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Another $6.5 Billion in DOE Loan Guarantees

Cato Op-Eds - Fri, 02/21/2014 - 15:54

Nicole Kaeding

After Solyndra collapsed, the Department of Energy (DOE) should have learned its lesson. Guaranteeing loans for energy and industrial companies is a bad idea. The failures of Beacon Power and Fisker Automotive should have driven home the message. Now, we have further proof that the DOE isn’t paying attention.

Yesterday, DOE Secretary Ernest Moniz traveled to Georgia to announce $6.5 billion in loan guarantees for two new nuclear reactors already under construction. 

The loan, like so many others, has the markings of an incredible risky use of taxpayer dollars. According to the Washington Post, the project is already 21 months behind schedule. Additionally, Southern Company, the largest shareholder of the project, had its ratings’ outlook downgraded from “stable” to “negative” by Standard and Poor’s last year, in part because of “cost overruns” at the Georgia facility.

Even more frustrating, the company already had private loans in place to finance construction. Now we, the taxpayers, will save the company $250 million a year in interest costs by bearing the full burden of default.

The company also benefits from $2 billion in other federal tax credits, according to its CEO.

Some deal.

Categories: Policy Institutes

Water in the West: It’s Complicated

Cato Op-Eds - Fri, 02/21/2014 - 15:50

Chris Edwards

In the media, one hears two different stories regarding the drought in California and Western water problems in general. Liberals say that droughts are being made worse by climate change. Conservatives say that water shortages are being perpetrated by the EPA in a misguided effort to sacrifice farmers for some tiny fish. The Washington Times editorial today is of the latter genre.

The real story is more complicated. It’s not just Mother Nature, and it’s not just farmer vs. fish.

The fundamental problem is that the federal government has been heavily subsidizing Western water for decades, particularly for crop irrigation. Artificially low water prices have encouraged overconsumption and the planting of very dry areas where farming is inefficient and environmentally unsound. Subsidized irrigation farming has created major environmental problems in the San Joaquin Valley, for example.

To make matters worse, federal farm subsidies have boosted demand for irrigation water, which has further encouraged farmers to bring marginal lands into production.

So don’t blame the Delta smelt. Instead, blame antimarket policies going back eight decades in the case of farm subsidies and a century in the case of subsidized water from the federal Bureau of Reclamation.

The long-term solution to the West’s growing water problems is free-market economics. Policymakers should end the farm subsidies, reform water property rights, transfer federal dams and aqueducts to state ownership, and move toward market pricing of water.

For more, see my essay with Peter Hill and check out the great work from the free-market environmentalists at PERC.

Categories: Policy Institutes

White House Stimulus Report Based on 'Keynesian Fairy Dust'

Cato Op-Eds - Fri, 02/21/2014 - 15:44

Daniel J. Mitchell

Did you sing “Happy Birthday”?

The nation just “celebrated” the fifth anniversary of the signing of the so-called American Recovery and Reinvestment Act, more commonly referred to as the “stimulus.”

This experiment in Keynesian economics was controversial when it was enacted and it’s still controversial today.

The Obama administration tells us that the law has been a big success, but I have a far more dour assessment of the spending binge. Here’s some of what I wrote about the topic for The Federalist.

The White House wants us to think the legislation was a success, publishing a report that claims the stimulus “saved or created about 6 million job-years” and “raised the level of GDP by between 2 and 3 percent from late 2009 through mid-2011.”

Sounds impressive, right? Unfortunately, those numbers for jobs and growth are based on blackboard models that automatically assume rosy outcomes. Here’s how I explain it in the article:

[H]ow, pray tell, did the White House know what jobs and growth would have been in a hypothetical world with no stimulus? The simple answer is that they pulled numbers out of thin air based on economic models using Keynesian theory. … Keynesian economics is the perpetual motion machine of the left. They build models that assume government spending is good for the economy and they assume that there are zero costs when the government takes money from the private sector. That type of model then automatically generates predictions that bigger government will “stimulate’ growth and create jobs. The Keynesians are so confident in their approach that they’ll sometimes even admit that they don’t look at real world numbers. And that’s what the White House did in its estimate. The jobs number (or, to be more technical, the job-years number) is built into the model. It’s not a count of actual jobs.

In the real world, however, you can count jobs. As part of my Federalist article, I looked at the Minneapolis Federal Reserve Bank’s interactive website and compared the current recovery to all business cycle expansions in the post-World War II era. I did that comparison for both jobs and economic growth. The figure below shows the numbers for the labor market. The current recovery is in red, and you can see that the nation is “stumbling through the second-worst recovery for job creation in the post-WWII era.”

The next figure shows the Minneapolis Fed’s numbers for economic growth. It doesn’t seem possible, but GDP performance has been even worse than job performance. We are mired in stagnation. As I noted, “the current recovery (red line) is the weakest expansion since World War II.”

In other words, it’s very difficult to argue—looking at the numbers—that the President’s main economic initiative was a success.

So why did it flop?

I pontificate in the article, pointing out three specific problems with Keynesian economics. I start with the elementary observation that the theory is based on the notion that you can become richer by taking money out of one pocket and putting it in another pocket:

[T]here is an “opportunity cost” when government borrows money and spends it. Resources are diverted from the productive sector of the economy. This might not be a problem if government spent money wisely, but stimulus schemes tend to reward interest groups with the most political clout. So instead of outlays for physical and human capital, which at least theoretically might improve the economy’s productive capacity, the White House directed the bulk of the stimulus to redistribution programs and handouts to state governments.

I then make a critical observation about how you shouldn’t try to solve one set of bad government policies with another layer of bad policy.

[T]he Keynesians don’t seem to appreciate that recessions generally are the result of bad government policies—such as inflation, housing subsidies, etc.—that lead to fundamental and unsustainable economic imbalances. Unfortunately, more government spending often is designed to prop up these imbalances, which can create a longer and more painful period of adjustment.

The clincher, at least for most people, is the simple fact that Keynesianism simply doesn’t work:

But the biggest problem with Keynesianism is that the real-world evidence is so unfriendly. Consider, for instance, that the White House claimed that the unemployment would never climb above 8 percent if the stimulus was adopted. … Keynesian economics has a long track record of failure. It didn’t work for Hoover and Roosevelt in the 1930s. It didn’t work for Nixon, Ford, and Carter in the 1970s. It didn’t work for Japan in the 1990s. And it hasn’t worked this century for either Bush or Obama.

