Studies from the Cato Institute

ObamaCare: A Bad Deal for Young Adults (Briefing Paper)

Wed, 04 Nov 2009 23:00:00 -0600

One of the most interesting questions about the health care overhaul now moving through Congress is how it would affect young adults. That legislation would force most or all Americans to purchase health insurance (an "individual mandate") and would impose price controls on health insurance ("community rating") that would limit insurers' ability to offer lower premiums to low-risk enrollees.

Those provisions would drive premiums down for 55-year-olds but would drive them up for 25-year-olds—who are then implicitly subsidizing older adults. According to the Urban Institute, many young people could see their premiums double, whereas premiums for older adults could be cut in half.

Massachusetts benefits from another type of subsidy that props up its regime of mandates and price controls: large subsidies from the federal government. In contrast, the United States as a whole has no external party it can exploit to subsidize a nationwide Massachusetts-style health care overhaul—unless Congress finances that overhaul through additional deficit spending, which is really just another way of taxing the young to subsidize the old.

The irony is that Barack Obama won the presidency with 66 percent of the vote among adults aged 18 to 29. That's a larger share than any presidential candidate has won in decades. Yet his health care overhaul could impose its greatest burdens on young adults.

Aaron Yelowitz is an associate professor of economics at the University of Kentucky and an adjunct scholar at the Cato Institute. This paper is based on a lecture delivered to the Undergraduate Economics Society at the University of Kentucky on October 1, 2009.

Reflections on Communism Twenty Years after the Fall of the Berlin Wall (Development Policy Analysis)

Sun, 01 Nov 2009 23:00:00 -0600

Twenty years ago the Berlin Wall fell, marking the collapse of Soviet communism. The failure of the communist system was not merely economic and political; it was a moral failure as well. Over time communism created a deep disillusionment and revulsion among those who lived under it. The diminished sense of legitimacy of the ruling elite in the Soviet Union and Soviet bloc countries contributed to the unraveling of those systems as well.

At the same time, there is a remarkable lack of moral concern in the West with the atrocities committed under communist systems, including the tens of millions of people who perished as a result of communist policies. By contrast there has been a great deal of impassioned condemnation of the outrages of Nazism. The most important reason for treating Nazism and communism differently has been the perception that communist crimes were unintended consequences of the pursuit of lofty goals whereas the goals of Nazism themselves were unmitigated evil.

Western intellectuals who had once idealized the Soviet Union have done little soul searching regarding the roots of their beliefs. The long association of idealism with animosity toward commerce and capitalism among Western intellectuals has contributed to a reluctance to criticize a system ostensibly established in opposition to the values they abhorred.

Public attitudes in former communist countries have been conflicted because of the arguable complicity of many citizens in keeping the old system in power. A predominant attitude in Eastern Europe and Russia toward the former communist systems has been a mixture of oblivion, denial, and repression.

Contemporary Western attitudes toward the fall of the Soviet system suggest that political beliefs endure when they are widely shared and can satisfy important emotional needs.

Paul Hollander is professor emeritus of sociology at the University of Massachusetts at Amherst and an associate at the Davis Center for Russian and Eurasian Studies of Harvard University. Born in Hungary, he escaped following the crushing of the 1956 Revolution by Soviet forces.

Socialism Kills: The Human Cost of Delayed Economic Reform in India (Development Briefing Paper)

Tue, 20 Oct 2009 23:00:00 -0500

As the world approaches the 20th anniversary of the fall of communism, it is worth investigating the costs borne by countries like India that did not become communist but drew heavily on the Soviet model. For three decades after its independence in 1947, India strove for self-sufficiency instead of the gains of international trade, and gave the state an ever-increasing role in controlling the means of production. These policies yielded economic growth of 3.5 percent per year, which was half that of export-oriented Asian countries, and yielded slow progress in social indicators, too. Growth per capita in India was even slower, at 1.49 percent per year. It accelerated after reforms started tentatively in 1981, and shot up to 6.78 percent per year after reforms deepened in the current decade.

What would the impact on social indicators have been had India commenced economic reform one decade earlier, and enjoyed correspondingly faster economic growth and improvements in human development indicators? This paper seeks to estimate the number of "missing children," "missing literates," and "missing non-poor" resulting from delayed reform, slower economic growth, and hence, slower improvement of social indicators. It finds that with earlier reform, 14.5 million more children would have survived, 261 million more Indians would have become literate, and 109 million more people would have risen above the poverty line. The delay in economic reform represents an enormous social tragedy. It drives home the point that India's socialist era, which claimed it would deliver growth with social justice, delivered neither.

Swaminathan Aiyar is a research fellow at the Cato Institute's Center for Global Liberty and Prosperity and has been editor of India's two biggest financial dailies, the Economic Times and Financial Express.

Yes, Mr. President: A Free Market Can Fix Health Care (Policy Analysis)

Tue, 20 Oct 2009 23:00:00 -0500

In March 2009, President Barack Obama said, "If there is a way of getting this done where we're driving down costs and people are getting health insurance at an affordable rate, and have choice of doctor, have flexibility in terms of their plans, and we could do that entirely through the market, I'd be happy to do it that way." This paper explains how letting workers control their health care dollars and tearing down regulatory barriers to competition would control costs, expand choice, improve health care quality, and make health coverage more secure.

First, Congress should give Medicare enrollees a voucher and the freedom to choose any health plan on the market. Vouchers would be means-tested, would contain Medicare spending, and are the only way to protect seniors from government rationing.

Second, to give workers control over their health care dollars, Congress should reform the tax treatment of health care with "large" health savings accounts. Large HSAs would reduce the number of uninsured Americans, would free workers to purchase secure health coverage from any source, and would effectively give workers a $9.7 trillion tax cut without increasing the federal budget deficit.

Third, Congress should break up state monopolies on insurance and clinician licensing. Allowing consumers to purchase health insurance licensed by other states could cover one-third of the uninsured without any new taxes or government subsidies.

Finally, Congress should reform Medicaid and the State Children's Health Insurance Program the way it reformed welfare in 1996. Block-granting those programs would reduce the deficit and encourage states to target resources to the truly needy.

The great advantage of a free market is that innovation and more prudent decisionmaking means that fewer patients will fall through the cracks.

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

Somalia, Redux: A More Hands-Off Approach (Policy Analysis)

Sun, 11 Oct 2009 23:00:00 -0500

The two-decade-old conflict in Somalia has entered a new phase, which presents both a challenge and an opportunity for the United States. The elections of new U.S. and Somali presidents in late 2008 and early 2009 provide an opportunity to reframe U.S.-Somali relations. To best encourage peace in the devastated country, Washington needs a new strategy that takes into account hard-learned lessons from multiple failed U.S. interventions. The old strategy favoring military force and reflexive opposition to all Islamists should give way to one emphasizing regional diplomacy and at least tacit acceptance of a government that is capable of bringing order to Somalia.

Whatever the Obama administration's approach to Somalia, it must avoid the failures of the Bush administration. The rise of a popular, moderate Islamic government in 2006 sparked an Ethiopian invasion, for which the United States provided key backing. Washington defended its support of the Ethiopian attack on the grounds that Somalia's Islamic Courts regime was actively harboring known members of al Qaeda, a claim that appears to have been exaggerated.

The resulting Ethiopian occupation of Somalia —in which as many as 16,000 people died—collapsed in early 2009 against the backdrop of one of the world's worst sustained humanitarian crises. Taking advantage of the political and economic chaos, hundreds of desperate Somali fishermen turned to piracy, making the waters off Somalia the world's most dangerous for seafarers.

With the Islamists' return to power earlier this year, under the banner of the new president, Sharif Sheikh Ahmed, Washington has a rare chance to reset bilateral relations. The Obama administration should work to build a regional framework for reconciliation, the rule of law, and economic development that acknowledges the unique risks of intervention in East Africa.

Somalia's best hope for peace is the moderate Islamic government that has emerged from the most recent rounds of fighting, despite early opposition from the United States and its allies. There are ways in which the United States could help Somalia escape its cycle of violence and peacefully encourage progress by working with this former enemy, but Washington should err on the side of nonintervention.

David Axe is a freelance military correspondent based in South Carolina and the author of War Fix.

Would a Stricter Fed Policy and Financial Regulation Have Averted the Financial Crisis? (Policy Analysis)

Wed, 07 Oct 2009 23:00:00 -0500

Many commentators have argued that if the Federal Reserve had followed a stricter monetary policy earlier this decade when the housing bubble was forming, and if Congress had not deregulated banking but had imposed tighter financial standards, the housing boom and bust—and the subsequent financial crisis and recession—would have been averted. In this paper, we investigate those claims and dispute them. We are skeptical that economists can detect bubbles in real time through technical means with any degree of unanimity. Even if they could, we doubt the Fed would have altered its policy in the early 21st century, and we suspect that political leaders would have exerted considerable pressure to maintain that policy. Concerning regulation, we find that the banking reform of the late 1990s had little effect on the housing boom and bust, and that the many reform ideas currently proposed would have done little or nothing to avert the crisis.

Commentators have also argued that the popularization of financial products such as teaser-rate hybrid loans for subprime homebuyers and credit default swaps for investors is to blame for the financial crisis. We find little evidence for this. Housing data indicate that the majority of subprime hybrid loans that have entered default had not undergone interest rate resets, and the default rate for subprime hybrid loans is not much higher than for subprime fixed rate loans. Concerning swaps, although their introduction may increase financial inflows into risky sectors, their execution through a clearing-house or regulation via other means would not necessarily have avoided the mispricing of risks in underlying contracts. Capital requirements for the credit default swaps that were used to insure mortgage-backed securities would have been low because housing investments were not considered risky.

Jagadeesh Gokhale is a senior fellow at the Cato Institute and the author of Social Security: A Fresh Look at Reform Alternatives (forthcoming). Peter Van Doren is a senior fellow at the Cato Institute and the editor of Cato's Regulation magazine.

Why Sustainability Standards for Biofuel Production Make Little Economic Sense (Policy Analysis)

Tue, 06 Oct 2009 23:00:00 -0500

The federal "sustainability standard" requires ethanol to emit at least 20 percent less carbon dioxide (CO₂) than gasoline. Recent rulings by California and the Environmental Protection Agency, however, have cast doubt on the methodology of the sustainability calculus and whether those standards are being met. We show that the methodological debate is misplaced because sustainability standards for ethanol are, by definition, illogical and ineffective. Moreover, those standards divert attention from the contradictions and inefficiencies of ethanol import tariffs, tax credits, mandates, and subsidies, all of which exist whether ethanol is sustainable or not.

Ethanol is sustainable by definition. The CO₂ sequestered by growing corn is exactly offset by the CO₂ emissions that follow from burning the fuel in a car. The same observation applies to, say, consuming bourbon made from corn, but ethanol can replace energy — bourbon cannot. Hence, any sustainability standard should be applied to all corn and other crop products, and not just ethanol.

Sustainability standards are based on "lifecycle accounting," in which ethanol is assumed to replace gasoline; but in fact, it may be replacing coal or other energy sources. Life-cycle accounting also fails to recognize that if incentives are given for ethanol producers to use relatively "clean" inputs (e.g., natural gas), the "dirtier" inputs (e.g., coal) that might otherwise have been used for the ethanol production will simply be used by other producers to make products that are not covered by the sustainability standard. Sustainability standards reshuffle who is using what inputs — with no net reduction in national emissions.

