Imports pose little risk to job security for U.S. workers and benefit all workers
Cato study says technology, not imports, accounts for majority of job displacement

For the large majority of American workers, including those in manufacturing, being displaced by a rising tide of imports is only a remote possibility, according to a new study released today by the Cato Institute. In "Trade, Jobs, and Manufacturing: Why (Almost All) U.S. Workers Should Welcome Imports," author Dan Griswold finds that "the vast majority of Americans work in sectors of the economy that do not face significant import competition."

Griswold, associate director of Cato's Center for Trade Policy Studies, examines the relationship between international trade and the aggregate number of jobs in the U.S. economy since 1980, dispelling the myth that a rising level of imports causes a net decrease in employment. In fact, import growth and total U.S. employment are positively correlated. Since 1980, the volume of imports to the United States has tripled while the number of Americans working has increased by 31 million.

The study finds that about 85 percent of America's non-farm workers are employed in services, construction and government-sectors where import competition is minimal. In the manufacturing sector of the economy-thought to be hardest hit by imports-import penetration is low in most industries. "Workers in trade-sensitive manufacturing industries account for only 12 percent of total manufacturing workers and less than 2 percent of total non-farm workers," Griswold points out. "The number of workers who have reason to fear for their jobs because of imports remains relatively small by any measure."

The most significant causes of displacement lie elsewhere. "Technology and other non-trade factors account for most workers displaced from their jobs each year." From 1995 through 1997, "three-quarters of the 8 million Americans displaced from their jobs were in sectors that by their nature are relatively insulated from import competition."

Free trade delivers lower prices and higher real wages to the great majority of American workers, the study finds. "Presidential and congressional candidates who talk about 'saving jobs' by raising barriers to free trade are really talking about dragging down the real incomes of the vast majority of Americans for the temporary benefit of a small fraction of American workers," Griswold warns.

"Trade, Jobs, and Manufacturing: Why (Almost All) U.S. Workers Should Welcome Imports"

Microsoft case is the "least justified antitrust crusade of our generation"
DOJ antitrust doctrine is bankrupt, destructive of modern Internet economy, study says

"The antitrust case brought by the U.S. Department of Justice against Microsoft Corporation is "the most important and manifestly the least justified antitrust crusade of our generation," according to legal scholar Robert Levy in a new Policy Analysis published today by the Cato Institute.

In "Microsoft Redux: Anatomy of a Baseless Lawsuit," Levy offers a "welcome to the postmodern world of high-tech antitrust where big is once again bad, lofty profit margins are a wakeup call to government regulators, executives are brought to heel for aggressively worded e-mails, pricing too high is monopolistic, pricing too low is predatory, propping up politically wired competitors is the surreptitious aim, bundling products that consumers want is illegal, and successful companies are rewarded by dismemberment. That's the Orwellian world in which Microsoft finds itself."

The fundamental questions that must be asked in the case against Microsoft, Levy says, are "whether Microsoft has a monopoly, whether it's misusing its market power, and whether government can find a cure that isn't worse than the disease. The answers are no, no, no."

The DOJ case was brought by "lawyers with marginal understanding of how businesses talk and operate, and even less understanding of the technical subject matter. Disgruntled rivals played on the naivete and power lust of government officials and persuaded them that Microsoft's aggressiveness could be scripted into an antitrust suit," Levy declares. "When the head of the Antitrust Division meets on numerous occasions to discuss this case with a disaffected Microsoft competitor, including breakfast at the latter's home, the conclusion is all but inescapable that the antitrust laws are being used as an anti-competitive subsidy to prop up less successful or unsuccessful firms."

Perhaps most important, Levy points out, is that "the market moves faster than antitrust could ever move. The assumption of would-be regulators-that inefficiencies, especially in high-tech markets, can lock a company into a position from which it can't be unseated-is a complete myth. Consumers rule, not producers." Microsoft faces stiff competition on many fronts, especially from Web-based software, which has already overlaid, and may eventually displace, major parts of Windows. "Microsoft has zero leverage in a world where applications are written so that any browser can run them and any operating system can access them," Levy notes.