And guess what? I’m going to make a very sad prediction that we’ll get more Keynesian economics in the future, but it’s easy to predict right now that these future spending binges will fail just like the previous stimulus schemes have flopped.

P.S.: Here’s my video on Keynesian economics and here’s my video on Obama’s failed stimulus.

P.P.S.: If you’d rather laugh than hear my voice, my favorite cartoons on Keynsianism can be viewed here and here.

Categories: Policy Institutes

Understanding the Protests in Ukraine and Venezuela

Cato Op-Eds - Fri, 02/21/2014 - 12:08

Dalibor Rohac and Juan Carlos Hidalgo

“All happy families are alike; each unhappy family is unhappy in its own way.” If one believes Tolstoy’s famous dictum, then the protest movements in Ukraine and Venezuela should not have much in common. However, there are several striking parallels between the events unfolding in the two countries—as well as some important differences:

1. It’s the economy, stupid!

Although the popular unrest in Ukraine was triggered by the government’s decision to cancel the agreed free trade agreement with the European Union, the popular discontent has deeper roots. After years of kleptocratic governance, which derailed the country’s transition toward a market economy, ordinary Ukrainians are desperate for change. In 1990, Ukraine’s GDP per capita was $8,200, which was roughly identical to Poland’s. Today, Poland’s GDP is $18,300 and Ukraine’s has gone down to $6,400. Unlike its post-communist neighbors to the West, Ukraine did not pursue deep institutional reforms and its economy was seized by a narrow group of oligarchs, with close connections to political power and to the Kremlin. The son of the President Viktor Yanukovych, Oleksandr, has become one of the richest men in the country during his father’s time in the office, while incomes of most Ukrainians stagnated.

In Venezuela the economic situation has deteriorated sharply since the death of Hugo Chávez last year. The country has the highest inflation rate in the world (officially 56 percent in 2013, although according to Steve Hanke’s Trouble Currency Project, the implied annual inflation rate is actually 305 percent). After years of nationalizations, expropriations, and currency and price controls—all under the name of “21st Century Socialism”—the private sector has been decimated. Hour-long lines in supermarkets are a daily occurrence and shortages of basic food staples and medicines are widespread. And just like in Ukraine, corruption is rampant as the ruling elite rake in the profits from oil revenues. This has resulted in the rise of a new privileged class called the “Boligarchs.” so-named because they’ve prospered tremendously under the so-called Bolivarian revolution. Moreover, Venezuela is now one of the most dangerous nations in the world, with almost 25,000 murders committed last year. A large segment of the population, mostly middle class, is simply fed up as the country quickly becomes unlivable.

2. Governments have responded with repression.

In Ukraine, the “Euromaidan” movement began with peaceful protests in late November, which occurred as a response to the government canceling the free trade agreement with the EU. In Kiev, the protesters gathered and set up an improvised camp on the Independence Square, called “maidan” in Ukrainian. After the protests were dispersed violently by the Berkut riot police on November 30, violence has slowly escalated, culminating in the events earlier this week, in which at least 77 people, and possibly more, died. The government has even paid thugs to infiltrate the opposition camps and incite clashes. Over past days, Ukrainian security forces used snipers and automatic weapons against protesters, resulting in large numbers of casualties.

In Venezuela, the protests began on February 12 after the government refused to release several students who had been arbitrarily detained days before. And just like the Viktor Yanukovych regime, Nicolás Maduro has cracked down on the demonstrations with unprecedented force, using the National Guard and armed paramilitary gangs. On February 19, government forces escalated their attacks against civilians, raiding apartment buildings and shooting people on the streets. The border state of Táchira is currently under military curfew. So far, at least eight people have been killed, dozens have been detained, and many are missing.

3. Foreign governments play a critical role in the events.

The Kremlin has been involved in Ukrainian affairs since its independence in 1991. After all, Vladimir Putin once called the demise of the Soviet Union “the greatest geopolitical catastrophe of the century.” Seeing Ukraine as part of its sphere of influence, Russia’s leaders have tried to use natural gas prices paid by Ukrainians as a way of extorting political concessions. Most recently, the Kremlin used gas prices to force the Ukrainian government to walk away from the free trade agreement with the EU, triggering the current unrest. Since the beginning of the Euromaidan protests, Russia has been providing the cash-strapped Ukrainian government with aid in the form of bond purchases.

The roles are slightly reversed when it comes to Cuban influence in Venezuela. Resources-strapped Cuba plays a critical role in propping up the Venezuelan government in return for much-needed oil: Venezuela provides Cuba with 120,000 barrels of oil per day, for an estimated value in 2012 of $3.6 billion (roughly 5% of Cuba’s gross domestic product). Cuban secret services control the security apparatus for the Maduro regime. Maduro himself was reportedly trained in communist ideology in Cuba in the 1980s, many years before Maduro predecessor Hugo Chávez actually came to power and ushered in the current communist government. It’s widely believed that Cuba’s ruling Castro brothers were the critical factors behind the selection of Maduro as Chávez’s successor. Without the oil, it is very likely that Cuba’s fragile economy would implode. The relationship between both countries is perhaps unique in world history as the larger, richer country has actually become a colony of its client state, up to the point that the Cuban flag flies in many Venezuelan military bases.

4. Countries seem divided by ethnicity and social status.

It has become conventional to distinguish between the pro-EU, Ukrainian-speaking part of the country and its eastern regions with closer ties to Russia. While it is true that the protest movement has gained relatively little traction in the Russian-majority regions, the ethnic and linguistic differences do not translate exactly into differences of opinion about the country’s future, with most Ukrainians, both Ukrainian- and Russian-speaking, favoring closer ties with the EU.

The division among Venezuelans isn’t along ethnic lines, but along socio-economic classes. The official—and disputed—results of last year’s presidential election in Venezuela show a country divided by halves: while Maduro obtained 50.6% of the vote, the opposition candidate Henrique Capriles got 49.1%. The regime draws most of its support from the poorest segments of the population that still receive significant government handouts, as well as public employees and the military apparatus. However, Maduro doesn’t command the same level of loyalty (and even adoration) that Hugo Chávez did with his supporters. Meanwhile, the opposition is mostly composed by the middle class and students. Unfortunately, there is a high level of hatred and mistrust between both camps that will persist for many years to come.