Finally, sustainability standards are discriminatory under World Trade Organization law and are unlikely to survive a legal challenge from ethanol producers abroad. The United States will not be able to rely on the World Trade Organization's exception for trade laws protecting the environment because of lax U.S. policies dealing with greenhouse gas emissions relative to its trading partners. Moreover, the imposition of U.S. tariffs on more climate-friendly ethanol produced abroad weakens any U.S. defense of ethanol sustainability standards under the WTO.

Harry de Gorter and David R. Just are economists in the Department of Applied Economics and Management at Cornell University.

How Urban Planners Caused the Housing Bubble (Policy Analysis)

Wed, 30 Sep 2009 23:00:00 -0500

Everyone agrees that the recent financial crisis started with the deflation of the housing bubble. But what caused the bubble? Answering this question is important both for identifying the best short-term policies and for fixing the credit crisis, as well as for developing long-term policies aimed at preventing another crisis in the future.

Some people blame the Federal Reserve for keeping interest rates low; some blame the Community Reinvestment Act for encouraging lenders to offer loans to marginal homebuyers; others blame Wall Street for failing to properly assess the risks of subprime mortgages. But all of these explanations apply equally nationwide, while a close look reveals that only some communities suffered from housing bubbles.

Between 2000 and the bubble's peak, inflation- adjusted housing prices in California and Florida more than doubled, and since the peak they have fallen by 20 to 30 percent. In contrast, housing prices in Georgia and Texas grew by only about 20 to 25 percent, and they haven't significantly declined.

In other words, California and Florida housing bubbled, but Georgia and Texas housing did not. This is hardly because people don't want to live in Georgia and Texas: since 2000, Atlanta, Dallas–Ft. Worth, and Houston have been the nation's fastest-growing urban areas, each growing by more than 120,000 people per year.

This suggests that local factors, not national policies, were a necessary condition for the housing bubbles where they took place. The most important factor that distinguishes states like California and Florida from states like Georgia and Texas is the amount of regulation imposed on landowners and developers, and in particular a regulatory system known as growth management.

In short, restrictive growth management was a necessary condition for the housing bubble. States that use some form of growth management should repeal laws that mandate or allow such planning, and other states and urban areas should avoid passing such laws or implementing such plans; otherwise, the next housing bubble could be even more devastating than this one.

Randal O'Toole is a senior fellow with the Cato Institute and author of The Best-Laid Plans: How Government Planning Harms Your Quality of Life, Your Pocketbook, and Your Future.

Vallejo Con Dios: Why Public Sector Unionism Is a Bad Deal for Taxpayers and Representative Government (Policy Analysis)

Sun, 27 Sep 2009 23:00:00 -0500

Rates of unionization in the United States today are at historic lows and are unlikely to rebound. However, there is one sector in which organized labor is growing in strength: government. This has severe implications for the future of public finances for state and local governments across the nation, and for the nature of organized labor itself.

High rates of unionization in the public sector have led to very high labor costs in the form of generous collective bargaining contracts. Now state and local governments are under increasing financial pressure, as a worsening national economy has led to decreased revenues for states and municipalities—many of which remain locked into the generous contracts negotiated in more flush times. Thus, as businesses retrench, governments find themselves in a financial straitjacket. In addition, as government unions grow stronger relative to private-sector unions, their prevalence erodes the moderating influence of the market on the demands that unions make of employers.

Now, as an economic downturn threatens state and local government revenues, officials who want to keep their fiscal situations under control would do well to look skeptically at public-sector bargaining—especially since the existing political checks on it have proven ineffective. Public officials should eschew public-sector bargaining when possible, or at the very least, seek to limit its scope.

As keepers of the public purse, legislators and local council members have an obligation to protect taxpayers' interests. By granting monopoly power to labor unions over the supply of government labor, elected officials undermine their duty to taxpayers, because this puts unions in a privileged position to extract political goods in the form of high pay and benefits that are much higher than anything comparable in the private sector.

This paper shows how the unionization of government employees creates a powerful, permanent constituency for bigger government— one that is motivated, well-funded, and organized. It also makes some recommendations as to how to check this constituency's growing power—an effort that promises to be an uphill struggle.

Don Bellante is professor of economics at the University of South Florida. David Denholm is the president of the Public Service Research Foundation, a nonprofit organization that studies unions and union influence on public policy. Ivan Osorio is editorial director and a labor policy researcher at the Competitive Enterprise Institute.

All the President's Mandates: Compulsory Health Insurance Is a Government Takeover (Briefing Paper)

Tue, 22 Sep 2009 23:00:00 -0500

The most hazardous health reform measure before Congress is not the so-called "public option," but proposals to make health insurance compulsory via an individual or employer mandate.

Compulsory health insurance could require nearly 100 million Americans to switch to a more expensive health plan and would therefore violate President Barack Obama's pledge to let people keep their current health insurance. In particular, the legislation before Congress could eliminate many or all health savings account plans. Making health insurance compulsory would also spark an unnecessary fight over abortion and would enable government to ration care to those with private health insurance.

Obama adviser Larry Summers writes that mandates "are like public programs financed by benefit taxes," meaning that compulsory health insurance would also violate President Obama's promise not to increase taxes on the middle class. Under the House Democrats' legislation, some middle-income earners would face marginal tax rates over 50 percent (before state taxes).

The experience in Massachusetts belies the claim that compulsory health insurance brings down health care costs. The "shared responsibility" ruse allows Massachusetts politicians to declare success for a compulsory health insurance scheme whose actual costs reveal it to be a failure. Massachusetts also demonstrates that compulsory health insurance enables, and ultimately requires, politicians and government bureaus to control nearly all aspects of health care and medical practice.

Rather than make health insurance compulsory, Congress should make it more affordable by letting individuals control their earnings and choose their own health plan from any state in the Union.

The most hazardous health reform measure before Congress is not the so-called "public option," but proposals to make health insurance compulsory via an individual or employer mandate.

Rather than make health insurance compulsory, Congress should make it more affordable by letting individuals control their earnings and choose their own health plan from any state in the Union.

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

Getting What You Paid For -- Paying For What You Get: Proposals for the Next Transportation Reauthorization (Policy Analysis)

Mon, 14 Sep 2009 23:00:00 -0500

When Congress passed the Federal Aid Highway Act of 1956, it gave the Bureau of Public Roads a clear mission: oversee construction of a safe, high-speed Interstate Highway System. As that system neared completion in the 1980s, the mission of the Department of Transportation became increasingly murky. Now the department is supposed to reduce congestion; attract people out of their automobiles; clean the air; promote economic development; improve livability; create a sense of community: and accomplish a variety of other often conflicting goals — most of which are not easily quantifiable.

As the mission became muddied, each surface transportation reauthorization since 1982 has included an increasing number of earmarks, divided revenues among more and more different funds, and added lengthy rules for how those funds may be spent. Each earmark, apportionment, and rule has made transportation spending incrementally less efficient.

This increasing politicization of something that began life as a fairly efficient program is the predictable result of government involvement in what is essentially a private economic activity. The inevitability of such decline is a good argument for abolishing the U.S. Department of Transportation and devolving federal transportation programs to the states.

Short of that, Congress should make every effort to return to a system where people get what they pay for — that is, transportation user fees are dedicated to systems that benefit the people who paid those fees — and people pay for what they get — that is, people pay the full cost of the facilities they use.

As a second-best solution to abolishing the Department of Transportation, this paper offers eight proposals essential for the 2009 reauthorization to achieve these goals. These proposals include

Apportion funds to states based on population,
Require that short-term plans be efficient
Create a citizen-enforcement process that
Eliminate long-range transportation planning
Allow unlimited use of road tolls
Eliminate clean-air mandates
Avoid earmarks
Remove employee protective arrangements from transit law

As a second-best solution to abolishing the Department of Transportation, this paper offers eight proposals essential for the 2009 reauthorization to achieve these goals. These proposals include

Apportion funds to states based on population,
Require that short-term plans be efficient
Create a citizen-enforcement process that
Eliminate long-range transportation planning
Allow unlimited use of road tolls
Eliminate clean-air mandates
Avoid earmarks
Remove employee protective arrangements from transit law

Randal O'Toole is a senior fellow with the Cato Institute and author of The Best-Laid Plans: How Government Planning Harms Your Quality of Life, Your Pocketbook, and Your Future and the forthcoming Gridlock: Why We're Stuck in Traffic and What to Do about It.

Escaping the "Graveyard of Empires": A Strategy to Exit Afghanistan (White Paper)

Sun, 13 Sep 2009 23:00:00 -0500

Given the nature of the conflict in Afghanistan, a definitive, conventional "victory" is not a realistic option. Denying a sanctuary to terrorists who seek to attack the United States does not require Washington to pacify the entire country, eradicate its opium fields, or sustain a long-term military presence in Central Asia. From the sky, U.S. unmanned aerial vehicles can monitor villages, training camps, and insurgent compounds. On the ground, the United States can retain a small number of covert operatives for intelligence gathering and discrete operations against specific targets, as well as an additional small group of advisers to train Afghan police and military forces. The United States should withdraw most of its forces from Afghanistan within the next 12 to 18 months and treat al Qaeda's presence in the region as a chronic, but manageable, problem.

Washington needs to narrow its objectives to three critical tasks:

Security. Support, rather than supplant, indigenous security efforts by training and assisting the Afghan national army and police and, where appropriate, paying off or otherwise co-opting regional militias. Training should be tied to clear metrics. If those benchmarks are not achieved, Washington must cut its losses and cease further assistance. U.S. forces should not become Afghanistan's perpetual crutch.

Intelligence and Regional Relations. Sustain intelligence operations in the region through aerial surveillance, covert operations, and ongoing intelligence-sharing with the Afghan and Pakistani governments. Seek cordial relations with all of Afghanistan's neighbors, particularly Russia and Iran, as each has the means to significantly undermine or facilitate progress in the country.

Drugs. Dial back an opium eradication policy to one that solely targets drug cartels affiliated with insurgents rather than one that targets all traffickers, including poor local farmers. Harassing the latter alienates a significant portion of the rural population.

Central Asia holds little intrinsic strategic value to the United States, and America's security will not be endangered even if an oppressive regime takes over a contiguous fraction of Afghan territory. America's objective has been to neutralize the parties responsible for the atrocities committed on 9/11. The United States should not go beyond that objective by combating a regional insurgency or drifting into an open-ended occupation and nation-building mission.

Most important, Afghanistan serves as the crossroads of Central Asia. From its invasion by Genghis Khan and his two-million strong Mongol hordes to the superpower proxy war between the United States and the Soviet Union, Afghanistan's trade routes and land-locked position in the middle of the region have for centuries rendered it vulnerable to invasion by external powers. Although Afghanistan has endured successive waves of Persian, Greek, Arab, Turk, Mongol, British, and Soviet invaders, no occupying power has ever successfully conquered it. There's a reason why it has been described as the "graveyard of empires," and unless America scales down its objectives, it risks meeting a similar fate.

Washington needs to narrow its objectives to three critical tasks:

Malou Innocent is a foreign policy analyst at the Cato Institute who focuses on Afghanistan and Pakistan. Ted Galen Carpenter, vice president for defense and foreign policy studies at Cato, is the author of 8 and the editor of 10 books on international affairs. His most recent book is Smart Power: Toward a Prudent Foreign Policy for America.

