Archive for January, 2007
Bush’s Energy Pablum
Last night, President Bush unveiled what he calls his “20-by-10″ plan, a program that he claims would reduce America’s gasoline consumption by 20 percent within 10 years. You can find my critique of the alternative fuels madness that he proposed last night here, a more thorough critique of ethanol subsidies in general here, my complaint with his $60 billion plan to massively expand the Strategic Petroleum Reserve here and here, and a call to dismantle — not revise — federal automobile fuel efficiency standards here.
By the way, you know that a plan was dreamed up by politicians and pollsters — and not by, oh, anyone who knows what they are talking about — when the numbers are nice and round with a catchy ring to them when put together.
Even Leftists Recognize that Over-Regulation Is Hindering U.S. Competitiveness
A report commissioned by New York Senator Charles Schumer and New York City Mayor Michael Bloomberg concludes that over-regulation is harming American competitiveness, with New York City being disproportionately impacted.
The most intriguing proposal in the report is the call for an optional federal charter for insurance companies. These companies currently are chartered by states, and state politicians abuse this process with mandates and other forms of regulation. An optional federal charter (similar to what exists in the banking sector) would force competition among regulators and create incentives for a more sensible system. That’s the good news.
The bad news is that the report also expresses sympathy for global regulations, which almost surely would mean politicians and bureaucrats insisting that all nations accept excessive regulation. Indeed, the International Organization of Securities Commissions (IOSCO) already is trying to impose a one-size-fits-all system on the world — an approach that would penalize jurisdictions with dynamic financial service industries, such as Hong Kong, Bermuda, and Cayman Islands (see here and here for more information). Tax-news.com reports on the new study:
United States Senator Charles E. Schumer and New York City Mayor Michael R. Bloomberg have released a report which warns that New York could lose its status as a global financial market within a decade without a major shift in public policy. Schumer, a New York Democrat, and Bloomberg, together with New York Governor Eliot Spitzer, warned that New York’s financial markets, stifled by stringent regulations, and high litigation risks, are in danger of losing businesses and high-skilled workers to overseas competitors, relegating New York to regional market status and adversely impacting the US economy. …Senator Schumer and Mayor Bloomberg commissioned the joint report, “Sustaining New York’s and the US’s Global Financial Services Leadership,” which sets out a series of recommendations to counter emerging threats to the United States’ position as the world’s financial leader, with a two-tiered package of national and local measures aimed at removing impediments to financial services competitiveness both domestically and internationally. The report warned that the United States would miss out on between $15 billion and $30 billion in financial services revenues annually by 2011 if the current situation goes unchanged. According to the joint report, while many of the causes are due to improved markets abroad and sophisticated technology that has virtually eliminated barriers to the flow of capital, a significant number of the causes for America’s declining competitiveness are self-imposed. …The report also noted that a complex and sometimes unresponsive regulatory framework has not only prompted many foreign firms to stay out of the US markets, but also is forcing more business overseas because of the complexity and cost of doing business in US financial markets regardless of where they are located.
Hear That? It’s the Sound of a Nation Constricting
Beginning today, citizens of the United States, Canada, Mexico, and Bermuda are required to present a passport to enter the United States when arriving by air from any part of the Western Hemisphere.
This new restriction on local international travel is part of the “Western Hemisphere Travel Initiative.” Tightening up on travel documentation was a recommendation of the 9/11 Commission that Congress passed into law in the Intelligence Reform and Terrorism Prevention Act of 2004.
To downplay the consequences of this new travel restriction, a Department of Homeland Security press release points out that over 90 percent of U.S. citizens, 97 percent of Canadians, and just about all Mexicans and Bermudans flying to the United States over the past week arrived with passports. But this means that fully 10 percent of Americans who currently travel overseas this way are going to be at least inconvenienced, and at most dissuaded, from doing so.
It’s hard to quantify what a marginal restriction on travel like this means, but let’s try:
As early as January 1, 2008, the new restriction may apply to citizens entering the U.S. from the Western Hemisphere by land or sea. Air travelers are probably more likely than land or border crossers to have passports so let’s assume that 10 percent of all American border crossers lack passports.
To get a rough idea of what this means, in 1999, there were approximately 300 million roundtrips between the United States and Mexico and the United States and Canada, the vast majority of them same-day trips. Let’s assume 250 million of them were U.S. citizens. If 1% of these trips don’t happen (10% of current non-passport holders) because of the new Western Hemisphere travel restrictions, that’s 2.5 million cross-border trips forgone each year, along with the commerce, goodwill, and freedom those trips would have entalied.