5. Neighbors and regional organizations are slow to respond.

Arguably, the reaction of the EU to the events in Ukraine has been excessively cautious and slow. Only yesterday did European leaders agree to impose targeted sanctions on Ukraine, including visa bans, assets freezes, and a suspension of export licenses for equipment that could be used for internal repression. In December and January, the EU did disappointingly little to articulate a potential relationship with the Ukrainian government that would be more appealing than deepening ties with Russia. Among the EU offerings: an accelerated “roadmap” to EU membership and its benefits, including free movement of people and access to the common market.

On the other side of the Atlantic, several Latin American left-wing governments have actually stated their solidarity with the Maduro regime, including the Mercosur trading bloc. Other nations with more mature democracies such as Mexico, Colombia, Peru, and Costa Rica have been silent—either out of cowardice or cynicism. Only Chile and Panama have voiced some restrained concern about human rights abuses in Venezuela. Regional coalitions such as the Organization of American States and the Community of Latin American and Caribbean States are likely to remain mum. Thus, the Venezuelan government doesn’t have to worry about being held accountable for repressing its population.

A final common trait of the two outbreaks of popular unrest against authoritarian and kleptocratic rulers is the uncertainty about the outcome. Today’s agreement in Kiev gives hope that an orderly transition toward a new constitution and a new election can be achieved. However, given that President Yanukovych has already reneged on similar promises in the past, any agreement that keeps him in power until a successor is elected is extremely fragile because of his lack of credibility. Similarly, in Venezuela, the government has refused to negotiate with the protesters, calling them “fascist.” Yet, as the discontent grows and the protests gain wider traction, they might well become a major headache to the regime.

Categories: Policy Institutes

Washington Pushed Common Core on Us, and All We Got Was This Lousy Burrito Wrapper

Cato Op-Eds - Thu, 02/20/2014 - 16:56

Neal McCluskey

The Common Core is slowly but surely becoming a big national issue, and three things in today’s news tell us a lot about what’s going on.

  • It is a major story – it was a lead Politico article this morning – that the National Education Association, after steadily, if quietly, backing the Core, yesterday slugged it. At least, President Dennis Van Roekel came out with guns blazing against the implementation of the Core, saying that in many states “implementation has been completely botched,” and calling for a slowdown in the Core rollout. To be sure, Van Roekel didn’t suddenly say the Core is poor-quality standards, but implementation is absolutely key, and it is there that experts across the spectrum have long been crushing the Core.
  • With the tide increasingly turning against them, Core advocates are no longer napping, feeling secure in the fact that Washington got a large majority of states to sign on to the Core before anyone really knew what was happening. This morning, news came out about survey results from the Core-supporting 50CAN. A big takeaway, according to 50CAN? Most people don’t know much about the Common Core, but would like it if they did: a sizeable majority support the idea of uniform standards. That’s probably accurate – in the abstract, one standard sounds nice – but what is more telling is the response to whether people trust policymakers in DC “to determine what is best for improving schools.” Only 17 percent either “strongly” or “somewhat” trust Washington. Eighty percent “do not trust” DC. Maybe that’s why Core-ites seem hell-bent on ignoring the crucial role Washington had, through the Race to the Top contest and No Child Left Behind waivers, in coercing Core adoption. So uniform standards may seem nice, but federally driven? Ick! Which brings us to our last story…
  • It was reported today that Missouri State Representative Mike Lair put an $8 provision into an appropriations bill to purchase “two rolls of high density aluminum to create headgear designed to deflect drone and/or black helicopter mind reading and control technology.” This was meant to be a riproarious slap at Common Core opponents, whom Core advocates insist on tarring as kooks for fearing stuff like nationalization of school curricula. And they may, indeed, seem crazy to you if you refuse to acknowledge that the federal government, at the behest of the “state” groups that created the Core, coerced adoption. And if you ignore that Washington selected and funded two consortia to create tests to go with the Core. And if you are unaware that the U.S. Department of Education has a “technical review” panel for those tests that meets behind closed doors. And if you forgot that the federal government still requires, though it has loosened the rules, that schools be judged in part on state test performance. Yes, if you ignore reality, you could conclude that Core opponents are bonkers. But if you know and accept reality, then you know that far from being crazy, opposition to the Core is based, to a large degree, on logic and facts. Which means few at whom Rep. Lair is aiming his little joke are going to be making a chapeau with the free foil. At most, they’re going to put it to good use and make a burrito wrapper, or a solar oven, or are just going to throw it back at Rep. Lair, yelling, “stop calling me crazy, and stop wasting my eight bucks!”
Categories: Policy Institutes

Dumbest Trade War Indeed

Cato Op-Eds - Thu, 02/20/2014 - 16:40

K. William Watson

In an article titled “The World’s Dumbest Trade War,” Slate’s Will Oremus offers a thorough accounting of the ridiculous policy of imposing tariffs on cheap solar panels from China. 

Remember, the U.S. government wants Americans to buy solar panels, and it subsidizes those purchases through rebates and incentives. The Chinese government wants Chinese companies to build solar panels, and it subsidizes their manufacture. And yet rather than celebrate this fortuitous arrangement, the world’s top economic powers find themselves on the brink of a trade war that could cripple a promising industry in both countries, kill jobs, and hurt the environment all at once. It’s a terrible trade-policy trifecta.

Trying to make solar panels more expensive to aid domestic manufacturers defeats the whole purpose of having domestic manufacturers in the first place. It aptly demonstrates the folly of green industrial policy—subsidies and tariffs to create and then maintain “green jobs”—as a rational environmental policy.

Fortunately, some countries have recognized the harmful impact of trade barriers and called for free trade in environmentally friendly products like solar panels and wind turbines. This initiative may be included in some form in the Trans-Pacific Partnership agreement. Last year, Simon Lester and I wrote a paper explaining that any such endeavor should not exclude antidumping and anti-subsidy duties like those being used here by the United States.