Burning Rubber: Proposed Duties on Chinese Tires Whiff of Senseless Protectionism (Free Trade Bulletin)

Thu, 10 Sep 2009 23:00:00 -0500

Introduction

Although the stew that is the U.S.-China trade relationship has the potential to reach a full boil, it has been on a low simmer since before the start of the financial crisis and subsequent global economic slowdown. Despite pork bans, poultry bans, a steady stream of antidumping and countervailing duty investigations, dispute settlement judgments from the World Trade Organization, accusations of currency manipulation, admonitions regarding China's dependence on export-led growth, and China's concerns about the impact of profligate U.S. government spending on its U.S. debt holdings, the relationship has held up fairly well.

But that could all change quickly. By September 17 President Obama is required to render a decision in a potentially combustible case concerning automobile tire imports from China. Pursuant to a petition filed by the United Steelworkers of America under Section 421 of the Trade Act of 1974-known colloquially as the "China-Specific Safeguard"-the U.S. International Trade Commission has already recommended that Obama impose duties of 55 percent on imports of consumer tires from China. Under the law, the president can adopt, modify, or reject that recommendation.

Although this may sound like just another day in Washington, Obama's decision will be consequential. It will help clarify his administration's heretofore opaque tradepolicy objectives. It will set the tone for U.S.-China trade relations for the foreseeable future. And it will affect broader international trade relations, for better or for worse, as America honors or disavows its pledge to the Group of 20 nations to avoid new protectionist measures.

Under the statute, the president has discretion to deny import "relief" if he determines that such restrictions would have an adverse impact on the U.S. economy that is clearly greater than its benefits, or if he determines that such relief would cause serious harm to the national security of the United States. The first condition is met overwhelmingly. And, for good measure, there is a very strong argument that the second is met, too.

But at the end of the day the president is a politician, who is presumed to owe Big Labor for his election last November. Will the president do what is overwhelmingly in the best interest of the country? Or will he do what he thinks is best for himself politically? This paper provides some law and case background and then summarizes why the president should reject the recommendations of the USITC and deny import restrictions altogether.

The Section 421 Statute and a Brief History

Section 421 of the Trade Act of 1974, as amended, is a special statute that applies only to imports from China. It became U.S. law as a condition of China's accession to the World Trade Organization in 2001. The provision aimed to assuage fears about Chinese competition by establishing a special "safeguard" to deal with increased imports from China for the first 12 years after China's entry into the WTO.¹ The law will expire at the end of 2013.

The broader U.S. "safeguard" law, Section 201 of the Trade Act of 1974, authorizes the imposition of temporary trade barriers against increased imports that are a "substantial cause" of "serious injury" to American producers. The China-specific safeguard of Section 421, by contrast, sets a lower threshold for imposing trade restrictions. Specifically, the statute provides:

If a product of the People's Republic of China is being imported into the United States in such increased quantities or under such conditions as to cause or threaten to cause market disruption to the domestic producers of a like or directly competitive product, the President shall, in accordance with the provisions of this section, proclaim increased duties or other import restrictions with respect to such product, to the extent and for such period as the President considers necessary to prevent or remedy the market disruption.²

Under the statute, "market disruption" exists "whenever imports of an article like or directly competitive with an article produced by a domestic industry are increasing rapidly, either absolutely or relatively, so as to be a significant cause of material injury, or threat of material injury, to the domestic industry."³ And the term "significant cause" refers to "a cause which contributes significantly to the material injury of the domestic industry, but need not be equal to or greater than any other cause."⁴

If the ITC renders an affirmative finding (which is decided by majority vote) or if there is an even split among commissioners, the affirming commissioners must submit recommendations for relief to the president and the U.S. Trade Representative within 20 days of the determination. The USTR then has 55 days to advise the president about the ITC's findings-a period during which it must hold hearings on the matter and solicit views from importers, exporters, and other interested parties. It is also authorized to pursue negotiations to address the underlying market disruption with the Chinese government during this period.

Unless an agreeable settlement is reached, the president must announce import relief by the 150th day after the petition's filing unless he determines that "provision of such relief is not in the national economic interest of the United States or, in extraordinary cases, that the taking of action . . . would cause serious harm to the national security of the United States."⁵ If the president chooses to grant import relief, it must become effective within 15 days of his decision.

It is also important to appreciate what Section 421 is not. It is not an "unfair trade" statute. Unlike the antidumping and countervailing duty laws, a Section 421 case does not include allegations of prices at less than fair value or prices that benefit from countervailable government subsidies. The evidentiary threshold is much lower. All that is alleged-and all that has to be established-in a 421 petition is that imports from China are increasing in such a manner as to be a cause of market disruption (or threat thereof) to the domestic industry.

Section 421 is not intended to remedy any wrongdoing on the part of Chinese exporters, but is intended rather to give U.S. producers the opportunity to holler "time out!" as they catch their breath, assess prospects, and attempt to adjust to a new level of competition. Of course there are huge costs to this kind of intervention in the marketplace, thus the president is granted discretion, under the law, to deny relief if he determines that the costs to the broader economy clearly exceed any benefits to the petitioning industry. While such discretion provides some comfort that the law's relaxed evidentiary standards won't be routinely abused by domestic interests seeking to stifle competition, there are no guarantees that the president's discretion will be based exclusively on considerations of the national economic interest. If there were, it would be nearly impossible to conjure a scenario in which the concentrated, temporary benefits to a specific industry receiving protection were not overwhelmed by the costs of that protection on the broader economy. Political considerations always influence decisions that lead to protection.

During the Bush administration (the first administration under which the law was in effect), there were six Section 421 cases filed by domestic parties, and in four of those the ITC found market disruption and recommended import restrictions. In each of those four cases, President Bush exercised his discretion to deny relief. Thus, trade restrictions have never been imposed under this statute.

Some Specifics of the Tires Case

The tires case is noteworthy in several respects, starting with the fact that it is the first Section 421 case initiated during the Obama administration. Petitioners came to regard the law as a dead letter under President Bush, but have been anxious to test its viability under a new president, who promised last year to decide Section 421 cases "on their merits, not on the basis of an ideological rejection of import relief like that of the current administration."¹⁷

The petition in the tires case was filed by the United Steel, Paper and Forestry, Rubber, Manufacturing, Energy, Allied Industrial and Service Workers International Union-the United Steel Workers, for short-on behalf of workers in the U.S. tire industry. However, the USW represents workers accounting for only 47 percent of U.S. tire production capacity, so most workers in the industry are not officially supporting the petition.⁷ Furthermore, this is the first 421 case that does not have a domestic producer as the petitioner. Out of the 10 firms determined to comprise the entire domestic tire industry, none supports the union's petition for import restraints. Thus, this case, initiated on behalf of no producers and less than half of the industry's workers, and given the acrimony it has engendered within the U.S. tire-supply chain, is probably not the kind of case that President Obama idealized when he promised to decide these issues "on their merits."

In reaching its affirmative conclusion of market disruption in June 2009, the USITC cited the 215-percent increase in the volume of tire imports from China between 2004 and 2008 as a cause of material injury to the domestic industry. The conclusion of material injury was based on evidence of declining industry capacity, production, shipments, employment, wages, and financial results.⁸

The argument put forward by respondents in the case (i.e., various producers, exporters, and importers) during the ITC proceeding, which was ultimately rejected in the majority's determination, is that tire production is stratified among three quality "tiers," and that competition across tiers is mitigated. Most of the increase in imports from China was of the lowest tier, while most of the tires produced in the United States are of the top two tiers.

Furthermore, 7 of the 10 U.S. tire producers also manufacture tires in China, as well as in other countries.⁹ And of those 7 firms, 4-Goodyear, Michelin, Cooper, and Bridgestone-account for almost 90 percent of U.S. production. Thus, the change in composition of domestic and imported tires in the U.S. market is a function of the decisions of these U.S. producers. And it was a deliberate decision of U.S. producers to reduce production of Tier-3 tires-the lowest-end, lowest-profit-margin tires-at their U.S. plants, and increase sourcing of that tier in China and elsewhere, where lower production costs enable the realization of some profit, which in turn helps support continued production of Tier-1 and Tier-2 tires in the United States. Thus, the declining employment, production, capacity, and shipments are all attributable to intentional, conscious planning on the part of profit-maximizing firms.

For a law that is characterized by its champions as a tool to support our producers vis-Ã -vis Chinese producers and to ensure a level playing field, this test case for Obama pits American workers against American producers, and American workers against American workers. By going after Chinese producers, petitioners ensnare their own employers, as well as fellow American workers, organized or otherwise. Although the lightning rod is China (with all of the negative perceptions that have been cultivated about its trade practices), this case has little to do with China per se, and everything to do with organized labor begrudging U.S. producers for pursuing profit- maximizing strategies in a globalized world. In seeking sanctions, petitioners are asking Obama to indict globalization.

Whom Will Protectionism Help, and How

Duties on imports of tires from China are more likely to lead to greater production in other developing countries than to greater production in the United States. U.S. producers have chosen to outsource production of their lower-tier tires to China because producing those tires in that location makes the most sense economically. But raising the costs of producing in China by imposing trade restrictions would not make U.S. production more attractive. It would not bring back U.S. jobs. It would make Indonesian or Mexican or Brazilian production more attractive, and would likely divert jobs from China to those countries.

According to data compiled by the ITC staff, the average unit price (based on the customs value) of a tire imported from China in 2008 was $38.98.¹⁰ A 55-percent tariff would drive up the unit value to $60.42. But, in 2008, U.S. producers sold 159 million tires, valued at $11 billion, for an average price of $68.60.¹¹ Factoring in mark-up of the Chinese price, it is reasonable to conclude that prices of American- and Chinese-produced tires might retail for about the same price. But that outcome is highly unlikely to be incentive enough for globalized tire producers to divert production from China to the United States. Instead, producers are much more likely to shift production to Mexico, Brazil, or Indonesia, where the unit prices in 2008 (based on customs value) were $56.26, $48.93, and $32.10, respectively.¹²

Furthermore, the ITC's recommended remedy would be in place for three years. The statute expires in four years. What kinds of changes should be expected during the interim that would make the United States a more cost-effective place to produce Tier-3 tires, or any tires for that matter? There are no changes-short of technological advances that raise productivity and reduce the demand for labor-that could make the United States a better place to produce tires. But this case is about jobs and nothing else, so even that outcome wouldn't satisfy petitioners. Three years of "relief" will do nothing but perhaps defer the day of reckoning, while imposing heavy costs on the rest of the economy, taxing our relationship with China, and further sullying America's international standing.

Adverse Economic Impact Is Clearly Greater Than any Benefits

Formal economic models, testimony, anecdotes from representatives of industries in the tire-supply chain, and common sense analysis all reveal an excessive cost burden on the economy from the proposed remedy of 55-percent duties in year one; 45-percent duties in year two, and; 35- percent duties in year three.

