December 1997-January 1998

"THIS JUST IN"

January 24, 1998

Gordon Humphrey is visiting fellow in foreign policy studies at Cato
Former U.S. senator to focus on financial, security costs of NATO expansion

Former U.S. senator Gordon Humphrey has taken a position as visiting fellow in foreign policy studies at the Cato Institute, where he will focus on the financial and security issues involved in the expansion of NATO, as well as U.S. security issues more generally.

"Whether nations like Poland, Hungary and the Czech Republic should be granted NATO membership may be the most important foreign policy question that we now face. It is certainly one of the most complex," Humphrey said. "Since our allies have refused to pay for the cost of NATO expansion and the proposed new members probably won’t be able to afford it, how much of a financial burden will United States taxpayers bear? Would expanding NATO turn regional East European conflicts into ones involving the United States, or even create more Bosnia-style expeditions? Is it worth the risk of antagonizing Russia, which remains a nuclear superpower? If stability is the goal of expansion, wouldn’t the commercial ties that European Union extension would create be more effective than expanding a military alliance? It is crucial that Congress and the foreign policy community address these questions seriously before a final decision is made."

Humphrey served two terms in the U.S. Senate from 1979 to 1991, representing New Hampshire. He was a member of the Committee on Foreign Relations, the Armed Services Committee and the Judiciary Committee, among others. Following his retirement from the Senate, he founded the Humphrey Group, Inc., which serves clients in international commerce, with primary focus on Russia and the Commonwealth of Independent States. On behalf of clients, he has made some 15 visits to the republics of the former Soviet Union, including Russia, Kazakhstan, Kyrghizstan, Azerbaijan and Georgia.

January 22, 1998

Privacy concerns should focus on government,
not private data collection
Regulating collection of consumer information would hurt small and new businesses

"We have little to fear from private collection and transfer of consumer information; our attention should shift to threats from government databases," according to Solveig Singleton, director of information studies at the Cato Institute. In a new Cato Policy Analysis, she explores the moral and economic issues surrounding the collection and transfer of information about consumers by businesses using the Internet and other networks.

In "Privacy as Censorship: A Skeptical View of Proposals to Regulate Privacy in the Private Sector," Singleton rejects calls by some privacy advocates for a "mandatory opt-in" regime--a requirement that consumers provide explicit written permission before a business could trade information about them--because it would conflict with our tradition of free speech and do real economic harm. "The First Amendment protects citizens’ rights to compile information in databases, just as it would protect their right to collect it in a diary or a book. Nowhere does the Constitution restrain the powers of private citizens to collect information," she writes.

Singleton maintains that it makes no sense to argue that information about a consumer’s purchase belongs only to the consumer, and not to the person providing the product to the consumer. "Because trade in consumer information serves an important economic function, regulatory obstacles to collecting this information can have hidden economic costs," Singleton explains. "The brunt of an opt-in law would be borne by small, new businesses or nonprofits struggling to establish a customer base." Making marketing much more burdensome "would work to the advantage of established companies."

"Privacy advocates miss the target when they focus on the growth of private-sector databases," Singleton notes. "Government-run databases present a terrible danger to civil liberties. . . . Their abuse . . . poses a more serious threat for one reason: government controls the courts, the police, and the army."

A cum laude graduate of Cornell Law School, Solveig Singleton practiced telecommunications law prior to joining the Cato Institute.

Policy Analysis no. 295 (http://www.cato.org/pubs/pas/pa-295es.html)

January 12, 1998

Cato Center for Trade Policy Studies opens its doors
Launch "comes at a critical time" for liberalizing world markets

The Cato Institute today opened its new Center for Trade Policy Studies, which will launch an ambitious program of scholarship on the role that open markets play in providing wider choices and lower prices for consumers, reduced costs and increased productivity for businesses and a higher standard of living for Americans generally. The Center’s creation comes against a backdrop of recent victories by anti-free trade activists. "Our goal is to make the case for open markets, consistently and aggressively," said the Center’s new director, Brink Lindsey. "We want to help free traders regain the intellectual offensive."

With the recent failure of Congress to grant fast-track authority and the prospect of soaring trade deficits with East Asia, free trade is currently an embattled cause. Cato President Ed Crane said that creation of the new Center for Trade Policy Studies "comes at a critical time. Protectionist momentum is building, and the Cato Trade Center will fill a vacuum in Washington’s public policy community. Cato scholars will do the rigorous research and academic work needed to demonstrate that U.S. adherence to free trade principles is the best way to encourage continued liberalization in foreign markets."