"Microsoft Redux: Anatomy of a Baseless Lawsuit"

Two-party negotiations most likely to stabilize the international financial system
IMF too often becomes a burdensome third party, Cato expert tells commission

"Many of the problems the IMF seeks to resolve would be reduced or eliminated with increased reliance on direct negotiations between lenders and borrowers in international finance and with decreased reliance on IMF lending and mediation," the director of Cato's Project on Global Economic Liberty told the Commission on International Financial Institutions today.

Project director Ian Vásquez told the panel that "repairing the dysfunctional relationship between lenders and borrowers in international finance requires that moral hazard be reduced and that crisis prevention and management be more effective. The IMF's new initiatives to deal with the crises, however, are likely to be ineffective."

One of the new initiatives is to provide aid to countries before crises occur, therefore preventing them. "Yet," Vásquez points out, "preventive lines of credit are likely to increase moral hazard, while efforts to force losses on the private sector may precipitate the very crises the efforts intend to prevent."

Vásquez criticized the IMF for attempting to serve as a credit-rating agency for countries as well as an agency that attempts to prevent turmoil. "The IMF's role as a surveillance agency has been seriously tarnished by the Asian crisis. The fund provided no warning about the impending collapse of currencies and domestic banking systems and instead lauded the East Asian economies in public documents shortly before the outbreak of the crises."

"An approach based on greater reliance on two-party negotiations holds more promise in stabilizing the international financial system than does the current approach, in which the IMF too often becomes a burdensome third party."

"Relying more on debtors and creditors to resolve and prevent financial crises would reduce moral hazard, increase the quality of surveillance and lead to innovations that would reduce the severity of crises. Private creditors would be responsible for bearing the full consequences of their investment decisions, a system of real conditionality and real reform would evolve, and the parties involved would have no incentive to stall the process of debt resolution."

"The International Monetary Fund: Challenges and Contradictions"

An Alternative Approach to International Financial Crises
IMF meddling in creditor-debtor negotiations destabilizes world finance

"A dysfunctional relationship has developed between lenders and borrowers in international finance," and the International Monetary Fund is part of the problem, according to a Foreign Policy Briefing published today by the Cato Institute.

In "Repairing the Lender-Borrower Relationship in International Finance," Ian Vásquez notes that "governments have gotten their countries into trouble with their creditors for hundreds of years, and periodic problems with paying back loans will surely continue to be a feature of global finance well into the future." But he adds that current attempts to shield creditors and debtor nations from economic realities, largely the result of IMF efforts, create disorder and prolong the process of crisis resolution.

Creditors should take losses during financial crises, and the IMF should not try to prevent countries from defaulting. Direct bargaining between creditors and debtors would reduce moral hazard and lead to faster debt renegotiations. Market innovations to lower risk, deal with collective action issues and prevent crises from erupting would also evolve in the absence of IMF bailouts.

Unfortunately, the IMF's new Contingent Credit Lines program to provide preventive bailouts is unnecessary and will increase moral hazard. The fund's efforts to "bail in" the private sector are also misguided because such actions may precipitate the crises they seek to prevent.

Ian Vásquez, director of the Cato Project on Global Economic Liberty, and has testified on IMF and World Bank issues before a number of congressional committees.

"Repairing the Lender-Borrower Relationship in International Finance"

The Fed's bailout of Long-Term Capital Management, one year later
Intervention was misguided, not necessary, and set stage for trouble in the future

A year ago, on September 23, 1998, the Federal Reserve stepped in to organize a rescue of Long-Term Capital Management, a well-known hedge fund. While the effort did prevent LTCM's demise, "the intervention is having serious long-term consequences," according to a Briefing Paper published today by the Cato Institute.