In their dissenting opinion, ITC Vice Chairman Daniel R. Pearson and Commissioner Deanna Tanner Okun concluded:

[W]e find that imposing a trade-restrictive quota or tariff on the subject imports will be far more likely to cause market disruption than to alleviate it for domestic producers who have already undertaken significant strategic adjustments to adapt to a changing global market.¹³

Indeed, economist Thomas Prusa estimates that "the tire manufacturing industry will experience little to no job creation as a result of the tariff. Under the best-case scenario more than a dozen jobs will be lost for every job protected." Prusa estimates a net loss of at least 25,000 U.S. jobs if the recommended tariff is imposed. Under the best case, Prusa finds that higher prices and other inefficiencies stemming from the proposed remedies would sap U.S. consumers of $600 to $700 million per year, translating to an annual cost of $300,000 for every job "protected" in the tire industry.¹⁴

According to a statement of the U.S. Tire Industry Association, which represents all segments of the tire industry, including those that manufacture, repair, recycle, sell, service, or use new or retreaded tires, and also those suppliers or individuals who furnish equipment, material, or services to the industry:

Our members, by directly importing or contracting with suppliers, are meeting the demands of a segment of the tire consumer market for lower-cost tires. No manufacturing uptick would satisfy this product segment, but instead could create a need for product allocation, resulting in shortages and outages. In the best of times, such occurrences are troubling, but in today's climate, this could inflict severe financial harm on many retailers and on the motoring public.¹⁵

Consumer groups and other organizations have also expressed safety concerns about the impact of higher-priced tires on increasingly-pinched consumers. The likelihood that an increasing number of consumers will forego the replacement of old and worn-out tires presents a whole new category of risk and costs that are difficult to quantify economically.

If President Obama imposes trade restrictions in this case-regardless of whether those restrictions are as severe as the ITC's recommendation or if they are milder-the United States will have blatantly violated its commitment to the G-20 earlier this year to avoid new invocations of protectionism. That would be a colossal mistake that simultaneously undermines U.S. credibility on trade and invites other governments to indulge their own protectionist lobbies. The consequences for world trade could be severe. There should be no doubt that the demonstration effect would not only influence other governments toward intervention, but would also encourage other U.S. interests to pursue their own protection under Section 421.

The fact that President Bush rejected the ITC's recommendations to impose restrictions four times reinforces the perspective held by the Chinese government that the imposition of trade restrictions under Section 421 is firmly a matter of presidential discretion. Unlike antidumping or countervailing duties, which run on statutory autopilot without requiring the president's attention or consent, Section 421 explicitly requires the attention and participation of the U.S. president. In other words, although there are over 90 outstanding U.S. antidumping and countervailing duty orders against various Chinese products, none of them is considered to reflect the direct wishes of the U.S. president, and thus none of them rise to the level of a potentially explosive trade dispute.

Technically, if the United States imposes restrictions under Section 421, the Chinese are not entitled to formally retaliate. But that's cold comfort when it's quite obvious that trade restraints under Section 421 will no doubt be considered by the Chinese to be a directive of the U.S. president, and thus the offense taken and the consequences wrought could be profound. U.S. industries across the manufacturing spectrum have written to President Obama, urging him not to impose restraints in this case for fear that they will bear the brunt of the costs through lost export sales. This is a real possibility.

As to the question of national security, the prospect of a spiraling trade war with China, if duties are levied and retaliation ensues, will strain the commercial ties that have been successfully cultivated over the past few decades and will increase the risk that China becomes less helpful on crucial matters of U.S. foreign and security policy.

Conclusion

Through the first eight months of his tenure, the president has avoided making any decisions of consequence on matters of trade policy. While his actions have not been conclusively protectionist, his tepid rhetorical endorsements of trade and his conditional repudiations of protectionism have sown doubts at home and abroad about the direction of U.S. trade policy. A decision to reject trade restraints in the tires case would be reassuring to a world that is struggling to grow out of recession.

The stakes appear to be much higher for Obama than they were for Bush. The unions feel that they have earned the president's support and are more emboldened in their position now than in the past. Bush didn't win the near-unanimous support of organized labor leaders in his elections, as Obama did. Nor did Bush promise to get tough on Chinese trade practices, as Obama did. Instead, Bush set the precedent of denying relief-and he did it four times.

The USITC's recommendation of a 55-percent tariff is a remedy far more restrictive than the quota sought by the USW. The president, then, may be tempted to offer what he might think is a compromise solution, of lower duties or a tariff-rate quota. But the costs of any protectionism at this time and under these circumstances could unleash a protectionist backlash in the United States and around the world. It would be far less costly for the president to reject trade restraints altogether and to capitalize on his earned credibility by moving the trade agenda forward.

Notes

¹ Daniel Ikenson, "Bull in a China Shop: Assessing the First Section 421 Trade Case," Cato Free Trade Bulletin no. 2, January 1, 2003, p.1.

² 19 U.S.C. Â§ 2451(a).

³ 19 U.S.C. Â§ 2451(c)(1).

⁴ 19 U.S.C. Â§ 2451(c)(2).

⁵ 19 U.S.C. Â§ 2451(k)(1). Note that in cases in which the ITC is evenly split, the president has complete discretion about whether or not to accept the affirming commissioners' recommendations for relief.

⁶ Barack Obama (letter to Cass Johnson, President of the National Council of Textile Organizations, October 24, 2008), http://www.ncto.org/newsroom/pr20081029.pdf.

⁷ U.S. International Trade Commission, Certain Passenger Vehicle and Light Truck Tires from China, Investigations No. TA- 421-7, Publication 4085, July 2009, p. I-14.

⁸ For a full discussion of the statutory questions of increasing imports, material injury, and causation, see USITC, Certain Passenger Vehicle and Light Truck Tires from China, pp. 11-29.

⁹ Those companies are Toyo, Yokohama, Pirelli, Michelin, Goodyear, Cooper, and Bridgestone. USITC, p. IV-3.

¹⁰ USITC, Table IV-4, p. IV-10.

¹¹ Ibid., Table III-5, p. III-13.

¹² Ibid., Table II-1, p. II-4.

¹³ Ibid., p.45.

¹⁴ Thomas J. Prusa, "Estimated Economic Effects of the Proposed Import Tariff on Passenger Vehicle and Light Truck Tires from China," American Coalition for Free Trade in Tires (submission to the International Trade Commission, July 26, 2009).

¹⁵ Tire Industry Association (position statement, June 17, 2009), http://www.tireindustry.org/pdf/news_archives/press release061709.pdf.

Introduction

The Section 421 Statute and a Brief History

If a product of the People's Republic of China is being imported into the United States in such increased quantities or under such conditions as to cause or threaten to cause market disruption to the domestic producers of a like or directly competitive product, the President shall, in accordance with the provisions of this section, proclaim increased duties or other import restrictions with respect to such product, to the extent and for such period as the President considers necessary to prevent or remedy the market disruption.²

Some Specifics of the Tires Case

Whom Will Protectionism Help, and How

Adverse Economic Impact Is Clearly Greater Than any Benefits

In their dissenting opinion, ITC Vice Chairman Daniel R. Pearson and Commissioner Deanna Tanner Okun concluded:

[W]e find that imposing a trade-restrictive quota or tariff on the subject imports will be far more likely to cause market disruption than to alleviate it for domestic producers who have already undertaken significant strategic adjustments to adapt to a changing global market.¹³

Our members, by directly importing or contracting with suppliers, are meeting the demands of a segment of the tire consumer market for lower-cost tires. No manufacturing uptick would satisfy this product segment, but instead could create a need for product allocation, resulting in shortages and outages. In the best of times, such occurrences are troubling, but in today's climate, this could inflict severe financial harm on many retailers and on the motoring public.¹⁵

Conclusion

Notes

¹ Daniel Ikenson, "Bull in a China Shop: Assessing the First Section 421 Trade Case," Cato Free Trade Bulletin no. 2, January 1, 2003, p.1.

² 19 U.S.C. Â§ 2451(a).

³ 19 U.S.C. Â§ 2451(c)(1).

⁴ 19 U.S.C. Â§ 2451(c)(2).

⁶ Barack Obama (letter to Cass Johnson, President of the National Council of Textile Organizations, October 24, 2008), http://www.ncto.org/newsroom/pr20081029.pdf.

⁷ U.S. International Trade Commission, Certain Passenger Vehicle and Light Truck Tires from China, Investigations No. TA- 421-7, Publication 4085, July 2009, p. I-14.

⁸ For a full discussion of the statutory questions of increasing imports, material injury, and causation, see USITC, Certain Passenger Vehicle and Light Truck Tires from China, pp. 11-29.

⁹ Those companies are Toyo, Yokohama, Pirelli, Michelin, Goodyear, Cooper, and Bridgestone. USITC, p. IV-3.

¹⁰ USITC, Table IV-4, p. IV-10.

¹¹ Ibid., Table III-5, p. III-13.

¹² Ibid., Table II-1, p. II-4.

¹³ Ibid., p.45.

¹⁵ Tire Industry Association (position statement, June 17, 2009), http://www.tireindustry.org/pdf/news_archives/press release061709.pdf.

Daniel J. Ikenson is the associate director of the Center for Trade Policy Studies at the Cato Institute.

High-Speed Rail Is Not "Interstate 2.0" (Briefing Paper)

Tue, 08 Sep 2009 23:00:00 -0500

The administration has likened President Obama's high-speed rail plan to President Eisenhower's Interstate Highway System. Yet there are crucial differences between interstate highways and high-speed rail.

First, before Congress approved the Interstate Highway System, it had a good idea how much it would cost. In contrast, Congress approved $8 billion for high-speed rail without knowing the total cost, which is likely to be at least $90 billion.

Second, highway users paid for interstate highways, whereas high-speed rail will be almost entirely subsidized by general taxpayers who will rarely use it.

Third, interstate highways connect all 48 contiguous states and major metropolitan areas. The FRA's high-speed rail plan consists of six unconnected networks that reach only 33 states and less than two-thirds of the nation's 100 largest urban areas.

Fourth, the average American traveled 4,000 miles on interstates in 2007. High-speed rail proponents optimistically estimate that the average American would ride the FRA's high-speed rail system less than 60 miles per year.

Finally, interstate highways improved social welfare by increasing highway safety. In contrast, far from saving energy and reducing pollution, high-speed rail would actually increase energy consumption and greenhouse gas emissions.

For all these reasons, the United States government should not fund high-speed rail. The $8 billion in high-speed rail stimulus funds should be invested in safety improvements, not in new trains and new routes that will add to future taxpayer obligations.

Second, highway users paid for interstate highways, whereas high-speed rail will be almost entirely subsidized by general taxpayers who will rarely use it.

Randal O'Toole is a senior fellow with the Cato Institute and author of The Best-Laid Plans: How Government Planning Harms Your Quality of Life, Your Pocketbook, and Your Future.

Halfway to Where? Answering the Key Questions of Health Care Reform (Policy Analysis)

Tue, 08 Sep 2009 23:00:00 -0500

Although neither the House nor the Senate passed a health care bill by President Obama's August deadline, various pieces of legislation have made it through committee, and they provide a concrete basis for analyzing what the proposed health care reform would and would not do. Looking at the various bills that are moving on Capitol Hill, we can determine the following:

Contrary to the Obama administration's repeated assurances, millions of Americans who are happy with their current health insurance will not be able to keep it. As many as 89.5 million people may be dumped into a government-run plan.
Some Americans may find themselves forced into a new insurance plan that no longer includes their current doctor.
Americans will pay more than $820 billion in additional taxes over the next 10 years, and could see their insurance premiums rise as much as 95 percent.
The current health care bills will increase the budget deficit by at least $239 billion over the next 10 years, and far more in the years beyond that. If the new health care entitlement were subject to the same 75-year actuarial standards as Social Security or Medicare, its unfunded liabilities would exceed $9.2 trillion.
While the bills contain no direct provisions for rationing care, they nonetheless increase the likelihood of government rationing and interference with how doctors practice medicine.
Contrary to assertions of some opponents, the bills contain no provision for euthanasia or mandatory end-of-life counseling. The bills' provisions on abortion coverage are far murkier.