Already, policy studies are in preparation on topics that include the unimportance of the trade deficit, the futility of trade sanctions against Burma and the positive connection between foreign investment and human rights. In April, the Trade Center will co-sponsor a conference in Tokyo with the Japanese business association Keidanren on deregulation in the global marketplace.

Center director Brink Lindsey is an attorney who has specialized in international trade regulation. Before taking over direction of the Center for Trade Policy Studies, Lindsey defended free trade interests in antidumping, countervailing duty, Section 201 and Section 301 investigations and in WTO dispute settlement proceedings. Prior to his stint as a trade lawyer at a major Washington, D.C., law firm, Lindsey had served as Cato’s director of regulatory studies and senior editor of Regulation magazine.

The assistant director of the new Trade Center is Dan Griswold, who previously directed Cato’s trade and immigration studies. Supervising the Center’s activities is William Niskanen, chairman of the Cato Institute and former member of President Reagan’s Council of Economic Advisers.

For more information, link to The Cato Center for Trade Policy Studies.

January 7, 1998

Homeschooling produces well-educated students at low cost
Tax credits and deregulation would ease the burden on homeschooling families

"The lesson for reformers bent on promoting statist educational models, such as Goals 2000 or School-to-Work, is this: homeschooling has produced literate students with minimal government interference at a fraction of the cost of any government program," writes Isabel Lyman in a new Cato Institute Policy Analysis.

In "Homeschooling: Back to the Future?" Lyman argues that homeschooling--defined simply as the education of school-aged children at home rather than at a school--is expanding substantially for two major reasons. "First, American public schools are turning out a poor product--illiterate and unprepared graduates," Lyman notes. "Equally troubling, public schools have become crime scenes where drugs are sold, teachers are robbed, and homemade bombs are found in lockers. . . . Many parents, impatient for reform, are taking matters into their own hands."

Lyman is codirector of the Harkness Road High School in Amherst, Massachusetts, and a long-time homeschooling parent. She traces two historical strains of homeschooling: one inspired by Raymond Moore on the religious right and the other begun by John Holt on the countercultural left. About 30 years ago, those two men launched unrelated efforts to lay the framework for a revolution in education.

Lyman provides responses to 10 frequently asked questions about homeschooling, including questions about the socialization of homeschooled children, legal issues and the quality of education at home compared with conventional schooling. Two significant pieces of evidence are the National Merit Scholarship Corporation’s choice of more than 70 homeschooled high school seniors as semifinalists in its 1998 competition and the boom in the admission of homeschooled students to selective colleges reported recently in the Chronicle of Higher Education.

Estimates of the number of homeschooled children in the United States vary. Patricia Lines, a researcher with the U.S. Department of Education, estimates that the number is between 500,000 and 750,000. The Home School Legal Defense Association maintains that the number is much higher--1.23 million. In any case, according to Brian Ray of the National Home Education Research Institute, homeschooling is growing at a rate of at least 15 percent and perhaps as much as 40 percent per year.

Lyman concludes that governments should make homeschooling easier by instituting tax credits for homeschooling and loosening compulsory school attendance laws.

Policy Analysis no. 294 (http://www.cato.org/pubs/pas/pa-294es.html)

December 29, 1997

Federal mortgage companies are "financial time bombs," expert says
Fannie Mae and Freddie Mac get "most expensive form of corporate welfare"

The Federal National Mortgage Association (Fannie Mae) and the Federal Home Loan Mortgage Corporation (Freddie Mac) make mortgage markets inefficient, choke off competition, and help the affluent, not the poor, according to a new policy analysis from the Cato Institute. The author of the study, attorney Vern McKinley, also points out that those enterprises are highly leveraged and calls them "financial time bombs." He concludes that they should be stripped of their special status and government subsidy.

Fannie Mae and Freddie Mac buy mortgages from lenders and then bundle them into securities that are sold to investors. In "The Mounting Case for Privatizing Fannie Mae and Freddie Mac," McKinley notes that they enjoy extraordinary advantages over private-sector firms, including "government securities" status, exemption from Securities and Exchange Commission requirements and state and local taxes, special "low-risk" treatment of securities for investment purposes, access to a $2 billion Treasury Department line of credit and government sponsorship that gives them the aura of a fully guaranteed government entity.