What’s more, as Oremus aptly points out, these duties not only reduce the viability of green energy, they harm domestic businesses that install solar energy equipment. 

Unfortunately, this phenomenon is in no way unique to solar panels. The U.S. imposes a great number of antidumping and anti-subsidy duties on imports that U.S. manufacturers rely on as inputs. Check out this video to learn more about America’s economically irrational and destructive antidumping laws:

Categories: Policy Institutes

Gap Pay Raise Follows Rand Not Obama

Cato Op-Eds - Thu, 02/20/2014 - 14:55

James A. Dorn

Clothing retailer Gap Inc. has won praise from the White House in announcing its decision to raise entry-level wages to $9 an hour this year, and $10 next year. President Obama applauded Gap and argued that Congress should follow suit by passing a bill to increase the federal minimum wage from $7.25 an hour to $10.10 by 2016.

But there’s a big difference between a voluntary increase in a market-determined wage rate and a government-mandated minimum wage.

Gap must report to shareholders and make a profit to stay in business; politicians report to voters and must win elections to stay in office. Polls show that the American public strongly support a higher federal minimum wage — but only if it appears to be costless.

President Obama, in promoting a higher minimum wage, argues that it would “lift wages for more than 16 million workers—all without requiring a single dollar in new taxes or spending.” This is the free lunch that politicians love to promise—and it is an illusion.

When the government arbitrarily pushes up wage rates above the competitive level, two things happen: some jobs are lost; and more workers look for jobs but can’t find them, so unemployment of lower-skilled workers increases. These effects are greater in the long run as employers switch to labor-saving technology.

When firms make adjustments in expectation of higher minimum wages (both federal and state), there will be a decrease in the number of jobs for lower-skilled workers (mostly younger, inexperienced, less-educated workers) but an increase in the demand for higher-productivity, skilled workers who complement the new technology.

Gap has already made significant investments in labor-saving technology and recently implemented a “reserve-in-store” computer program that relies on higher-skilled workers whom Gap invests in to enhance their human capital. Gone are the days when high-school dropouts could easily get a job with retailers. As Gap raises its starting wage, there will be more competition for a dwindling number of jobs. More workers will want a job, but fewer workers will be hired, and those that are will be of higher quality.

Glenn K. Murphy, Gap’s CEO, told the company’s employers upon announcing the change in policy, “To us, this is not a political issue. Our decision to invest in front-line employees will directly support our business, and is one that we expect to deliver a return many times over.”

This is free-market, Randian thinking: self-interest is the motivating factor, not altruism.

When President Obama says, “It’s time to pass [the minimum wage] bill and give America a raise,” he is making a promise that can’t be kept: some workers will gain (those who have higher productivity) but others (the least productive workers who most need a job to gain experience and move up the income ladder) will lose.

Indeed, the Congressional Budget Office now tells us that an increase in the federal minimum wage to $10.10 an hour could cost a loss of 500,000 jobs. Those most affected would be low-productivity workers in low-income families—making them poorer, not richer. (If the government promises a wage of $10.10 an hour but a worker loses her job or can’t find one, then her income is zero.) There is no free lunch!

People do what is in their own best interest. Gap may win some friends by increasing entry-level wages and saying this is in tune with company “values,” but unless that business decision is profitable Gap will lose sales, and its shares will drop in value. There is thus a market test of the decision to raise wages.

The government has no business telling private employers what to pay or telling workers they cannot offer their labor services at less than the legal minimum wage, even if they are willing to do so to retain or get a job. The President’s minimum wage is anti-economic freedom and violates personal freedom; Gap’s higher entry wage does neither. This is a case of “the emperor has no clothes!”

Categories: Policy Institutes

About Those "Creeping Sharia" Fears

Cato Op-Eds - Thu, 02/20/2014 - 14:49

Walter Olson

If you’ve wondered about charges of “creeping sharia” in American law, you really should read this week’s series of blog posts by Eugene Volokh based on an Oklahoma Law Review article. (Oklahoma is the state whose legislators passed a law banning the use of Islamic sharia and other religious law in courts, struck down by the Tenth Circuit as unconstitutional because of its specific proscription of the law of one religion as against others.) Included are installments on the courts’ enforcement of contracts, wills, and similar instruments that would call on courts to interpret Islamic law or that are motivated by desire to conform to such law; instances where American courts use foreign law that itself incorporates religious law; instances where devout Muslims claim broadly available religious exemptions from generally applicable laws or work rules; and provision in government services of accommodations that benefit devoutly Muslim customers, employees, students, or clients. Summary passage, footnotes omitted:

In many of the instances that critics see as improper “creeping sharia,” I will argue, it is longstanding American law that calls for recognizing or implementing an individual’s religious principles, including Islamic principles. American law provides for freedom of contract and disposition of property at death. Muslims (like Christians, Jews, and the irreligious) can therefore write contracts and wills to implement their understanding of their religious obligations. American law provides for arbitration with parties’ consent. Muslims can use this to route their disputes to Muslim tribunals, just like Christians, Jews and the irreligious often route their disputes to private arbitrators of their choice.

American law provides for religious exemptions from generally applicable laws and from employer regulations. Muslims, as well as Christians, Jews, and others, may claim such exemptions. American law provides for the use of foreign law in certain cases stemming from foreign occurrences (marriages, divorces, injuries and the like). Sometimes this calls for the use of foreign religious law, whether Islamic law, Jewish law, or the decisions of Christian tribunals.

Of course, American law also imposes limiting principles on these doctrines. Some contracts and foreign judgments are unenforceable. Many religious exemption requests are denied. But these limiting principles, I argue below, already adequately prevent improper recognition of Islamic law and allow recognition of such law when recognition is proper. There is no need for new law here.

…[My approach] urges courts to continue following well-established American legal traditions rather than distorting those traditions either in favor of Islam or against.

Last month, Prof. Volokh published a series of posts, likewise based on a law review article, on the closely related issue of the reception of foreign law generally in American courts.

Categories: Policy Institutes

Friedman and Hanke on Bitcoin

Cato Op-Eds - Thu, 02/20/2014 - 14:35

Steve H. Hanke

In 2008, Bitcoin was mysteriously introduced to the world in an obscure, technical paper written under the pseudonym Satoshi Nakamoto. By late 2013, the financial press was filled with reportage on Bitcoin and its dramatic price increase.

