on earth. In light of the nation's troubled fiscal condition, the danger is not that the president will cut too much, but rather that the exorbitantly high military spending and global military activism during the last two decades will continue.

President Obama and his lieutenants have yet to spell out the details (those will be released with the budget in a few weeks), but we do know that they are planning to cut $260 billion over five years from the president's 2012 fiscal year plan released in February of 2011. According to calculations by Carl Conetta of the Project on Defense Alternatives, this is an 8.6 percent inflation-adjusted reduction from the first five years of Obama's previous plan, but only a 4 percent reduction from the previous five years, which included the height of the Bush-Obama military build-up.

With respect to the strategy, and to the military's global commitments, some genuine changes may be in the offing. The end of the decade may see reductions in U.S. troops in Europe and the number of nuclear warheads — unnecessary legacies of the Cold War. Obama seems unlikely to deploy U.S. troops to remake failing states, operations that have proved costly and counterproductive. That shift in focus allows for significant reductions in the Army and Marine Corps.

The United States would be secure with an even smaller force. Few contemplate the United States fighting a land war in Asia — wise advice that has been echoed by the likes of Douglas MacArthur, Dwight Eisenhower, and Robert Gates. Some troops can be brought home from that region. And when we bring them home, we can also shrink the size of the stay-at-home "institutional army," as well as supporting civilian employees and private contractors.

At its core, the "new" strategy is based on many of the same flawed assumptions of the old. It continues to task the U.S. military with the defense of the global commons, assuming this is the sole duty of the United States. There is the obligatory talk about "building partner capacity," but such efforts have largely proved unsuccessful. Other countries usually do not see their security needs the same way Washington does, and some are inclined to "free ride" on our security guarantees.

The twin constraints of fiscal insolvency and dwindling public support for a grandiose foreign policy present an opportunity for rethinking U.S. security commitments, as well as what we spend to fulfill them. A more realistic foreign policy, and a smaller, more restrained military presence around the globe, will allow us to engage in fewer costly missions. We can then turn our attention to the true source of our national insecurity: our untenable fiscal situation and the anemic economy.

By refocusing on the foundations, we can regain our balance.

Spending Can Be Cut Our Way, Or Europe's by Jagadeesh Gokhale

Fri, 20 Jan 2012 00:00:00 -0500

Better-than-expected job growth in recent months is increasing confidence that the economy may become more robust this year. However, serious challenges remain, especially on the federal budget, that are likely to constrain the recovery. To encourage investors to take more risks, businesses to hire more workers, and consumers to spend more money, lawmakers must resolve the budget deadlock soon, and in the right way. That should include privatization of social insurance programs such as Medicare and Social Security.

Recent sharp increases in interest rates on European government debt have forced Greece, Spain, Italy, and other nations to adopt austerity policies involving deep cuts to their social insurance programs. This should serve as much-needed notice to U.S. lawmakers, especially liberal-leaning ones: If they continue to make outlandish demands for more revenue, and the policy deadlock continues until U.S. debt valuations begin to slide, it will be too late to avoid a fate similar to that of the fiscally strapped Europeans facing forced austerity policies.

Why shouldn't America just raise taxes to cover deficits that stem primarily from social insurance programs? For one thing, even the Europeans are emphasizing spending cuts. Moreover, it would be counterproductive to finance U.S. spending commitments by increasing taxes, which would require roughly doubling payroll taxes immediately and permanently.

A recent International Monetary Fund analysis shows that closing deficits by raising more revenue tends to lead to deeper recessions and slower growth. It's far better to follow the example of Canada's mid-1990s reforms, which involved just $1 in tax increases for every $7 in cuts, and which resulted in strong economic performance over the next decade.

Emphasizing tax hikes would also reinforce high levels of social insurance benefits, diminishing individual incentives to acquire skills, work, save, and invest. In a key 1937 Supreme Court ruling establishing Social Security's constitutionality, Justice Benjamin Cardozo paraphrased those opposed to the program as arguing "that aid from a paternal government may sap those sturdy virtues and breed a race of weaklings."