"Other participants in the financial services industry cannot compete with them because of the benefits of their quasi-government status," McKinley notes. Fannie Mae and Freddie Mac "have taken on greater risks that may ultimately threaten their viability" and "may expose the federal taxpayer to an ever-increasing potential contingent liability that could ultimately cost tens of billions of dollars to rectify."

Both the Congressional Budget Office and the Treasury Department estimate that, because of their special status, the two entities receive federal subsidies of about $6 billion, "of which roughly $2 billion . . . benefits Fannie Mae and Freddie Mac shareholders, executives and employees, not homeowners," McKinley notes. That makes the subsidies "one of the most expensive forms of corporate welfare in Washington today." The other $4 billion in benefits is passed along largely to middle- and upper-income households, "a classic case of white, middle- and upper-class welfare."

Vern McKinley has been a financial analyst for the Federal Deposit Insurance Corporation, the Federal Reserve Board, and the Resolution Trust Corporation. He is currently an attorney in Washington, D.C.

Policy Analysis no. 293 (http://www.cato.org/pubs/pas/pa-293es.html)

December 22, 1997

Harvard scholar says it's time to shut down HUD
Government intervention in housing markets and urban development is harmful

"As a result of its misguided goals, HUD has become a conduit for expensive, counterproductive programs that do not justify a cabinet-level agency," Harvard scholar Howard Husock declares in a new Cato Institute study published today. Husock, director of case studies in public policy at the Kennedy School of Government at Harvard University, analyzes the major premises underlying HUD's mission and finds them faulty:

HUD Premise: U.S. cities are in a state of crisis and decline.

Husock: Although select residential areas in cities have declined because of shifts in demand and population, cities as a whole are healthy.

HUD Premise: Run-down, lower-income areas of cities can be "saved" through public investment in housing construction and renovation, combined with social service programs.

Husock: Federal efforts to "revitalize" urban areas are doomed to failure. Propping up neighborhoods with government dollars prevents them from hitting "bottom" and in turn prevents the infusion of real capital investments that would otherwise lead to real, sustainable growth.

HUD Premise: The United States should strive for metropolitan governments and regional land-use planning.

Husock: The American public has made clear its distaste for central planning at the federal and metropolitan levels.

In "The Inherent Flaws of HUD," Husock also criticizes rent subsidies and vouchers, noting that "by rewarding need, not achievement, vouchers send the wrong message to those they subsidize; they generate resentment among those who have worked hard to achieve a better level of housing; and they threaten to introduce social problems to the neighborhoods into which voucher-holders move."

Instead of an attempt to reduce fraud, waste and mismanagement at the agency, Husock says there ought to be a fundamental examination of the very need for federal involvement in housing and urban planning. "HUD is an agency whose establishment was unnecessary, whose purview is of questionable constitutionality, and whose goals can be better met through the private housing industry," he concludes.

Policy Analysis no. 292 (http://www.cato.org/pubs/pas/pa-292es.html)

December 18, 1997

Legal expert says Supreme Court should find IOLTA unconstitutional
Interest on lawyers’ trust accounts belongs to clients, not to public-interest law programs

A government scheme that funnels interest on lawyers’ trust fund accounts to advocacy groups amounts to a "taking" of private property and is therefore unconstitutional, according to the author of a new Policy Analysis from the Cato Institute. The Supreme Court will hear oral argument in a case involving Interest on Lawyers’ Trust Accounts (IOLTA) on January 13, 1998.

At issue is some $100 million annually, a substantial portion of which is used to support largely left-wing political litigation. Yet that money belongs to legal clients who have never consented to such use.

In "IOLTA: Interest without Principle," Suffolk University Professor of Law Charles E. Rounds Jr. argues that "IOLTA programs are unconstitutional because, when the state asserts control over the equitable interest of client property without consent or just compensation, it violates the Fifth Amendment’s Takings Clause. The Supreme Court should vindicate the property rights of legal clients by declaring IOLTA unconstitutional."

IOLTA programs are typically created and administered by state supreme courts, although a few were created by legislation. They arose in part because of the difficulty of accounting for interest on small sums or large sums held for short periods. With modern electronic accounting, however, that rationale no longer holds, if it ever did.