In "Too Big to Fail: Long-Term Capital Management and the Federal Reserve," author Kevin Dowd, professor of economics at the University of Sheffield and adjunct scholar at the Cato Institute, says that unintended negative effects of the bailout are many: "It implies a major open-ended extension of Federal Reserve responsibilities, without any congressional mandate; [and] it implies a return to the discredited doctrine that the Fed should prevent the failure of large financial firms, which encourages irresponsible risk taking."

LTCM managers had "taken a major gamble," pushing the fund's leverage ratio to very risky levels-first to 25 to 1, then 45 to 1. When the Fed intervened the ratio was "approaching stratospheric levels-a sure sign of impending doom." Dowd argues that "letting LTCM fail might well have had a salutary effect on financial markets: it would have sent a strong and convincing signal that no financial firm-however big-could expect to be bailed out from the consequences of its own mismanagement."

Instead, the Fed offered fund managers and shareholders a more attractive deal than a pending offer from an investor group headed by Warren Buffett. LTCM turned Buffett away "because they were confident of getting a better deal from the Federal Reserve's consortium," Dowd writes. Had the Buffett offer been accepted, he adds, it "would have ended the crisis without any further involvement of the Federal Reserve-a powerful illustration of the invisible hand and a textbook example of how private-sector parties can resolve financial crises on their own without Federal Reserve or other regulatory involvement."

Dowd contends that the Fed's action in the LTCM case "has serious consequences for longer-term stability" because it "sends out the worst possible signal: it leads others to think that they, too, may get rescued if they get into difficulties. Bailing out a weak firm may help to calm markets in the very short term, but it undermines financial stability in the long run."

"Too Big to Fail: Long-Term Capital Management and the Federal Reserve"

Encryption technology vital to future of e-commerce; restrictions won't work
Cato publishes Web sources of strong cryptography, showing "futility of controls"

Encryption technology, which allows people using electronic networks to ensure that the messages they send remain private, cannot be controlled by government interference-and shouldn't be, according to a Briefing Paper released today by the Cato Institute.

In "Strong Cryptography: The Global Tide of Change," author Arnold G. Reinhold, co-author of the popular books E-mail for Dummies and The Internet for Dummies Quick Reference, argues that "it is time to recognize the inevitability of strong, nonrecoverable cryptography and take steps to maximize that technology's benefits to society and deal realistically with its less desirable attributes."

The paper says that "encryption technology will prove vital to the future of electronic commerce," but that its widespread adoption has been impeded by government restrictions that "discourage the integration of encryption into operating systems and computer chips." Security problems at U.S. nuclear weapons labs stem from the fact that "their computers use commercial operating systems" that "lack the fine-grained transfer controls needed to enforce security policies."

Reinhold notes that the government has long tried to control encryption technology in order to preserve its ability to intercept criminal communications. "Such claims usually invoke a troika of evils-drug dealers, terrorists, and child pornographers-though decades of wiretapping have not halted those crimes," he writes. But cryptographic technology simply cannot be stopped. "If any major governments, terrorist organizations, or drug cartels are not now using strong cryptography, it is not because of lack of availability or lack of reliable suppliers. There are many firms overseas that are willing to provide cryptographic software." To drive the point home, the Cato Briefing Paper offers a long list of Internet sites that offer strong encryption products.

Although the Clinton administration continues to argue for export controls and government access to "key recovery" tools to decode encrypted messages, Reinhold says such efforts are merely academic at this late date. "The simple reality that strong encryption is widely available around the globe can rescue us from endless debate," he writes. "The security benefits of strong privacy will be available to everyone; law enforcement can and will adapt. It is time to move forward."