In short, Americans will pay more and get less. Whatever the variation, however these bills are merged or compromised, this would be bad news for Americans.

Contrary to the Obama administration's repeated assurances, millions of Americans who are happy with their current health insurance will not be able to keep it. As many as 89.5 million people may be dumped into a government-run plan.
Some Americans may find themselves forced into a new insurance plan that no longer includes their current doctor.
Americans will pay more than $820 billion in additional taxes over the next 10 years, and could see their insurance premiums rise as much as 95 percent.
The current health care bills will increase the budget deficit by at least $239 billion over the next 10 years, and far more in the years beyond that. If the new health care entitlement were subject to the same 75-year actuarial standards as Social Security or Medicare, its unfunded liabilities would exceed $9.2 trillion.
While the bills contain no direct provisions for rationing care, they nonetheless increase the likelihood of government rationing and interference with how doctors practice medicine.
Contrary to assertions of some opponents, the bills contain no provision for euthanasia or mandatory end-of-life counseling. The bills' provisions on abortion coverage are far murkier.

In short, Americans will pay more and get less. Whatever the variation, however these bills are merged or compromised, this would be bad news for Americans.

Michael D. Tanner is a senior fellow with the Cato Institute and coauthor of Healthy Competition: What's Holding Back Health Care and How to Free It (second edition, 2005).

A Harsh Climate for Trade: How Climate Change Proposals Threaten Global Commerce (Trade Policy Analysis)

Tue, 08 Sep 2009 23:00:00 -0500

The upcoming Copenhagen conference on climate change has led to calls for the United States to adopt a climate change abatement program in advance. In an effort to minimize adverse effects on certain domestic industries from higher energy costs, however, proponents of a cap-and-trade program for greenhouse gas emissions have loaded up their proposal with giveaways, loopholes, and barriers to imports from nations with less stringent emission caps. These trade measures are likely to be ineffective at best and harmful to U.S. interests at worst.

First, the key targets of the proposed import barriers, India and China, are relatively minor sources of imports of energy-intensive goods. Most carbon-intensive imports to the United States come from other developed countries that have stricter emissions controls than the United States and will therefore likely escape import penalties. Second, and more fundamentally, the trade provisions may be counterproductive. Global trade rules allow import barriers to protect the environment under certain conditions, some of which the main climate change bill appears to contradict. A trade dispute and possible retaliation is not in anyone's interest, especially in a global downturn. Even if the United States was able to avoid formal dispute settlement proceedings, copycat regulations in other countries may be designed in a manner unfavorable to U.S. interests.

To the extent that global warming is a real problem warranting action, it needs to be addressed globally rather than through unilateral efforts. Antagonizing trade partners through probably illegal trade measures will undermine efforts to secure global cooperation on climate change. A freer, more prosperous economy is a more auspicious path to ensuring a more rapid spread of environmental technology and the global consensus needed to combat climate change.

Sallie James is a policy analyst with Cato's Center for Trade Policy Studies.

Restriction or Legalization? Measuring the Economic Benefits of Immigration Reform (Trade Policy Analysis)

Wed, 12 Aug 2009 23:00:00 -0500

By the latest estimates, 8.3 million workers in the United States are illegal immigrants. Proposed policy responses range from more restrictive border and workplace enforcement to legalization of workers who are already here and the admission of new workers through a temporary visa program. Policy choices made by Congress and the president could have a major economic impact on the welfare of U.S. households. This study uses the U.S. Applied General Equilibrium model that has been developed for the U.S. International Trade Commission and other U.S. government agencies to estimate the welfare impact of seven different scenarios, which include increased enforcement at the border and in the workplace, and several different legalization options, including a visa program that allows more low-skilled workers to enter the U.S. workforce legally.

For each scenario, the USAGE model weighs the impact on such factors as public revenues and expenditures, the occupational mix and total employment of U.S. workers, the amount of capital owned by U.S. households, and price levels for imports and exports. This study finds that increased enforcement and reduced low-skilled immigration have a significant negative impact on the income of U.S. households. Modest savings in public expenditures would be more than offset by losses in economic output and job opportunities for more skilled American workers. A policy that reduces the number of low-skilled immigrant workers by 28.6 percent compared to projected levels would reduce U.S. household welfare by about 0.5 percent, or $80 billion.

In contrast, legalization of low-skilled immigrant workers would yield significant income gains for American workers and households. Legalization would eliminate smugglers' fees and other costs faced by illegal immigrants. It would also allow immigrants to have higher productivity and create more openings for Americans in higherskilled occupations. The positive impact for U.S. households of legalization under an optimal visa tax would be 1.27 percent of GDP or $180 billion.

Peter Dixon is the Sir John Monash Distinguished Professor and Maureen Rimmer is a Senior Research Fellow at the Centre of Policy Studies at Monash University in Australia. Their USAGE model of the U.S. economy has been used by the U.S. Departments of Commerce, Agriculture, and Homeland Security, and the U.S. International Trade Commission.

The Poverty of Preschool Promises: Saving Children and Money with the Early Education Tax Credit (Policy Analysis)

Sun, 02 Aug 2009 23:00:00 -0500

The political momentum behind state-level preschool programs is tremendous, but existing proposals are often flawed and expensive. Preschool can provide small but statistically significant short-term gains for low-income children; however, these gains usually fade quickly in later grades. There is little evidence to support the belief that large-scale government preschool programs are effective, by themselves, in improving long-term student outcomes. Reform of the existing K–12 system should therefore remain the primary focus of those interested in sustainable improvement in student outcomes.

Given that many states have already instituted pre-K programs, or are committed to doing so, this paper proposes model early education legislation aimed at maximizing their chances for longterm success. The Early Education Tax Credit aims to sustain any potential preschool benefits and establish a solid academic foundation for later success. The program would improve the quality and efficiency of preschool options by harnessing market forces and would pay for itself by using savings generated from the migration of students from public to private schools in grades K–4.

The Early Education Tax Credit approach is unique in meeting the demands of activists for expanded access to high-quality preschool, meeting the needs of children and the preferences of their parents, and meeting the goal of increased educational freedom — all while keeping the budgetary impact low or positive.

Policy Analysis no. 641 with appendices on the model legislation (PDF, 874KB )
Policy Analysis no. 641 without appendices (PDF, 744KB )

Appendices on the model legislation:

Appendix A: The Early Education Tax Credit Act (PDF, 78KB )
Appendix B: The EETC in Action (PDF, 32KB )

Policy Analysis no. 641 with appendices on the model legislation (PDF, 874KB )
Policy Analysis no. 641 without appendices (PDF, 744KB )

Appendices on the model legislation:

Appendix A: The Early Education Tax Credit Act (PDF, 78KB )
Appendix B: The EETC in Action (PDF, 32KB )

Adam B. Schaeffer is a policy analyst with Cato's Center for Educational Freedom and author of "The Public Education Tax Credit" (Cato Institute Policy Analysis no. 605).

Fannie Med? Why a "Public Option" Is Hazardous to Your Health (Policy Analysis)

Sun, 26 Jul 2009 23:00:00 -0500

President Obama and other leading Democrats have proposed creating a new government health insurance program as an option for Americans under the age of 65, within the context of a new, federally regulated market — typically described as a "National Health Insurance Exchange." Supporters claim that a new government program could deliver higher-quality health care at a lower cost than private insurance, and that competition from a government program would force private insurers to improve.

A full accounting shows that government programs cost more and deliver lower-quality care than private insurance. The central problem with proposals to create a new government program, however, is not that government is less efficient than private insurers, but that government can hide its inefficiencies and draw consumers away from private insurance, despite offering an inferior product.

A health insurance "exchange," where consumers choose between private health plans with artificially high premiums and a government program with artificially low premiums, would not increase competition. Instead, it would reduce competition by driving lower-cost private health plans out of business. President Obama's vision of a health insurance exchange is not a market, but a prelude to a government takeover of the health care sector. In the process, millions of Americans would be ousted from their existing health plans.

If Congress wants to make health care more efficient and increase competition in health insurance markets, there are far better options.

Congress should reject proposals to create a new government health insurance program — not for the sake of private insurers, who would be subject to unfair competition, but for the sake of American patients, who would be subject to unnecessary morbidity and mortality.

If Congress wants to make health care more efficient and increase competition in health insurance markets, there are far better options.

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

As Immigrants Move In, Americans Move Up (Free Trade Bulletin)

Mon, 20 Jul 2009 23:00:00 -0500

Congress and President Obama may tackle the controversial issue of immigration reform as soon as the fall of 2009. If past congressional debates are any guide, one point of contention will be the impact of reform on the American underclass.

In 2006, and again in 2007, the U.S. Senate debated "comprehensive immigration reform" designed to curb illegal immigration by ramping up enforcement while providing expanded opportunities for legal immigration. Both bills would have legalized several million immigrants currently in the United States illegally and created a temporary visa program to allow more low-skilled workers to enter the country legally in future years.

One argument raised against expanded legal immigration has been that allowing more low-skilled foreign-born workers to enter the United States will swell the ranks of the underclass. The critics warn that by "importing poverty," immigration reform would bring in its wake rising rates of poverty, higher government welfare expenditures, and a rise in crime. The argument resonates with many Americans concerned about the expanding size of government and a perceived breakdown in social order.¹

As plausible as the argument sounds, it is not supported by the social and economic trends of the past 15 years. Even though the number of legal and illegal immigrants in the United States has risen strongly since the early 1990s, the size of the economic underclass has not. In fact, by several measures the number of Americans living on the bottom rungs of the economic ladder has been in a long-term decline, even as the number of immigrants continues to climb. Other indicators associated with the underclass, such as the crime rate, have also shown improvement. The inflow of low-skilled immigrants may even be playing a positive role in pushing nativeborn Americans up the skills and income ladder.

Measuring the Size and Composition of the Underclass

"Underclass" is not a precise term, but it is generally understood to mean those who live below or near the poverty line and who lack the education or jobs skills to join the middle class. If we define the underclass to be the number of people in the United States living below the poverty line, in households earning less than $25,000 a year or without a high school diploma, and then examine the changing size and composition of each of those categories by either race or citizenship status, a consistent pattern emerges.

By all three measures, the size of the underclass has been shrinking since the early 1990s-during a period of large-scale legal and illegal immigration. The composition of the underclass has also been changing, with the number of immigrants and Hispanics growing, while the number of native-born and non-Hispanics has declined at an even more rapid rate.