Well ahead of Satoshi Nakamoto, Nobelist Milton Friedman, champion of free market economics and noted expert on money and banking, anticipated the coming of digital currencies, and foresaw the potential impacts that they would have on finance and economics.

In a 1999 interview, Prof. Friedman concluded:

I think that the Internet is going to be one of the major forces for reducing the role of government. The one thing that’s missing, but that will soon be developed, is a reliable e-cash, a method whereby on the Internet you can transfer funds from A to B without A knowing B or B knowing A. The way I can take a $20 bill hand it over to you and then there’s no record of where it came from.

You may get that without knowing who I am. That kind of thing will develop on the Internet and that will make it even easier for people using the Internet. Of course, it has its negative side. It means the gangsters, the people who are engaged in illegal transactions, will also have an easier way to carry on their business.

Prof. Friedman’s anticipation of Bitcoin is truly remarkable. He even understood the concept well enough to anticipate something like the Silk Road scandal involving illegal Bitcoin transactions.

In April 2013, Nathaniel Popper of The New York Times reported on Bitcoin in an article titled “Digital Money is Gaining Champions in the Real World”. In his reportage, Popper asked me if I thought Bitcoin had the makings of a speculative mania like the 17th century Dutch tulip bulb frenzy. My response was clear and unambiguous: “To say highly speculative would be the understatement of the century.”

Subsequently, the price action in Bitcoin confirms my diagnosis (see the following chart). In January 2013, one could buy a Bitcoin for about $13. By late November, one Bitcoin would have set a buyer back over $1100. And what about Bitcoin’s price volatility? As shown in the chart, Bitcoin’s volatility is truly fantastic.

While the price currently fluctuates around $600, Bitcoin remains far from secure. Serious discrepancies in price exist even between exchanges. For example, the price of a Bitcoin on the Mt. Gox exchange has fallen by over 50% in the past week, while the price of the exact same Bitcoin on the BitStamp exchange has fallen by only 3% in the same time period.

Categories: Policy Institutes

CBO's Minimum Wage Report

Cato Op-Eds - Thu, 02/20/2014 - 10:18

Jeffrey A. Miron

In a new report, the Congressional Budget Office estimates that raising the federal minimum wage from its current level of $7.25 an hour would raise the incomes of low-wage workers who remain employed while lowering the incomes of low-wage workers who lose their jobs. CBO’s “middle” estimate is that a $10.10 minimum wage would reduce total employment by about 500,000.

These effects are exactly what textbook economics predicts; the question is then how policy should regard this combination of good news for some, bad news for others. On that score, the answer is obvious.

A policy that alleges to help low-wage workers, yet forces half a million to lose their jobs, is hard to reconcile with any sensible view of redistribution. People with the lowest incomes are more appropriate targets of redistribution than people with higher incomes, yet the minimum wage forces more people to have zero incomes. A minimum wage is therefore loony from the get-go, even if one believes in a government safety net.

Worse, the minimum wage is poorly targeted toward low-wage workers in poverty, even amongst those who retain their jobs. According to CBO:

The increased earnings for low-wage workers resulting from the [$10.10] … minimum wage would total $31 billion … However, those earnings would not go only to low-income families, because many low-wage workers are not members of low-income families. Just 19 percent of the $31 billion would accrue to families with earnings below the poverty threshold, whereas 29 percent would accrue to families earning more than three times the poverty threshold.

Thus, the minimum wage, in part, transfers income from people in poverty to people in middle- and upper-income households!

And the minimum wage’s negative effects do not stop at its perverse impact on the distribution of income. The minimum wage forces employers to substitute higher-wage workers or capital for low-wage labor, raising costs and therefore prices. The minimum wage perpetuates the notion that evil employers, rather than low skill, explain low wages. And the minimum wage pretends to fix a problem without imposing any costs, except that the costs are merely hidden, not avoided.

The right minimum wage is not $10.10, or $7.25. It is zero.

Categories: Policy Institutes

It's Time to Break up the NSA

Cato Op-Eds - Thu, 02/20/2014 - 09:15

Jim Harper

says security guru Bruce Schneier on CNN.com.

His brief, readable piece articulates the three distinct – and conflicting – missions the NSA now has, and how they should be handled. It’s no hit piece: Schneier calls NSA’s Tailored Access Operations group “the best of the NSA and … exactly what we want it to do.”

The generals who have built NSA into a fiefdom will fight tooth and nail against true reforms like these, of course, but they’re the kind of reforms we need. The most prominent measures under discussion are mere nibbles around the edges of the problem, or worse.

Categories: Policy Institutes

Jared Bernstein’s "Tax Reform" Assault on Pensions, IRAs and 401(k)s

Cato Op-Eds - Thu, 02/20/2014 - 09:10

Alan Reynolds

The bad habit of defining “tax reform” in terms of fairness or “closing loopholes” sidesteps the most essential task of effective tax policy – namely, to collect taxes in ways that do the least possible damage to incentives for productive effort, investment and entrepreneurship.

The Joint Committee on Taxation list of “tax expenditures” is arbitrary accounting, not economics, and tax expenditures are not necessarily “loopholes.” These estimates do not take taxpayer behavior into account and therefore do not estimate revenues that could be raised by closing the so-called loopholes (e.g., a higher tax on capital gains would shrink asset sales and revenues). Policies that make sense in terms of economic incentives can therefore be portrayed as useless tax subsidies in the purely static accounting of “tax expenditures.”

For example, a recent New York Times article by former vice presidential adviser Jared Bernstein complains that tax deferral for retirement savings is unfair because, “most savings subsidies go to households that would surely save anyway, while almost nothing goes to the households that need help to save.” 

These “subsidies” for high-bracket taxpayers mainly consist of deferring rather than avoiding taxes, which only partly offsets the way savings are double-taxed. Even if higher-income households would actually save the same without 401(k) accounts (which contradicts research), they would still end up with much smaller retirement savings. Dividends and capital gains would then be repeatedly taxed, year after year, rather than being continually reinvested within a tax-deferred pension, IRA or 401(k) account. 