Rounds provides a list of IOLTA disbursements that directly or indirectly support political activity. In Massachusetts, for example, IOLTA funds are fueling initiatives to reinstate rent control in Boston, notwithstanding a statewide initiative that recently abolished such controls. In Washington state, IOLTA money has funded lawsuits that seek to force the state government to increase benefits for welfare recipients. And in Texas, IOLTA money has underwritten a lawsuit that is attempting to reverse the electoral victories of two Republican officials because of absentee ballots cast by military personnel. The lawsuit challenges the right of soldiers and sailors to vote by absentee ballot because such votes can "dilute" the electoral power of minority groups.

Policy Analysis no. 291 (http://www.cato.org/pubs/pas/pa-291es.html)

December 12, 1997

Free-market alternative to Clinton health quality proposals
Tax credit would ensure consumer choice

"The best way to ensure quality health care is to give consumers control over their health care by providing every American a tax credit for health insurance," argues Sue A. Blevins, president of the Institute of Health Freedom. In a new Cato study, Blevins introduces the Health Freedom of Choice Index, which allows individuals to objectively measure the freedom to choose health care providers and treatments they have under their personal health insurance plans.

In "Restoring Health Freedom: The Case for a Universal Tax Credit for Health Insurance," Blevins notes that federal tax law favors employer-sponsored health insurance by excluding the value of such insurance from employees’ gross income, leaving it untaxed. "Workers who purchase their own health insurance or who purchase health care out of pocket receive no tax break," Blevins points out. Because of that bias, individuals often have little choice about their health care plans, providers and treatments. "In fact, 48 percent of U.S. workers report that their employers offer only one health care plan," Blevins says.

Blevins applies the Health Freedom of Choice Index to the Federal Employee Health Benefits Program, Medicare and medical savings accounts. Of a possible 100 points, the FEHBP plans scored from 45 to 75, Medicare 45 and MSAs 100. Despite the FEHBP’s political popularity, Blevins shows that its plans do not represent true free choice because they limit access to certain providers and services, including mental health care and chiropractic services. The primary reason for Medicare’s low score is that it does not cover preventive care and restricts access to many health care providers. MSAs cover all the providers and treatments listed on the Health Freedom of Choice Index.

Recently President Clinton’s Advisory Commission on Consumer Protection and Quality in the Health Care Industry issued proposals for government regulation of insurance plans. However, according to Blevins, "mandating additional health services drives up the costs of health care, increases the number of uninsured persons, and lowers wages," thereby worsening the problem rather than solving it. "A more efficient way to restore Americans’ freedom to choose the health benefits they desire is to place the decision of who buys health insurance back in the hands of the people," concludes Blevins.

Policy Analysis no. 290 (http://www.cato.org/pubs/pas/pa-290es.html)

December 8, 1997

Replacing the income tax with a national sales tax won’t hurt the poor
Rebate features make sales tax about as progressive as current income tax

"It is relatively easy to construct a national sales tax that protects the poor from paying any tax and is roughly as progressive as the current income tax," contends Gilbert E. Metcalf in a new Cato study. As widespread discontent with the current income tax and the Internal Revenue Service has generated interest in replacing the income tax with a consumption tax, some people have criticized consumption tax proposals as a burden on the poor. In the study, Metcalf uses data from the Bureau of Labor Statistics’ Consumer Expenditure Study to demonstrate that the criticism is flawed.

In "The National Sales Tax: Who Bears the Burden?" Metcalf explains, "How we rank people--by annual or lifetime income--makes a big difference when we measure the progressivity of a national sales tax." If lifetime income is used for analysis, a sales tax looks much less regressive than if annual income is used.

Moreover, Metcalf notes that there are several ways to minimize or eliminate any adverse impact on the poor of a national sales tax. The Schaefer-Tauzin bill (H.R. 2001), for example, provides for a universal rebate tied to poverty thresholds and is thus "about as progressive as the current income tax." Another approach, providing a payroll tax rebate to low-income families, "is only slightly less progressive than the current income tax system."

In any case, Metcalf says that the choice of a method of taxation shouldn’t be focused on whether it's progressive or regressive. "When evaluating the merits of major tax reform . . . policymakers should not focus unduly on distributional considerations. Rather, Congress would be better advised to focus on the efficiency gains and the broad economic benefits of moving to a consumption tax system," he concludes.

Metcalf is an associate professor of economics at Tufts University and an economist with the National Bureau of Economic Research.

Policy Analysis no. 289 (http://www.cato.org/pubs/pas/pa-289es.html)