What price freedom? Well, let’s make it 10 bucks. At that price, using these strictly back-of-envelope estimates, WHTI costs $25 million per year (not counting the cost of administration). The net present value of a $25 million annual expenditure is $500 million (at a 5% interest rate). In other words, more than half-a-billion dollars (a low estimate) worth of freedom and commerce goes down the drain starting today.
It would be worth every penny if it improved our national security by a similar margin. Alas, it does not.
The reason why requiring passports at borders provides so very little security boils down to the fact that identity does not reveal intention.
In our daily lives, we use identity to assure ourselves of the bona fides of others – neighbors, coworkers, stores, and restaurants, for example. But terrorists and hardened criminals are not similarly constrained by the social and legal pressures we can bring to bear on our law-abiding neighbors.
You could have perfect knowledge of who everyone is – lock down everyone’s identity with a mandatory cradle-to-grave biometric tracking system – and you would still not prevent crime and terrorism. I have carefully analyzed the utility of identity for security in my book, Identity Crisis.
Terrorists can defeat an identity-based security system either physically or logically. They can enter the country someplace other than a border crossing for example – and the half-billion expendture on WHTI is 100% wasted. A logical evasion of identity-based border security is to enter the country legally, not having participated in terrorism planning or acts before. This was the technique used by al Qaeda with most of the 9/11 terrorists.
Checking passports at the border of the country is what security expert Bruce Schneier correctly calls “security theater.” It may make you feel safer, but it doesn’t make you safer. It does corral law-abiding citizens into the habit of showing ID as they go about their business, and it puts information about law-abiding travelers into government data stores for who-knows-what future use.
With the travel restrictions going into effect today, America does not get safer, just smaller.
Facts and Logic Pertaining to the Enemy
I was preparing to write a lengthy blog post responding point by point to the many erroneous assertions and flawed arguments contained within the president’s State of the Union address, but then I discovered that I didn’t have to. Veteran Washington Post reporter Glenn Kessler did it for me.
Among the gems contained within Kessler’s article:
– “The Shia and Sunni extremists are different faces of the same totalitarian threat,” the president said. In other words, Kessler writes: “Under Bush’s rubric, a country such as Iran … is lumped together with al-Qaeda, the terrorist group responsible for the Sept. 11, 2001, attacks.”
– With respect to Hezbollah, which President Bush singled out as a terrorist group “second only to al-Qaeda in the American lives it has taken,” Kessler points out that those attacks on the U.S. embassy and a Marine barracks in Lebanon occurred “nearly a quarter-century ago…when the United States intervened in Lebanon’s civil war by shelling Hezbollah strongholds.”
– In the president’s cataloguing of the actions of “the enemy” since 2005, he “tried to tie together a series of diplomatic and military setbacks that had virtually no connection to one another, from an attack on a Sunni mosque in Iraq to the assassination of Maronite Lebanese political figure [sic].”
– The so-called freedom agenda also takes a few hits. In a familiar refrain, the president argued that “free people are not drawn to violent and malignant ideologies — and most will choose a better way when they are given a chance.”
– However, as Kessler reminds us, “In the two of the most liberal and diverse societies in the Middle East — Lebanon and the Palestinian territories — events have undercut Bush’s argument… Hezbollah has gained power and strength in Lebanon, partly at the ballot box. Meanwhile, Palestinians ousted the Fatah party — which wants to pursue peace with Israel — from the legislature in favor of Hamas, which is committed to Israel’s destruction and is considered a terrorist organization by the State Department.”
– As for the “moderate” governments that the terrorists wish to overthrow, ”Many of the countries that Bush considers ‘moderate’ — such as Egypt and Saudi Arabia — are autocratic dictatorships” whose “Freedom House ratings are virtually indistinguishable from Cuba, Belarus and Burma, which Bush last night listed as nations in desperate need of freedom.”
– Finally, with respect to the president’s assertion that “we have a diplomatic strategy that is rallying the world to join in the fight against extremism,” Kessler notes that “global opinion of U.S. foreign policy has sharply deteriorated in the past two years.” A recent poll found that nearly three-quarters of those surveyed “disapprove of U.S. policies toward Iraq, and nearly half said the United States is playing a mainly negative role in the world.”
Notably, Kessler’s article was not identified as a “News Analysis” — the typical flag that reporters employ when they wish to call attention to the fact that an article in the news portion of the paper (as opposed to the Opinion page) contains opinions. Kessler’s piece did not require such a designation because it was based not on opinion, but rather on a fair and accurate reading of the facts.
Which is more than can be said for the president’s speech.
Health Care in the SOTU
Read my contribution to National Review Online‘s post-State of the Union symposium here, and my comments in the Wall Street Journal.
Old Dominion GOPers Fall Off the Tax Wagon…Again.