Estimated “subsidies” from tax deferral are deceptive: Instead of having recent dividends and capital gains taxed at a 15-20 percent rate in recent years, distributions from tax-deferred accounts will later be taxed at rates up to 39.6 percent. It’s a subsidy only if you don’t live much past 70.

Bernstein presents a graph showing the top 20 percent getting a 66 percent share of these “subsidies” for pensions and defined-contribution plans while the middle fifth gets only nine percent and the poorest 20 percent just two percent. What these figures actually demonstrate is that (1) people who work full-time for many years have more income to save than those who don’t, and that (2) people who pay no income tax cannot benefit from any policy that reduces taxable income, even temporarily.

There are five times as many workers in the top 20 percent than there are in the bottom 20 percent. To exclude young singles and old retirees, Gerald Mayer examined the work experience of households headed by someone between the working ages of 22 and 62. Average work hours among the poorest 20 percent still amounted to just 1,415 hours a year in 2010, while those in the middle fifth worked 2,771 hours, and the top 20 percent worked 4060 hours.

If Bernstein’s “subsidies” were properly expressed as shares of income, rather than as shares of foregone tax revenue, the differences nearly vanish. The Congressional Budget Office (the undisclosed source of his estimates) shows tax benefits for retirement savings worth only about twice as much to the top 20 percent (2 percent of net income) as to the middle 20 percent (0.9 percent of income). Retirement savings incentives appear to be worth only 0.4 percent of income to the poorest 20 percent, since they rarely owe taxes, yet annual benefits are a poor guide to lifetime benefits. Those in low income groups while they are young commonly move up to higher tax brackets by the time they start saving for retirement.

The alleged unfairness of lower-income households not getting the same dollar tax break as couples earning more than $115,100 (the top 20 percent) could be alleviated by reducing marginal tax rates on two-earner families. But Bernstein instead suggests “closing loopholes that make it easy for wealthy individuals to exceed contribution limits to tax-preferred accounts (as was found to be the case with Mitt Romney), reducing contribution limits for high-income filers, or simple limiting the value of tax breaks for the wealthiest of filers (e.g. allowing them to deduct such contributions at 28 percent instead of 39.6 percent.” None of these schemes would add a dime to the savings of low or middle-income households, of course, and they wouldn’t work.

It is not legal – and therefore not “easy”– to exceed strict contribution limits for high-income taxpayers, and Mitt Romney certainly did not do so.  What Romney did was to roll over qualified retirement plans into an IRA and then earn high compounded returns on very successful investments.  Similarly, albeit on a much smaller scale, I rolled-over a lump-sum pension into an IRA in 1990 when I changed jobs, and that IRA is now 12-times larger thanks to compound interest and bold investments.  Since I never contributed another dollar after 1990, tougher or lower contribution limits would have been entirely irrelevant.  

Bernstein’s final proposal is from the Obama budget – “allowing taxpayers to deduct contributions at 28 percent instead of 38.6 percent.” But that too is irrelevant. Any alleged “loopholes” for retirement savings have nothing to do with itemized deductions for top-bracket taxpayers, who are not allowed to deduct contributions to an IRA.  Failure to include employer contributions as taxable income is not an itemized deduction to begin with, nor is the exclusion from adjusted gross income for contributions to a Keogh retirement plan for the self-employed.  

In the process of giving “tax reform” a bad name, Jared Bernstein uses a sham fairness argument to justify arbitrary and unworkable anti-affluence policies that are irrelevant to any ill-defined problems. 

 

 

 

 

 

 

Categories: Policy Institutes

What Both Sides Miss in the Immigration Debate

Cato Op-Eds - Wed, 02/19/2014 - 17:21

Ilya Shapiro

That’s the title of my latest Forbes column, which begins:

As chances for immigration reform fade ahead of this year’s congressional elections, the main sticking point seems to be the “pathway to citizenship” for those who are in the country illegally.

Reform opponents don’t want to reward those who break our laws, while activists on the other side refuse to consider a deal that doesn’t naturalize this entire population. Fixing our broken immigration system thus seems to turn on the question of what to do with the estimated 11-12 million illegal aliens living in our midst. (I’m reminded of John Candy’s final movie, Canadian Bacon, where a propaganda bit ominously decries: “Canadians: They walk among us.”)

But both sides are wrong to focus on citizenship and should instead target permanent resident status—otherwise known as green cards.

Read the whole thing, which includes a bit about the naturalization process that I’m now experiencing.

Categories: Policy Institutes

The Federal Reserve's "Foreign Banking Organization" Rule Is Unnecessary

Cato Op-Eds - Wed, 02/19/2014 - 16:30

Louise Bennetts

Last November, Arthur Long and I released a policy study on the likely impact of the Federal Reserve’s 2012 “Foreign Banking Organization” proposal.

We argued – along with many others – that the proposal amounted to little more than a costly corporate reshuffling exercise. Of even greater concern, we suggested that the proposal threatened the ability of global banks to allocate capital and liquidity in an efficient manner, would increase financial instability, and dampen economic growth.

Yesterday, the Federal Reserve released a final rule that is essentially the same as the original proposal. The final rule is more lenient only in the sense that it increases the timeframe for compliance, simplifies the leverage requirements a little, and impacts fewer organizations. To that end, the fundamental criticisms still apply, as does the confusion around why such a proposal is necessary.

Governor Tarullo – a leading proponent of the rule – has argued that the Federal Reserve extended financial “support” to foreign banks at unprecedented levels during the crisis and therefore should be given greater oversight of these banks’ activities. That sounds reasonable. But upon closer review, the support he refers to was limited to liquidity provided through the Fed’s discount window. Foreign banks were not eligible to receive TARP or other forms of bailout assistance.

Fed officials have gone to great lengths to argue that providing liquidity through the discount window (which may be provided only to otherwise solvent institutions on a fully collateralized basis) is a legitimate central bank function and is NOT financial assistance constituting a bailout.

I agree (although on this point, I note that I depart quite radically from some of my contemporaries). However, this argument does undermine the central pillar supporting the Fed’s new rule. In addition, if protecting U.S. taxpayers is the fundamental aim, why implement a rule that will close-off the channels of liquidity and support that the U.S. subsidiary could receive from the foreign parent? 