Families and individuals below the poverty level. If we define the underclass as families living below the official poverty level, the recent trend has been downward. Between 1995 and 2004, the number of family households living below the poverty level fell by half a million, from 8.1 million to 7.6 million. The number of immigrant households in poverty did indeed rise-by 194,000-but that increase was more than offset by a drop of 675,000 in native-born households living in poverty. In other words, for every poor immigrant family we "imported" during that time, more than three native-born families were "exported" from poverty.²

Poverty figures by race span a longer period, 1993 though 2007, but they tell the same story. The total number of family households living in poverty fell by 770,000 during that period, from 8.4 million to 7.6 million. The number of Hispanic families living in poverty increased by 420,000-providing evidence of a growing Hispanic/immigrant underclass-but over those same years, the number of non-Hispanic families in poverty dropped by 1.1 million, including a decline of 408,000 in the number of poor black families.³

The trend is no different when we look at individuals in poverty. From 1993 through 2007, the number of individuals in our society subsisting below the poverty line declined by 2 million, from 39.3 million to 37.3 million. A 1.8 million increase in the number of Hispanics living in poverty was swamped by a 3.8 million decline in non-Hispanics, including a 1.6 million decline in black poverty. Similarly, a 1 million increase in immigrants living in poverty was more than matched by a 3 million drop in native-born Americans under the poverty line.⁴ Measured by the official poverty numbers, the American underclass has been shrinking as it has become composed of more immigrants and more Hispanics.

Households with income less than $25,000. Measuring the underclass by household income reveals the same underlying trend. The number of households earning less than $25,000 in a given year dropped by 5.6 million from 1995 to 2004, according to the most recent numbers that disaggregate the underclass by citizenship status. Almost all the drop was accounted for by a decline in non-immigrant households earning less than $25,000, which dropped from 20.6 million in 1995 to 15.0 million in 2004. (All incomes were measured in inflation-adjusted dollars.) The number of immigrant families under that income threshold also dropped, but only by 80,000. As a result, the immigrant share of the underclass grew from 15 percent to 20 percent, even as the size of the underclass was shrinking.⁵

The same picture emerges when we examine the number of low-income households by race and ethnicity. From 1994 through 2007, the number of households in America getting by on less than $25,000 fell by almost 10 million (with incomes measured across the years in real dollars). The share of total households living under that threshold dropped from 40 percent to 25 percent. Again, the entire decline was accounted for by non-Hispanic households, including a drop of 900,000 in black households, while the number of Hispanic households surviving on less than $25,000 was virtually unchanged.

Although the underclass became increasingly more Hispanic during the period, the share of all households living on less than $25,000 fell for every ethnic group. In fact, the steepest decline in percentage terms was among Hispanic households, with the share of households living below $25,000 dropping from 53 percent to 31 percent.⁶

Householders and Individuals without a High-School Diploma. A third way of measuring the underclass is by householders or individuals without a high-school diploma. In America today, a worker or head of household without a high-school education is almost invariably confined to lowerproductivity, and thus, lower-wage occupations, with limited prospects for advancement.

As with the poverty and income measures, here, too, the story is basically positive. Between 1993 and 2006, the number of households headed by someone 18 and older without a high-school diploma dropped by 3.7 million, from 19.9 million to 16.2 million. The number of such "low-skilled households" headed by a Hispanic did indeed increase by 1.8 million during that period, undoubtedly driven in significant part by large inflows of low-skilled immigrants from Mexico and Central America. The rest of the story, however, is that during those same years, the number of non-Hispanic households headed by a high-school dropout fell by a hefty 5.5 million. That means that for every net addition of one Hispanic-headed, low-skilled household to the ranks of the underclass, the number of such non-Hispanic households dropped by three. Meanwhile, the share of total U.S. households headed by a high-school dropout declined steadily, from one in five to one in seven.⁷

The number of individuals 25 years and older without a high-school diploma has also been in steady decline. From 1993 through 2006, the number of adults who were highschool dropouts declined from 32.1 million to 27.9 million, a fall of 4.2 million (see Figure 1). The number of adult Hispanics in the United States without a high-school education swelled by 3.9 million, much of that growth driven by the influx of low-skilled illegal immigrants. But during that same period, the number of non-Hispanic adults toiling in life without a high-school diploma plunged by 8.1 million, including a drop of 1 million in the number of adult black dropouts. For every additional Hispanic dropout added to the pool, the number of non-Hispanic dropouts fell by two. The share of adults without a diploma dropped in every racial and ethnic group, although the decline was less rapid among Hispanics.⁸

Educational attainment by citizenship status covers a slightly different period but also confirms the trend. From 1995 to 2004, the number of adults without a high school diploma declined by 2.9 million. An increase of 2.4 million in the number of immigrant dropouts was overwhelmed by a decline of 5.3 million in native-born dropouts. As that measure of the underclass shrank, the share represented by immigrants grew from 22 percent to 32 percent. By this and the other measures above, "the underclass" in our society has been shrinking as its face has become more Hispanic and foreign-born.⁹

Immigrants Move In, Americans Move Up

Multiple causes lie behind the shrinking of the underclass in the past 15 years. The single biggest factor is probably economic growth. Despite the current recession, the U.S. economy enjoyed healthy growth during most of the period, lifting median household incomes and real compensation earned by U.S. workers, which ushered millions of families into the middle class and beyond. Welfare reform in the 1990s, and rising levels of education, may also be contributing factors.

Another factor may be immigration itself. The arrival of low-skilled, foreign-born workers in the labor force increases the incentives for younger native-born Americans to stay in school and for older workers to upgrade their skills. Because they compete directly with the lowest-skilled Americans, low-skilled immigrants do exert mild downward pressure on the wages of the lowest-paid American workers. But the addition of low-skilled immigrants also expands the size of the overall economy, creating openings in higher-paid occupations such as managers, skilled craftsmen, and accountants. The result is a greater financial reward for finishing high school and for acquiring additional job skills. Immigration of low-skilled workers motivates Americans, who might otherwise languish in the underclass, to acquire the education and skills necessary so they are not competing directly with foreign-born workers.

The shrinking of the native-born underclass contradicts the argument that low-skilled immigration is particularly harmful to African-Americans, who are disproportionately represented in the underclass. By each of the three measures above-poverty, income, and educational attainment-the number of black American households and individuals in the underclass has been declining. Native-born blacks have been moving up along with other native-born Americans as immigrants have been moving in.

That same win-win dynamic may have been at work a century ago during the "great migration" of immigrants from eastern and southern Europe. Most of those immigrants were lower-skilled compared with Americans, and their influx also exerted downward pressure on the wages of lower-skilled Americans. It was probably not a coincidence that during that same period the number of Americans staying in school to earn a high-school diploma increased dramatically in what is called "the high-school movement." From 1910 to 1940, the share of American 18-year-olds graduating from high school rose from less than 10 percent to 50 percent in a generation.¹⁰ Today's immigrants are arguably contributing to the same positive dynamic.

America's experience with immigration contradicts the simplistic argument that the arrival of a certain number of low-skilled immigrants increases the underclass by that very same amount. That approach ignores the dynamic and positive effects of immigration on native-born American workers. The common calculation that every low-skilled immigrant simply adds to the underclass betrays a static and inaccurate view of American society.

A Less Dysfunctional Underclass

Another contribution of immigration has been that it has changed the character of the American underclass for the better. Years of low-skilled immigration have created an underclass that is not only smaller than it was 15 years ago, but also more functional. Members of today's more immigrant and Hispanic underclass are more likely to work and less likely to live in poverty or commit crimes than members of the more native-born underclass of past decades.

One striking fact about low-skilled immigrants in America, both legal and illegal, is their propensity to work. In 2008, the labor-force participation rate of foreign-born Hispanics was 70.7 percent-compared to an overall rate of 65.6 percent for native-born Americans. Immigrants 25 years of age or older, without a high-school diploma, were half again more likely to be participating in the labor force than native-born dropouts (61.1 percent vs. 38.4 percent).¹¹ According to estimates by the Pew Hispanic Center, male illegal immigrants, ages 18-64, had a labor force participation rate in 2004 of an incredible 92 percent.¹² Illegal immigrants are typically poor, but they are almost all working poor.

Nowhere is the contrast between the immigrant and native-born underclass more striking than in their propensity to commit crimes. Across all ethnicities and educational levels, immigrants are less prone to commit crimes and land in prison than their native-born counterparts.

The reasons behind this phenomenon are several. Legal immigrants can be screened for criminal records, reducing the odds that they will engage in criminal behavior once in the United States. Illegal immigrants have the incentive to avoid committing crimes to minimize their chances of being caught and deported. Legal or illegal, immigrants come to America to realize the opportunities of working in a more free-market, open, and prosperous economy; committing a crime puts that opportunity in jeopardy.

Strong empirical evidence points to the fact that immigrants are less likely to commit crimes than native-born Americans. In testimony before Congress in 2007, Anne Morrison Piehl, a professor of criminal justice at Rutgers University, addressed the question of "The Connection between Immigration and Crime." Using census data from 1980, 1990, and 2000, she told the House Judiciary Committee that "immigrants have much lower institutionalization rates than the native born-on the order of one-fifth the rate of natives. More-recently arrived immigrants had the lowest relative institutionalization rates, and the gap with natives increased from 1980 to 2000." Piehl found no evidence that the immigrant crime rate was lower because of the deportation of illegal immigrants who might otherwise be held behind bars in the United States.¹³

Crime rates are even lower than average among the poorly educated and Hispanic immigrants that arouse the most concern from skeptics of immigration reform. RubÃ©n Rumbaut of the University of California at Irvine, after examining the 2000 census data, found that incarceration rates among both legal and illegal immigrants from Mexico, El Salvador, and Guatemala were all less than half the rate of U.S.-born whites.¹⁴ Immigrants without a high-school diploma had an incarceration rate that was one-fourth that of native-born high-school graduates, and one-seventh that of native-born dropouts.¹⁵

The reluctance of low-skilled immigrants to commit crimes helps to explain the lack of any noticeable connection between rising levels of illegal immigration and the overall national crime rate. As Professor Rumbaut explained in a recent essay:

Since the early 1990s, over the same time period as legal and especially illegal immigration was reaching and surpassing historic highs, crime rates have declined, both nationally and most notably in cities and regions of high immigrant concentrations (including cities with large numbers of undocumented immigrants, such as Los Angeles, and border cities like San Diego and El Paso, as well as New York, Chicago, and Miami).¹⁶

Ironically, illegal immigrants who break U.S. immigration laws to enter the United States appear much more likely than native-born Americans to respect our domestic criminal code once they are inside the country. Once here, low-skilled immigrants, as a rule, get down to the business of earning money, sending home remittances, and staying out of trouble. The wider benefit to our society is that, in comparison to 15 years ago, a member of today's underclass, standing on a street corner, is more likely to be waiting for a job than a drug deal.

Contrary to popular notions, low-skilled immigration has not contributed to a swelling of the underclass, or any increase at all, nor has it contributed to a rise in crime or other antisocial behaviors. In fact, it would be more plausible to argue that low-skilled immigration has actually accelerated the upward mobility of Americans on the lower end of the socioeconomic ladder. At the same time, the influx of lowskilled immigrants has helped to transform the American underclass into a demographic group that is still poor-but more inclined to work and less prone to crime.

Conclusion

Members of Congress should not reject market-oriented immigration reform because of misguided fears about "importing poverty." Based on recent experience, a policy that allows more low-skilled workers to enter the United States legally would not necessarily expand the number of people living in poverty or the number of low-skilled households demanding government services. It would not impose significant costs on American society in the form of welfare spending or crime abatement.