U.S. productivity growth weakened during the early 1970s, soon after health entitlements were established and Social Security benefits were protected from inflation. More recently, the brief productivity spurt of the 1990s information-technology shock has dwindled. America is suffering from poor skill acquisition, with education performance sliding for the past two decades; a reduced work ethic, with average weekly work hours having declined from 39 during the mid-'60s to 34 today; and saving and investment rates that have been dropping since the late '70s. The fear about our "sturdy virtues" is proving true.

Reinforcing social spending through taxes would increase the chances that, like the Europeans, we will discover such spending can't be financed by an economy of "weaklings." That would eventually force austerity measures that would amount to a backdoor privatization of social programs. That is, Americans would have no choice but to increase savings, work longer, or scale back their living standards in retirement.

Unfortunately, a long-term agreement to reduce the deficit seems unlikely this year. The failure of Congress and President Obama to achieve a deal thus far is a double-edged sword. On the one hand, it signals Republicans' willingness to steadfastly reject destructive tax increases. On the other, it brings us closer to an undesirable, European-style privatization through forced austerity.

Isn't it time to think about actively privatizing our social programs to make them sustainable while we can still decide who will bear the cost?

Jagadeesh Gokhale is a senior fellow at the Cato Institute, member of the Social Security Advisory Board, and author of Social Security: A Fresh Look at Policy Options University of Chicago Press (2010).

The Great Renewable Energy Scam: Is There A Change in the Wind? by Patrick J. Michaels

Thu, 19 Jan 2012 00:00:00 -0500

People don’t like being forced to purchase things they may not want, which is why over half of us are hoping that the Supreme Court throws out the individual insurance mandate in President Barack Obama’s health care plan.

There’s also a worldwide rebellion brewing against being forced to purchase expensive electricity produced by so-called “renewable” sources, now being exacerbated by the availability of very cheap natural gas from shale formations.

But, here in the U.S. there are some 30 different statewide “renewable portfolio standards” (RPSs) that also mandate pricey power, usually under the guise of fighting dreaded global warming.

RPSs command tha. a certain percentage of electricity has to come from wind, solar, geothermal, or biomass. Given that this power generally costs a lot more than what comes from a modern coal or gas plant, your local utility passes the cost on in the form of higher bills, which the various state utility commissions are only too happy to approve in the name of saving the planet.

RPSs generally do not include hydroelectric power, which produces no carbon dioxide. It’s also much more predictable than solar or wind, and costs about the same as the average for gas and coal combined. It’s not in the portfolio standards because dams are soooo 20th century, and it isn’t a darling of the green lobby, like solar, wind and biomass. But hydro can deliver more juice than solar is ever likely to.

Nor do RPSs allow for natural gas. There are massive quantities in shale formations around the country, and new horizontal drilling techniques are releasing so much of it that it is now the cheapest source of electrical power. If our environmentalist friends were at all serious about climate change, they would enthuse over it becaus. it produces significantly less carbon dioxide than an equivalent quantity of coal when used for power generation. Instead, they are horrified that cheap gas will destroy solar and wind.

Their worries are quite well-founded. In November, NextEra Energy, the country’s largest wind-energy producer, said it would develop no new wind projects this year, as utilities sell cheaper gas power.

When are governments going to learn that they ought to butt out of the energy business? RPSs that specify certain technologies are essentially picking winners and losers based more upon political pull than market logic.

One needs to look no further than ethanol as a motor fuel, mandated by the feds. Sold as “renewable” and reducing pernicious carbon dioxide emissions, it actually produces more in its life cycle than simply burning an equivalent amount of gasoline. It also—unconscionably—consumes 40% of U.S. corn production, and we are the by far the world’s largest producer of this important basic food.

The popular revulsion against ethanol has succeeded in cutting its massive federal subsidy, of $0.54 per gallon, which ran out on Dec. 31. But that doesn’t stop the federal mandate. Last year it was for roughly 14 billion gallons from corn and it will be nearly 15 billion in 2012. By 2022, up to 20 billion gallons will be required — all from corn — unless there is a breakthrough in so-called “cellulosic” ethanol, which, no matter how much money the government throws at it, hasn’t happened. Indeed, the largest cellulosic plant, Range Fuels, in Camilla, Ga., just went bankrupt. The loss to American taxpayers appears to be about $120 million, or about 25% of a Solyndra.