The Fed’s rule may well spark retaliatory actions from foreign regulators, who are even more annoyed about it than the banks they oversee. The losers will be both local and foreign banks and, most importantly, consumers of credit. Governor Tarullo himself noted during yesterday’s open meeting that the rule “may not strike the right balance indefinitely.” The Fed had an opportunity to lead from the front. That it failed to do so is unfortunate. 

Categories: Policy Institutes

Selling Federal Government Buildings

Cato Op-Eds - Wed, 02/19/2014 - 15:33

Chris Edwards

How many buildings does the federal government own? 10,000? 20,000? Actually, it is a staggering 306,000, according to the U.S. General Services Administration. In addition, the government leases 55,000 buildings, for a total of 361,000. These include offices, hospitals, warehouses, and other sorts of facilities. The chart shows federal buildings owned by department.

In addition to all the buildings, the federal government owns and leases a remarkable 486,000 structures such as parking lots. The GSA reports that the annual operating costs for all the buildings and structures is $33 billion. The current market value of the buildings is unknown, but the government estimated that the replacement value in 2007 was $1.5 trillion.

A good way to save taxpayer money and increase economic efficiency would be to start privatizing these assets. The government itself says that it has about 77,000 buildings that are underutilized or unneeded.

It is widely recognized that the government is a poor manager of its assets. The GAO has had federal property on its “high risk” waste list for years, and it has found that “many assets are in an alarming state of deterioration.”

Privatizing buildings and assets is an area of some bipartisan agreement, and so the parties should move ahead with reforms. House Republicans issued a report on the waste in federal buildings in 2010. The Obama administration is also supportive of selling excess buildings and facilities.

Policymakers should focus on removing the legal and bureaucratic barriers to unloading federal assets. One problem is that the government does not know exactly what it owns, what condition assets are in, and what items are excess. The GAO says that the government has a “lack of accurate and useful data to support decisionmaking” on its vast property holdings. So the government needs much better inventory information.

Another problem is that the current process for disposing of assets is lengthy and convoluted. There are, for example, detailed requirements for repairs and environmental remediation of assets before sales. And there are burdensome rules requiring that surplus property be evaluated for possible use by homeless persons. The rules for the homeless—believe it or not—can add two years to the asset disposal process.

Sweeping away the red tape and privatizing buildings and structures would create many benefits. Selling assets would put them to more productive use in the private sector, which would boost economic growth. And using property more efficiently would save on energy, which would gain support from environmentalists.

Privatizing federal buildings would be also good fiscal policy. The sales proceeds would reduce the budget deficit in the short run, while the reduction of property maintenance costs would cut spending over the long run.

In sum, privatizing federal buildings and facilities would be a win all around. It would be good economics and good politics. So let’s get started.

Categories: Policy Institutes

William Galston’s Not-So-Great Decoupling of Pay, Productivity, and Common Sense

Cato Op-Eds - Wed, 02/19/2014 - 13:21

Alan Reynolds

Wall Street Journal columnist William A. Galston says “the Great Decoupling of wages and benefits from productivity [is] the biggest economic story of the past 40 years.”  Wow!  The Biggest Economic Story of the past 40 years!  Imagine that!  I have been researching such data longer than 40 years yet this particular story is so old (and so wrong) I had almost forgotten about it.   

The alleged decoupling of growth of pay from productivity, as Robert Gordon explained in 2009, “compares apples with oranges, and then oranges with bananas.” Median wages for the whole economy were deflated by the consumer price index, which exaggerated inflation and understated real income growth. Rapidly growing health and retirement benefits were often excluded. These muddled measures of real pay, which also failed to adjust for changing household size or hours, were compared to productivity of the nonfarm business sector, not the whole economy. And real output was calculated using GDP deflators that showed much less inflation than the CPI. With those errors, one estimate for the income-productivity gap from 1979-2007 was 1.46 percentage points, but Gordon’s adjustments shrunk that to a negligible 0.16. He also noted that mean and median incomes grew at remarkably similar rates, suggesting inequality did not explain much.

A 2013 study from the London School of Economics likewise found no significant gap between growth of compensation and productivity in the United States or UK (unlike the EU and Japan) if both measures are properly calculated with the same price index. The LSE study concluded that, “the debate around net decoupling in the UK and US is rather a distraction (it is actually more important in Continental Europe and Japan). Obtaining faster productivity growth is a highly desirable policy goal in the current climate of near recession as it will ultimately lead to faster wage growth and consumption.”

Galston tells other stories, such as “mobility has stalled” – which is indefensible nonsense. His allusion to the “past 40 years,” appears based on a Pew Research paper’s pointless claim that the “middle class” constituted a smaller share of adults in 2011 than in the idyllic year of 1971. As Pew Research hesitantly revealed, that is mainly because millions of people moved up – “the upper-income tier [earning more than double median income] rose to 20% of adults in 2011, up from 14% in 1971.”

All this statistical fog is thin camouflage for Galston’s invitation to grant authoritarian politicians and bureaucrats the discretion to somehow “link the tax rates individual firms have to the compensation practices they adopt.” That may well be the worst economic policy idea of the past 40 years, trailing barely behind Nixon’s dictatorial price controls.

Categories: Policy Institutes

Nightmare Scenario Underway in Ukraine

Cato Op-Eds - Wed, 02/19/2014 - 12:23

Dalibor Rohac

As the Ukrainian security forces are moving to clear Kiev’s ‘Maidan’ protest camp again, after an unsuccessful attempt last night, the events are unfolding quickly and with the characteristically scary dynamics of an autocratic regime acting under pressure:

Ukraine’s state security service said it was launching an “anti-terrorist operation” across the country after the seizure of administrative buildings and arms and ammunition depots by “extremist groups.”

Labeling the opposition as ‘terrorists’ is a common rhetorical device used by authoritarian governments under duress. But we should make no mistake – the current situation is not just an outcome of the divisions existing within Ukrainian society but also a result of Vladimir Putin’s long standing and sinister meddling in Ukraine.

For Mr. Putin, the current situation is both a source of fear and an opportunity. The fear stems from the possibility of Ukraine setting a precedent of a bottom-up, civil society-driven initiative displacing a Moscow-sponsored leadership in a country with strong cultural and historical ties to Russia. The opportunity lies in leveraging the current unrest and the ethnic divisions it has uncovered to strengthen Russia’s influence over the country’s politics. The Russian government already provided Mr. Yanukovych with cash in December 2013; this week, another bond purchase worth $2 billion was announced, conditional on the government successfully tackling the opposition.