As Cato research has shown elsewhere, strong, positive arguments remain for pursuing a policy of expanding legal immigration for low-skilled workers. Comprehensive immigration reform that included a robust temporary worker program would boost economic output and create new middleclass job opportunities for native-born Americans. It would reduce the inflow of illegal workers across the border, allowing enforcement resources to be redeployed more effectively to interdict terrorists and real criminals. It would restore the rule of law to U.S. immigration policy, while reducing calls for enforcement measures such as a national ID card or a centralized employment verification system, which compromise the freedom and civil liberties of American citizens.¹⁷

Along with those major benefits, immigration reform would enhance the incentives for native-born Americans up and down the income ladder to acquire the education and skills they need to prosper in a dynamic economy.

Notes

¹ See, for example, Robert Rector, "Importing Poverty: Immigration and Poverty in the United States: A Book of Charts," Heritage Foundation, Special Report #9, October 25, 2006; Heather Mac Donald, "Surge in Birth Rate Among Unwed Hispanics Creating New U.S. Underclass," Dallas Morning News, Jan. 21, 2007; and Robert J. Samuelson, "Importing Poverty," The Washington Post, September 5, 2007.

² U.S. Bureau of the Census, Current Population Survey, Foreign Born Population, 1995-2004, Survey Table 1.12, http://www. census.gov/cps/.

³ U.S. Bureau of the Census, Current Population Survey, Poverty Status of Families, Table 4, http://www.census.gov/cps/.

⁴ For poverty numbers by citizenships status, see U.S. Bureau of the Census, Current Population Survey, Historical Poverty Tables, People, Table 23; by race, see ibid., Table 2, http://www.census. gov/cps/.

⁵ U.S. Bureau of the Census, Current Population Survey, Foreign Born Population, 1995-2004, Survey Table 1.9, http://www.census. gov/cps/.

⁶ U.S. Bureau of the Census, Current Population Survey, Detailed Household Income, Table H-1, http://www.census.gov/cps/.

⁷ U.S. Bureau of the Census, Current Population Survey, Educational Attainment, Table 4, http://www.census.gov/cps/. Data is not available for householder's education level by citizenship status.

⁸ Ibid.

⁹ U.S. Bureau of the Census, Current Population Survey, Foreign Born Population, 1995-1999, Survey Table 1.4, and 2000-2004, Survey Table 1.5, http://www.census.gov/cps/.

¹⁰ See, for example, Claudia Goldin and Lawrence F. Katz, "Human Capital and Social Capital: The Rise of Secondary Schooling in America," National Bureau of Economic Research, Working Paper no. 6439, March 1998.

¹¹ U.S. Bureau of Labor Statistics, "Foreign-born Workers: Labor Force Characteristics in 2008," Bureau of Labor Statitstics (news release, March 26, 2009), Table 1.

¹² Jeffrey S. Passel, "Unauthorized Migrants: Numbers and Characteristics," Pew Hispanic Center, June 14, 2005, p. 25.

¹³ Anne Morrison Piehl, "The Connection between Immigration and Crime" (testimony before the House Judiciary Subcommittee on Immigration, Citizenship, Refugees, Border Security, and International Law, hearing on "Comprehensive Immigration Reform: Impact of Immigration on States and Localities," May 17, 2007).

¹⁴ RubÃ©n Rumbaut, "Undocumented Immigration and Rates of Crime and Imprisonment: Popular Myths and Empirical Realities," Appendix D, in The Role of Local Police: Striking a Balance Between Immigration Enforcement and Civil Liberties, ed. Anita Khashu (Washington: The Police Foundation, April 2009), p. 127.

¹⁵ Ibid., p. 129.

¹⁶ Ibid., p. 124.

¹⁷ See Jim Harper, "Electronic Employment Eligibility Verification: Franz Kafka's Solution to Illegal Immigration," Cato Policy Analysis no. 612, March 6, 2008; Daniel Griswold, "The Fiscal Impact of Immigration Reform: The Real Story," Cato Free Trade Bulletin no. 30, May 21, 2007; Daniel Griswold, "Comprehensive Immigration Reform: Finally Getting It Right," Cato Free Trade Bulletin no. 29, May 16, 2007; and Daniel Griswold, "Willing Workers: Fixing the Problem of Illegal Mexican Migration to the United States," Cato Trade Policy Analysis no. 19, October 15, 2002.

Measuring the Size and Composition of the Underclass

Immigrants Move In, Americans Move Up

A Less Dysfunctional Underclass

Conclusion

Notes

² U.S. Bureau of the Census, Current Population Survey, Foreign Born Population, 1995-2004, Survey Table 1.12, http://www. census.gov/cps/.

³ U.S. Bureau of the Census, Current Population Survey, Poverty Status of Families, Table 4, http://www.census.gov/cps/.

⁵ U.S. Bureau of the Census, Current Population Survey, Foreign Born Population, 1995-2004, Survey Table 1.9, http://www.census. gov/cps/.

⁶ U.S. Bureau of the Census, Current Population Survey, Detailed Household Income, Table H-1, http://www.census.gov/cps/.

⁷ U.S. Bureau of the Census, Current Population Survey, Educational Attainment, Table 4, http://www.census.gov/cps/. Data is not available for householder's education level by citizenship status.

⁸ Ibid.

⁹ U.S. Bureau of the Census, Current Population Survey, Foreign Born Population, 1995-1999, Survey Table 1.4, and 2000-2004, Survey Table 1.5, http://www.census.gov/cps/.

¹¹ U.S. Bureau of Labor Statistics, "Foreign-born Workers: Labor Force Characteristics in 2008," Bureau of Labor Statitstics (news release, March 26, 2009), Table 1.

¹² Jeffrey S. Passel, "Unauthorized Migrants: Numbers and Characteristics," Pew Hispanic Center, June 14, 2005, p. 25.

¹⁵ Ibid., p. 129.

¹⁶ Ibid., p. 124.

Daniel Griswold is the director of the Center for Trade Policy Studies at the Cato Institute.

Thinking Clearly about Economic Inequality (Policy Analysis)

Mon, 13 Jul 2009 23:00:00 -0500

Recent discussions of economic inequality, marked by a lack of clarity and care, have confused the public about the meaning and moral significance of rising income inequality. Income statistics paint a misleading picture of real standards of living and real economic inequality. Several strands of evidence about real standards of living suggest a very different picture of the trends in economic inequality. In any case, the dispersion of incomes at any given time has, at best, a tenuous connection to human welfare or social justice. The pattern of incomes is affected by both morally desirable and undesirable mechanisms. When injustice or wrongdoing increases income inequality, the problem is the original malign cause, not the resulting inequality. Many thinkers mistake national populations for "society" and thereby obscure the real story about the effects of trade and immigration on welfare, equality, and justice. There is little evidence that high levels of income inequality lead down a slippery slope to the destruction of democracy and rule by the rich. The unequal political voice of the poor can be addressed only through policies that actually work to fight poverty and improve education. Income inequality is a dangerous distraction from the real problems: poverty, lack of economic opportunity, and systemic injustice.Recent discussions of economic inequality, marked by a lack of clarity and care, have confused the public about the meaning and moral significance of rising income inequality. Income statistics paint a misleading picture of real standards of living and real economic inequality. Several strands of evidence about real standards of living suggest a very different picture of the trends in economic inequality. In any case, the dispersion of incomes at any given time has, at best, a tenuous connection to human welfare or social justice. The pattern of incomes is affected by both morally desirable and undesirable mechanisms. When injustice or wrongdoing increases income inequality, the problem is the original malign cause, not the resulting inequality. Many thinkers mistake national populations for "society" and thereby obscure the real story about the effects of trade and immigration on welfare, equality, and justice. There is little evidence that high levels of income inequality lead down a slippery slope to the destruction of democracy and rule by the rich. The unequal political voice of the poor can be addressed only through policies that actually work to fight poverty and improve education. Income inequality is a dangerous distraction from the real problems: poverty, lack of economic opportunity, and systemic injustice.

Will Wilkinson is a research fellow at the Cato Institute and editor of Cato Unbound.

An International Monetary Fund Currency to Rival the Dollar? Why Special Drawing Rights Can't Play That Role (Development Policy Analysis)

Mon, 06 Jul 2009 23:00:00 -0500

To alleviate the global recession, the G-20 group of nations recently agreed to authorize the International Monetary Fund to allocate $250 billion worth of Special Drawing Rights — the IMF's unit of account — to its member states. This sparked much discussion on whether the SDR could become a new international currency, rivaling the U.S. dollar. Speculation was further fueled by the suggestions of Chinese officials that SDRs could displace the dollar in foreign exchange reserves. However, the SDR is not a currency and has no chance of becoming one.

Today the SDR has two roles: as a unit of account, and as a line of credit between IMF members. Neither role makes it a currency. The SDR's value is defined as equal to that of a basket of four currencies: the U.S. dollar, the euro, the yen, and the pound sterling. Member-states occasionally agree to issue SDRs to themselves, and these serve as mutual lines of credit, providing needy countries access to hard currency. SDR allocations represent purchasing power through a credit facility, not through creation of a new currency.

Chinese officials and some leading economists want a greater role for SDRs in foreign exchange reserves. This would shift currency risk away from China to the IMF. But other IMF members would have to pick up that risk, and there is no reason for them to subsidize China. Underlying the SDR issue is a global struggle for political power. But China has a large and growing GDP and tax capacity, which may overtake that of the United States one day. Before then, the Chinese yuan will probably become convertible, and become a highly sought-after reserve currency in its own right. The real currency challenge to the dollar will come from the yuan, not the SDR.

Swaminathan S. Anklesaria Aiyar is a research fellow at the Cato Institute's Center for Global Liberty and Prosperity and has been editor of India's two biggest financial dailies, The Economic Times and Financial Express.

Massachusetts Miracle or Massachusetts Miserable: What the Failure of the "Massachusetts Model" Tells Us about Health Care Reform (Briefing Paper)

Mon, 08 Jun 2009 23:00:00 -0500

When Massachusetts passed its pioneering health care reforms in 2006, critics warned that they would result in a slow but steady spiral downward toward a government-run health care system. Three years later, those predictions appear to be coming true:

Although the state has reduced the number of residents without health insurance, 200,000 people remain uninsured. Moreover, the increase in the number of insured is primarily due to the state's generous subsidies, not the celebrated individual mandate.
Health care costs continue to rise much faster than the national average. Since 2006, total state health care spending has increased by 28 percent. Insurance premiums have increased by 8–10 percent per year, nearly double the national average.
New regulations and bureaucracy are limiting consumer choice and adding to health care costs.
Program costs have skyrocketed. Despite tax increases, the program faces huge deficits. The state is considering caps on insurance premiums, cuts in reimbursements to providers, and even the possibility of a "global budget" on health care spending—with its attendant rationing.
A shortage of providers, combined with increased demand, is increasing waiting times to see a physician.

With the "Massachusetts model" frequently cited as a blueprint for health care reform, it is important to recognize that giving the government greater control over our health care system will have grave consequences for taxpayers, providers, and health care consumers. That is the lesson of the Massachusetts model.