Virginia Republicans have lost seats in the state legislature and lost the governor’s mansion in part because of their propensity to raise taxes. Unfortunately, they do not seem to understand the link between their profligate behavior and their political misfortunes. The Wall Street Journal explains that they now want to raise taxes when the state has a giant budget surplus:
Virginia was once a solidly conservative Republican state, but in recent years it has tilted Democratic. A big reason for the shift is the GOP’s recent love affair with higher taxes. In the 1990s Republican Governors George Allen and Jim Gilmore won sweeping victories running as tax cutters. Then in 2004 Richmond Republicans enacted the largest tax increase in the commonwealth’s history — a $1 billion hike in sales and tobacco taxes. Now they are flirting with another tax hike even though the state has a Blue Ridge Mountain-high $900 million budget surplus. …The Republican plan would spend $1 billion more for roads and cost-inefficient transit programs and pay for it through borrowing, raising taxes and fees on cars and trucks, and giving local governments authority to raise their assessments. …Only 10 years ago the Virginia GOP was riding high after Jim Gilmore was elected Governor on a wildly popular message: “End the Car Tax.” Now the Virginia Republicans want to raise car taxes. Have they learned nothing from the party’s implosion in Washington?
Why the States — Not Congress — Should Keep the President’s “Promise”
In his State of the Union address, the president will propose that “persistently underperforming” public schools, as defined by the No Child Left Behind act, be required offer their students ”promise scholarships” that could be used to transfer to private schools or to out-of-district public schools, or be applied to after-school tutoring.
Promoting educational choice is an excellent idea, but attempting to do it from the Oval Office is not. Even if the U.S. Constitution did not leave power over education in the hands of the states and the people (which in fact it does), a national school choice program would still be undesirable.
When states are left to create their own education policies, it is easy to see how their decisions affect students and communities. We can compare what happens in states that adopt a given policy to what happens in states that don’t. That’s how California’s disastrous side-lining of phonics instruction in the late 1980s was caught and reversed.
But when you create programs at the federal level, any unintended effects occur all across the country at the same time, eliminating the ability to make comparisons across states.
Countries that have adopted school choice programs at the national level (e.g., Chile, the Netherlands, Sweden, etc.) have either imposed extensive regulations on participating private schools right from the start, or have added them gradually over time. Some kinds of school choice policies are likely to generate less of this regulatory encroachment than others, so it would behoove the president to encourage states to develop their own policies rather than impose one from Washington.
When the president floated a similar proposal last year I responded in more detail, and that comment can be found here.
The United States Owes Hillary Clinton a Debt
Hillary Clinton’s announcement of her presidential bid has evoked several news stories predicting the demise of the presidential public financing system.
In Buckley v. Valeo, the U.S. Supreme Court decided that spending limits violated the First Amendment. The same decision, however, said that the government could impose spending limits in exchange for public financing of a campaign. The presidential system enacted just after Watergate provided public funding for primary campaigns (on a matching basis) and for the general election. The law established equal spending limits and prohibited private fundraising for the general presidential election for the major party candidates.
McCain-Feingold is also part of this story. That 2002 law liberalized contribution limits a bit which made it easier for strong candidates like Hillary Clinton to raise more money privately than she would receive from the public funding scheme. Of course, she could accept public funding and forego the larger sums she might raise privately. However, her competitors for the nomination – say, Barack Obama or John Edwards – might also be able to raise more money privately, and they would do so to gain an edge in the primaries over Sen.Clinton. The same might well be true of the Republican candidate in the general election. If Sen. Clinton took the public funding and its spending limits, she would be outspent by the GOP nominee. Given all these considerations, Sen. Clinton has decided to forego public funding. Any serious candidate for the presidency in 2008 is likely to make the same decision.
Too much political analysis, you might say. After all, didn’t Congress create the public financing system to prevent corruption of candidates or “level the playing field” for outsiders? The members of Congress who created public funding ascribed such noble and moral ends to their effort. But the actual purposes of the system were rather less noble and more partisan.
Taxing the Future
Today’s New York Times reports that Illinois is seriously considering selling off its state lottery and converting the future cash flow into a current lump sum plus a smaller cash flow over the next 75 years. Gambling, of course is not an economic development strategy. Excess profits exist only because the state restricts entry. Like the mercantile regimes of old, the state is raising cash by selling off its monopoly.
Given the numbers in the Times, I conducted some present value calculations. The sale is projected to result in a cash flow of $200 million per year for 75 years to the state (current profits are $430 billion). The remaining cash flow goes to the winning bidder. The reported estimated bid for this franchise is approximately $1 billion. That suggests a return on investment of 20% per year compounded over 75 years. Seems rather steep to me. A 5% return would result in a much higher bid of $3.9 billion.