The international response is too timid given the magnitude of the problem and its proximity to the European Union’s borders. Targeted EU sanctions, such as the asset freezes and travel bans directed at Ukrainian officials, which are likely to be adopted tomorrow, seem fully justified–although they come very late. Still, care needs to be exercised so that they hurt the regime and not ordinary citizens.

More importantly, European leaders need to clearly articulate the long-term alternative that they are offering to Ukraine lest it remain the Kremlin’s client state. The roadmap to full EU membership ought to have an accelerated timeline, incentivizing Ukrainian policymakers to adopt open political and economic institutions.

The EU’s engagement with the country needs to come with tangible benefits for Ukrainians. Those would include most fundamentally a removal of trade and regulatory barriers, as well as immigration restrictions, making Ukrainians a de facto part of the common European market now rather than at an uncertain point in the future.

Categories: Policy Institutes

Fuel Efficiency Standards for New Trucks—Can’t We Decide These for Ourselves?

Cato Op-Eds - Wed, 02/19/2014 - 08:43

Patrick J. Michaels and Paul C. "Chip" Knappenberger

Rather than wait on the market to demand more fuel efficient trucks, President Obama, bypassing Congress, has directed the Environmental Protection Agency to draw up a new round of regulations raising the fuel efficiency standards on heavy-duty trucks. He promises that this will save billions of dollars in fuel costs, lower prices and reduce greenhouse gas emissions—or, as he describes it, a “win-win-win” situation.

Thank you, Mr. President for taking such good care of us.

Apparently, we are too stupid to have realized the manifold benefits of this chain of events ourselves.

Or is it that we realize these actions will have no impact of climate change and will probably result in higher prices for new trucks and everything that they transport?

You can use our “Handy-Dandy Temperature Change Calculator” to see that, using the EPA’s own computer model, if Americans cut all of our carbon dioxide emissions to zero, today, the amount of warming that would be prevented (assuming a warming forecast that is itself probably to high) by 2100 is around two-tenths of a degree—an amount that would be virtually impossible to measure against natural climate variability.  Increasing the fuel efficiency of heavy trucks would have considerably less of an effect than cutting all carbon dioxide emissions and would simply not be discernible in climate data.

And the President’s claim that increasing the fuel efficiency will lower the price of all things neglects the fact that we simply do not know what technology would accomplish this end.

Perhaps he should have said—”if you like your truck, you can keep your truck,” that is, until you have to replace it with something that will cost much more than you would have otherwise purchased and not do what it is supposed to do.

Again, thank you, Mr. President.

Categories: Policy Institutes

John Kerry’s Bumbling Performance Regarding East Asia

Cato Op-Eds - Tue, 02/18/2014 - 16:53

Ted Galen Carpenter

Secretary of State John Kerry seems to be suffering a case of foot-in-mouth disease before and during his current trip to East Asia. We had already learned to be wary of his judgment on substantive foreign policy issues. He was, for example, an enthusiastic proponent of U.S. military intervention in Syria, a move that would have mired the United States in yet another expensive, futile war in the Muslim world. Fortunately, intense congressional opposition and a timely Russian diplomatic initiative spared the Obama administration from its own folly—at least for the time being.

But whatever challenges might exist when handling difficult foreign policy issues, one should be able to expect a secretary of state not to mangle basic facts about key countries and regions. Alas, that expectation is apparently erroneous when it comes to John Kerry. During a press conference in Washington prior to his departure for East Asia, he emphasized Washington’s support for Japan’s position regarding the bitter dispute with China over the Senkaku/Diaoyu islands in the East China Sea. Unfortunately, Kerry’s credibility became somewhat suspect when he initially placed those islands in the South China Sea (the arena of territorial disputes involving China and other neighbors).

Matters got worse when he traveled to South Korea. During a press conference in Seoul, a reporter asked him about the long-standing territorial dispute between Tokyo and Seoul over the Dokdo/Takeshima islands in the Sea of Japan. The audience was astonished when he appeared to signal a major shift in U.S. policy by stating that the U.S.-South Korean mutual defense treaty covered those islands. Such a position would place the United States on the side of South Korea against Washington’s principal ally in East Asia, Japan.

A State Department spokesman had to scramble later to rectify Kerry’s verbal gaffe, insisting that the Secretary apparently had misunderstood the question, believing it had referred to the Senkaku/Diaoyu dispute. One problem with the revised version of events is that South Korea is not a party to that controversy; as noted above, it’s a feud between Japan and China.

Unfortunately, Kerry’s blunders are indicative of widespread problems in President Obama’s foreign policy team. The president appointed Caroline Kennedy to the crucial post of ambassador to Japan, although her knowledge of Japan (or foreign policy in general, for that matter) is exceedingly meager. Other ambassadorial appointees have embarrassed themselves in Senate confirmation hearings, displaying little or no knowledge of the country to which they would be assigned. In some cases, their principal qualification for the diplomatic post appeared to be their record in raising funds for President Obama’s election campaigns.

The American people have every right to expect a better performance from individuals who are tasked with running the foreign policy of the United States. And that expectation should start with Secretary Kerry.

Categories: Policy Institutes

Nick Gillespie and Matt Welch on the New Episode of "Free Thoughts," the Libertarianism.org Podcast

Cato Op-Eds - Tue, 02/18/2014 - 15:54

Trevor Burrus

On Free Thoughts, the newish podcast from Libertarianism.org, Aaron Ross Powell, myself, and our guests explore the deep questions in libertarian thought. Guests include philosophers, economists, other Cato scholars. Rather than focusing on current public policy issues, we try to take a deeper look at how libertarians see the world. 

Nick Gillespie and Matt Welch joined us for this week’s episode, and Jason Kuznicki filled in for Aaron. We discuss whether there is a growing movement of independents that is a cause for optimism among libertarians. Are we in for a better, more libertarian era than ever before? Or should we be skeptical of this kind of optimism, given the growth of the federal government in recent years?

You can also subscribe to the iTunes feed or the RSS.

Categories: Policy Institutes

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