Don’t expect Congress to zero the ethanol mandate anytime soon. Farm country tends to be conservative on pretty much everything except propping up corn prices, which is what ethanol mandates do.

Having seen the ethanol debacle, will the states put solar and wind in their rightful (small) niches by repealing the RPSs? Increasing utility bills with renewable mandates is politically dangerous, and there is less and less political will to subsidize and otherwise prop up energy sources and technologies that cost too much.

Look for a movement in the many state legislatures that approved the outrageous RPSs without asking people how they liked being forced to buy something they don’t want. Or will cheaper natural gas and hydro be allowed in the standards in the place of wind and solar? There is likely to be some legislation introduced this year and a lot more in the future, as the U.S. catches on to the great renewable energy scam.

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

Blackout Protesting SOPA, PIPA Bills Makes Statement on Censorship by Julian Sanchez, David Segal

Thu, 19 Jan 2012 00:00:00 -0500

Wikipedia was just one of many popular websites that went dark yesterday, in an unprecedented protest against controversial anti-piracy legislation that threatens the open internet — and reporters are scrambling to understand the debate in familiar terms: Is it right vs. left? Silicon Valley vs. Hollywood? But opposition to the Stop Online Piracy Act and its Senate counterpart, the Protect IP Act, is shattering those familiar battle lines.

Back when so-called “network neutrality” regulation was the hot-button technology issue of the day, conservative Republicans such as Rep. Lamar Smith (R-Texas) urged their fellow legislators to “reject government regulation of the internet.” In 2006, Smith called one neutrality proposal “a regulator’s dream, but an entrepreneur’s nightmare.”

Now, Smith is the lead sponsor of SOPA, a bill that would give the government — and even private companies — sweeping powers to choke off Americans’ access to foreign websites accused of copyright infringement.

SOPA would stifle innovation, stymie free speech and create a powerful incentive for social networking platforms to pre-emptively police their users’ posts, for fear of being branded “rogue sites.”

The last internet regulation this sweeping was seen in 2010, when the Federal Communications Commission ruled to impose the net neutrality regulations that Congress had declined to pass. The rules limit broadband providers’ ability to prioritize or differentiate online traffic.

Supporters thought such rules were needed to protect market competition and prevent large corporations such as Comcast or Time Warner from favoring their own content while slowing potential challengers such as Netflix.

Many conservatives and libertarians, by contrast, worried that net neutrality would open the door to further government meddling.

In response to SOPA and PIPA, however, internet users have let loose the loudest unified roar in the history of the web, with upward of 4 million people e-mailing or calling their lawmakers in opposition to the legislation.

Civil libertarians of the left and right — such as the two of us, who often disagree on tech issues — have joined forces to decry the legislation’s proposed infrastructure for censorship. Liberal constitutional scholars, including Harvard’s Lawrence Tribe, have been joined in opposition by such conservative legal luminaries as Eugene Volokh and Glenn (“Instapundit”) Reynolds.

One reason the backlash has been so boisterous is that, whereas the net neutrality debate involved a conflict between the values of network openness and limited government, opposition to SOPA unites them. Proponents of openness recoil at the way SOPA lets the government and corporations decide what content users can access.

Unsurprisingly, the old-media conglomerates leading the charge in support of SOPA represent the concentrated corporate power progressives mistrust — but also an undisguised hostility to disruptive power of unfettered markets.

As of this writing, dozens of Republicans who opposed net neutrality are co-sponsors of SOPA or PIPA. Across the aisle, leading lights of the fight for net neutrality such as Al Franken (D-Minn.) and Patrick Leahy (D-Vt.) have all signed on as co-sponsors.

Odd as it may sound, given their conflicting philosophies, neither group is holding true to the principles they espouse. Combating online piracy is an important goal, but using government censorship of the internet to do it flies in the face of the values all Americans, liberal and conservative alike, should hold in common.

Julian Sanchez is a research fellow at the Cato Institute. David Segal is the executive director of Demand Progress and a former Rhode Island state representative and candidate for Congress.