"Strong Cryptography: The Global Tide of Change"

New Zogby International poll: majority support for Social Security privatization
All groups of voters more likely to vote for candidate who supports individual accounts

A new nationwide poll conducted for the Cato Institute by Zogby International shows wide support for allowing people to invest their Social Security taxes in privately owned individual retirement accounts. Overall, by a margin of 54.9 percent to 31.4 percent, Americans prefer changing the Social Security system to allow people the choice of putting their payroll taxes in individual accounts similar to IRAs or 401(k) programs. The survey of 1,205 voters nationwide was conducted from July 29 to August 2, 1999, and the poll has a margin of error of plus or minus 3 percent.

Large pluralities of Republicans, Democrats and Independents favor allowing people to invest Social Security taxes in individual accounts. All three groups are more likely to vote for a candidate for Congress or president who supports privatization in the 2000 elections.

Majority support for individual accounts extended across all age groups except those over 65. Respondents aged 18-29 favored private investment accounts by a decisive margin of 78.3 percent to 12.6 percent; those aged 30-49 favored individual accounts by 71.0 percent to 17.7 percent; and even those nearest retirement age, aged 50-64, preferred the private investment alternative with a majority of 51.4 percent in favor and 35.3 percent against. Only those over 65 were opposed, 26.5 percent to 53.8 percent. The survey also found that all age groups other than those 65 and older consider the current Social Security system more risky than private investments because they believe the government will not be able to pay all the benefits it has promised.

Among racial groups, minorities turned out to favor private investment even more than whites: 57.8 percent of blacks want to be able to invest at least part of their money; Hispanics, 60.6 percent; and whites, 54.0 percent.

A significant variation turned up among women: 60.1 percent of women who work outside the home prefer at least some investment opportunity, compared with 36.2 percent of women who stay at home. And although union leaders have waged a heavy campaign against privatization, 53.8 percent of union workers supported transforming Social Security into a system of individual accounts. Only 30.8 percent of union workers opposed privatization. Those numbers were nearly identical with those for the population at large. Born-again Christians supported privatization by 52.1 percent to 34.0 percent.

The Zogby Poll on Social Security (PDF, 24 pp, 175kb)

September 1, 1999

Philosophy of government in Declaration of Independence is a modern casualty
Founders' conception of the purpose and limits of government mangled in New Deal

"It would surely pain those who pledged their lives, their fortunes, and their sacred honor to see how far we have come from those heady days of liberty," the Cato Institute's Roger Pilon says of the signers of the Declaration of Independence. "Many of the grievances the Declaration lists, which led to our revolt, are today the ordinary stuff of government in America."

In an essay entitled "The Purpose and Limits of Government," Pilon, Cato's vice president for legal affairs, examines the theory behind the universal insights found in the Declaration of Independence, focusing on the moral order outlined in the document and the place of government within that order.

Pilon examines the ways in which the United States has strayed from the moral vision set forth in the Declaration of Independence. "The most cursory reading of the writings of the day makes it plain that the Founders intended nothing like our present American leviathan. . . . it is not for nothing that the 20th century has been called the century of government. . . . Today there seems to be almost no subject too personal or too trivial for federal regulatory attention."

A few critical opinions handed down by the Supreme Court between 1936 and 1938 left the Constitution "standing on its head," Pilon observes, and they paved the way for the redistributive and regulatory programs of the New Deal. "The rewriting of the Constitution, without benefit of amendment, goes far toward explaining how political forces bent on expanding government have been able to do so in the face of a document written plainly to prevent that."

"We've lost sight of the Founders' conception of the purpose and limits of government, and at stake are nothing less than our liberty and the legitimacy of our legal affairs," and to protect our freedoms, we must "breathe life back into the principles our Founders so carefully crafted," according to Pilon. "We must limit the leviathan we have created."

Pilon's analysis was published as part of the Cato's Letters series, featuring distinguished essays on political economy and public policy. The name Cato's Letters is taken from an earlier series of 18th-century essays on political liberty that played a major role in laying the philosophical foundation for the American Revolution.

"The Purpose and Limits of Government"

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