Although the state has reduced the number of residents without health insurance, 200,000 people remain uninsured. Moreover, the increase in the number of insured is primarily due to the state's generous subsidies, not the celebrated individual mandate.
Health care costs continue to rise much faster than the national average. Since 2006, total state health care spending has increased by 28 percent. Insurance premiums have increased by 8–10 percent per year, nearly double the national average.
New regulations and bureaucracy are limiting consumer choice and adding to health care costs.
Program costs have skyrocketed. Despite tax increases, the program faces huge deficits. The state is considering caps on insurance premiums, cuts in reimbursements to providers, and even the possibility of a "global budget" on health care spending—with its attendant rationing.
A shortage of providers, combined with increased demand, is increasing waiting times to see a physician.

Michael Tanner is a senior fellow with the Cato Institute and coauthor of Healthy Competition: What's Holding Back Health Care and How to Free It (2007).

Broadcast Localism and the Lessons of the Fairness Doctrine (Policy Analysis)

Tue, 26 May 2009 23:00:00 -0500

The First Amendment to the U.S. Constitution recognizes a laissez-faire policy toward speech and the press. The Framers of the Bill of Rights worried that the self-interest of politicians fostered suppression of speech. In contrast, some constitutional theorists have argued that the Constitution empowers, rather than restricts, the federal government to manage speech in order to attain the values implicit in the First Amendment.

The government managed broadcast speech for some time, in part through the Fairness Doctrine, which was said to promote balanced public debate and "an uninhibited marketplace of ideas." The history of the Fairness Doctrine confirms the validity of the concerns of the Framers of the First Amendment, because federal officials and their agents used and sought to use the Fairness Doctrine to silence critics of three presidencies. Broadcasters adapted to the Fairness Doctrine by avoiding controversial speech, thereby chilling public debate on vital matters.

The Federal Communications Commission is proposing to manage broadcast speech by imposing localism requirements, including content requirements and advisory boards to oversee managing stations. This proposal limits the editorial independence of license holders to serve the public interest. The history of the Fairness Doctrine suggests that federal officials who make and enforce such policies are more concerned with limiting political debate than they are with advancing local concerns or the public interest. Like the Fairness Doctrine, the FCC's localism initiative poses the risk of restricting speech. Our unhappy experience with the Fairness Doctrine suggests that imposing localism mandates on broadcasters is unlikely to serve the public interest in constitutional propriety and uninhibited political debate.

John Samples is director of the Center for Representative Government at the Cato Institute and the author of The Fallacy of Campaign Finance Reform (University of Chicago Press, 2006).

Obamacare to Come: Seven Bad Ideas for Health Care Reform (Policy Analysis)

Wed, 20 May 2009 23:00:00 -0500

President Obama has made it clear that reforming the American health care system will be one of his top priorities. In response, congressional leaders have promised to introduce legislation by this summer, and they hope for an initial vote in the Senate before the Labor Day recess.

While the Obama administration has not, and does not seem likely to, put forward a specific reform plan, it is possible to discern the key components of any plan likely to emerge from Congress:

At a time of rising unemployment, the government would raise the cost of hiring workers by requiring employers to provide health insurance to their workers or pay a fee (tax) to subsidize government coverage.
Every American would be required to buy an insurance policy that meets certain government requirements. Even individuals who are currently insured — and happy with their insurance — will have to switch to insurance that meets the government's definition of "acceptable insurance."
A government-run plan similar to Medicare would be set up in competition with private insurance, with people able to choose either private insurance or the taxpayer-subsidized public plan. Subsidies and cost-shifting would encourage Americans to shift to the government plan.
The government would undertake comparative-effectiveness research and cost-effectiveness research, and use the results of that research to impose practice guidelines on providers — initially, in government programs such as Medicare and Medicaid, but possibly eventually extending such rationing to private insurance plans.
Private insurance would face a host of new regulations, including a requirement to insure all applicants and a prohibition on pricing premiums on the basis of risk.
Subsidies would be available to help middle-income people purchase insurance, while government programs such as Medicare and Medicaid would be expanded.
Finally, the government would subsidize and manage the development of a national system of electronic medical records.

Taken individually, each of these proposals would be a bad idea. Taken collectively, they would dramatically transform the American health care system in a way that would harm taxpayers, health care providers, and — most importantly — the quality and range of care given to patients.

While the Obama administration has not, and does not seem likely to, put forward a specific reform plan, it is possible to discern the key components of any plan likely to emerge from Congress:

At a time of rising unemployment, the government would raise the cost of hiring workers by requiring employers to provide health insurance to their workers or pay a fee (tax) to subsidize government coverage.
Every American would be required to buy an insurance policy that meets certain government requirements. Even individuals who are currently insured — and happy with their insurance — will have to switch to insurance that meets the government's definition of "acceptable insurance."
A government-run plan similar to Medicare would be set up in competition with private insurance, with people able to choose either private insurance or the taxpayer-subsidized public plan. Subsidies and cost-shifting would encourage Americans to shift to the government plan.
The government would undertake comparative-effectiveness research and cost-effectiveness research, and use the results of that research to impose practice guidelines on providers — initially, in government programs such as Medicare and Medicaid, but possibly eventually extending such rationing to private insurance plans.
Private insurance would face a host of new regulations, including a requirement to insure all applicants and a prohibition on pricing premiums on the basis of risk.
Subsidies would be available to help middle-income people purchase insurance, while government programs such as Medicare and Medicaid would be expanded.
Finally, the government would subsidize and manage the development of a national system of electronic medical records.

Michael D. Tanner is a senior fellow with the Cato Institute and coauthor of Healthy Competition: What's Holding Back Health Care and How to Free It (2007).

The Cost of Zimbabwe's Continuing Farm Invasions (Economic Development Bulletin)

Sun, 17 May 2009 23:00:00 -0500

In the late 1990s, the government of Zimbabwe held a conference on land reform in Zimbabwe. The government, the interested parties (including the farmers), and international aid agencies reached a broad agreement. That agreement, however, was never implemented. In 2000, in an attempt to destroy the opposition, which derived much support from the commercial farmers and their employees, the government began what it eventually called the "Fast Track Land Reform" exercise.

Land Reform Ignored the Property Rights of Commercial Farmers

The government justified the land reform to the rest of the world by arguing that it redressed historical injustices and racial imbalances in the ownership of the land. The land reform ignored the prevailing legal situation with respect to farm ownership. It also ignored the issue of fair and reasonable compensation for assets taken over by the government.

The legal position was straightforward—commercial farmers held full freehold title. In addition, over 80 percent of the farmers also held a "certificate of no interest" issued by the Zimbabwe government. Under the Zimbabwean law, farmers who wished to sell their farms had to first offer them to the government at a market price. When the government declined to purchase such farms, it issued the farmers with the "certificate of no interest" and the farmers could proceed to sell their farms on the open market. In fact, the government purchased some 3.8 million hectares of farmland in that way between 1980, the year of Zimbabwe's formal independence from Great Britain, and the commencement of the land reform.

Farmers who held both the title and the certificates possessed an apparently unassailable legal right to the land and all the improvements they have made on that land. As such, they also had the right to be fully compensated when their assets were taken over by the state.

Unfortunately, over the last nine years, the government "acquired" thousands of farms without paying market price or, in many cases, any price to the farmers. To accomplish that, the government changed the law every time a farmer or a group of farmers secured legal judgments in their favor. Eventually a group of Zimbabwean farmers took their case to the Southern African Development Community's Legal Tribunal in Windhoek, Namibia. In 2008, those farmers obtained a decision instructing the government of Zimbabwe to protect the farmers' legal rights. The government, in spite of being a signatory to the treaty creating the SADC Legal Tribunal, ignored the ruling.

One small group of affected farmers also enjoyed the protection of a "Bilateral Investment Protection Agreement" signed between the government of Zimbabwe and foreign farmers. A group of farmers of Dutch origin, who had invested after 1980 and who were protected by the BIPA, took their case to the International Court of Justice in The Hague. In April 2009, the Hague tribunal ruled in favor of the Dutch investors and granted them nearly $22 million in compensation.

The attitude of the members of the Zimbabwean regime toward the farm acquisitions was straightforward—they were "taking the farms" from their owners. No police protection was afforded to the farmers or their staff, and no interference with expropriation was permitted. In the majority of cases, force was used—mainly by groups of young, politically motivated thugs. Those thugs acted on behalf of the future "beneficiaries" of farm expropriations—mostly members of President Robert Mugabe's ZANU-PF party. Once the owners and their senior staff had been evicted, the new "owners" occupied the land and took advantage of the assets, including crops and livestock.

Many elderly and outstanding farmers were evicted in that way—leaving some of them so traumatized that they never recovered. One such farmer, Keith Harvey (aged 86), was evicted from his cattle ranch in the Midlands and subsequently went into a coma for two years. He eventually died. He was a former chairman of the Natural Resources Board and a life-long conservationist. He was a fine cattleman, a person of great integrity and totally committed to the country of his birth. Many other farmers lost their lives—either directly or indirectly—as a result of expropriations.

The Staggering Costs of the Land Reform

To date, no proper estimate has been made of the financial cost of the land reform. Therefore, I asked economists in the farming industry to come up with the numbers. According to the Commercial Farmers' Union, the total output of the agricultural industry in Zimbabwe in 2000 was 4.3 million tons of agricultural products, worth, at today's prices, some US$3.347 billion. This output has declined to just over 1.348 million tons of products in 2009, worth some US$1 billion—a decline of 69 percent in volume and a decline of 70 percent in value.¹

It is not often appreciated that smallholder farmers have been just as badly affected as the large-scale commercial farmers. Their production in 2008 was 73 percent lower than their production in 2000. According to the government-appointed Utete Commission, during the first three years of land reform, some 250,000 people and their 1.3 million dependents were forcibly displaced from commercial farms alone.²

In spite of those stunning figures, the farm invasions have continued with 480 new incidents of violence against farmers recorded since the power-sharing agreement between Mugabe's ZANU-PF and the Movement for Democratic Change was signed in September 2008. According to the CFU, even those farms that were granted legal protection by the SADC Tribunal were targeted—presumably as a punitive measure.

The international decisions in Windhoek and The Hague create very significant challenges for the new transitional government. Justice for Agriculture, an organization of commercial farmers, estimates the total value of potential legal claims at US$5 billion dollars—some 30 percent more than current Zimbabwean gross domestic product.³

It is clear that the land reform had been a costly failure. In 2008, CFU estimates, over 90 percent of all production from commercial farms came from the remaining largescale farmers—the same farmers who are now being targeted. JAG claims that more than half of all the farms taken over by the state are now derelict and abandoned. Many of the individuals who are now "taking" farms are doing so for the third or fourth time.

The combined costs of the land reform are staggering— they include US$2.8 billion in international food aid on an emergency basis, nearly US$12 billion in lost agricultural production over 10 years, and a potential US$5 billion in compensation—a total of some US$20 billion.

It is time to give all farmers secure tenure that will enable them to finance their operations properly. Such policies cannot be implemented until the issue of the rights of the farm owners is resolved and the issue of compensation addressed.

Notes

1. Personal communication with representatives of the Commercial Farmers' Union.
2. Unpublished report by the Utete Commission.
3. Unpublished report by Justice for Agriculture.

Land Reform Ignored the Property Rights of Commercial Farmers

The Staggering Costs of the Land Reform

Notes

1. Personal communication with representatives of the Commercial Farmers' Union.
2. Unpublished report by the Utete Commission.
3. Unpublished report by Justice for Agriculture.

Eddie Cross is a Zimbabwean businessman and a Member of Parliament of Zimbabwe for the Movement for Democratic Change.