If the $1 billion is an accurate reflection of what an auction would yield, then the market is telling us that there is large risk to investing in a business whose only asset is state restrictions on entry. This is particularly true because of the possibility not only of actual physical entry in Illinois, which is less likely, but entry through the internet.
Gambling markets are not the only markets whose source of profits is state enforced entry restriction. Some years ago Richard Sansing and I studied the difference between the lease prices and sale values of taxi medallions in New York City (Journal of Policy Analysis and Management volume 13 issue 3 (1994) pp. 565-570). We found that the market acted as if there was a 5% chance of deregulation in any year (i.e. the market was pricing the asset as if its cash flow would be zero in year 21).
Why are states selling assets for their cash flows? Spending a billion dollars now rather than $630 million every year (the current profits of the lottery) allows today’s politicians to appear generous. But my suspicion is that they are taxing the only thing left to tax i.e. people in the future. My colleague Jagadeesh Gokhale’s work in entitlement reform argues that Social Security and Medicare are policies that redistribute from all future generations to current and past generations. Politicians do this because the future is the last unorganized group in society. I think some of the same politics are behind the Illinois lottery financial proposal. But ironically the inability of the political system to credibly commit to future policies reduces the value of the sale to the current era because the market includes political risk in its valuation.
Trade Showdown Looks Inevitable
Yesterday I argued that Congress’s unflinching devotion to the antidumping law poses a real threat to the world trading system. As the WTO dispute settlement mechanism renders more decisions against U.S. antidumping actions and procedures, Congress will grow more inclined to question the efficacy and legitimacy of the WTO in public. And that is a slippery slope.
I wrote:
To Congress, trade remedy laws are not the problem. Dumping and subsidization are. And the latest Appellate Body decision against zeroing makes it that much harder to combat “unfair” trade.
Accordingly, Congress is highly unlikely to go quietly into the night after the WTO’s latest indictment of zeroing. Thus, confrontation–perhaps intractable confrontation–between the United States and the WTO dispute settlement system may be in the cards later this year.
Well, judging from this news release and letter, written by the two highest ranking legislators on trade issues, “later this year” is here. Stay tuned.
Bush Health Care Proposal Mirrors Cato Scholars’ Proposal
I’ve returned from my first pre-State of the Union briefing of the day by the Bush administration. (I’ve got another at 4:30). What I heard about the president’s health care proposal has me even more heartened.
In part, that’s because the president’s proposal mirrors the proposal for “large HSAs” that I introduced here and here, and that Mike Tanner and I explain in Healthy Competition: What’s Holding Back Health Care and How to Free It.
Tonight, the president will propose setting a very high limit on existing distortionary tax breaks for health insurance. The Large HSAs proposal would do the same. He also will propose extending the revamped tax break to all individuals, ending the tax code’s discrimination against those who don’t have access to employer-sponsored insurance. Ditto Large HSAs.
However, the president’s proposal does not incorporate an important third element of the Large HSAs idea: giving workers ownership of the part of their compensation that purchases their health benefits.
Here’s why that’s important. If your employer currently spends $10,000 on your health benefits, that part of your compensation is untaxed. The president’s proposal would let you keep that tax break if you choose to purchase coverage someplace else. But it does nothing to make sure that you get to keep the $10,000 that your employer spends on your health benefits. That money is not a gift — it is part of your compensation. But if you choose to leave your employer’s health plan, the employer is under no obligation to give you the money that he otherwise would spend on your health benefits. In fact, your employer would face strong incentives not to “cash you out.” Being free to choose where to purchase your health insurance means less if you have to take a pay cut to excerise that freedom.
Large HSAs would give workers ownership of that part of their compensation. The proposal would convert the current tax break for employer-sponsored coverage into a tax break only on HSA contributions. The contribution limits on HSAs would be raised, so that most workers could put all of their health benefits dollars into the account. They could then use those funds to purchase coverage tax free from their employer, or any other source. Importantly, with Large HSAs, the worker would control that $10,000 from day one.
Even though the president’s proposal doesn’t give workers ownership over that portion of their compensation, it is still a step in the right direction.
Filed under: Cato Publications; General; Health Care; Tax and Budget Policy
Spin Doctors Left and Right
Never say the Republicans don’t learn from their adversaries. On NPR, historian Timothy Naftali discusses responses to State of the Union speeches. He notes a tough response by House Republican leader Robert Michel to President Clinton in 1993, in which Michel complains about the way the “Clinton spin doctors” are changing the meaning of words. In particular, he grumbles, “Patriotism now means agreeing with the Clinton program.” That’s certainly a definition that (with the change of one word) the Bush spin doctors and their conservative supporters have endorsed wholeheartedly.
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