Archives: 02/2008

Our Big, Fat Defense Budget

I suppose I should be happy to live in a country that can afford to spend nearly three quarters of a trillion dollars a year on defense even though we are relatively safe, historically speaking. But the defense spending that the President proposed to Congress Monday is so excessive that I can only manage outrage. Everyone complains about earmarks, but they cost $17 billion across the government last year. That’s just two months in Iraq; pocket change in the Pentagon.

Hawks, like Admiral Mike Mullen, the new Chairman of Joint Chiefs of Staff and Secretary of Defense Robert Gates, argue that, hey, it is only 4 percent of GDP. After all, they say, we used to spend far more of our wealth on the military, especially during wars – 35 percent of GDP in World War II and 9 percent in Korea.

That argument, popular as it is, baffles me. The US is about six and half times as rich it was in 1950, adjusting for inflation. Economic growth means that devoting a pegged portion of GDP to the Pentagon is to annually increase defense spending, whatever happens with foreign threats. That’s a silly way to spend tax dollars, to put it mildly. The sensible way to provide defense is look at your enemies’ capabilities and likely scenarios for defeating them and back spending out from that – whether that amounts to one percent of GDP or 30.

And it is not just the waste that offends. According to Steve Kosiak of the Center for Strategic and Budgetary Assessments, the budget will leave the Pentagon short – by $10 to 20 billion a year – of the cash it needs to meet its own requirements. That’s because the budget avoids choice, the essence of strategy. As Fred Kaplan noted the other day, instead of selecting a method of providing defense that would create winners and losers among military services and their platform communities, the non-war budget basically gives the services what they want under a topline. It also gives each service roughly the same relative share of the total as they received in each year since the Kennedy administration, with only a slight uptick this year for the ground forces. That tells you a great deal about George Bush’s claim to have transformed the military.

The worst thing about the budget is that it is bipartisan. No one influential complains. Congressional Republicans on the defense committees are either for it or want more. Democrats knock the Iraq funds, but accept the other $560 billion. History says that the defense budget – at least the non-war portion – that emerges as law next fall will deviate only slightly from what the President submitted.

Why is no one opposed? For one (and I could go on), both parties embrace brands of militaristic hegemony – the idea that that we are better off with massive military predominance over all other powers and that there is a military solution to most foreign policy concerns. Want a liberal world? Buy enough carriers and F-22s so that we can dominate it. China’s growing? Arm so heavily that they cannot compete. Pakistan troubles you? Draw up an invasion plan. Africa is disorderly? Create Africa Command.

But really you can’t blame politicians, who have to get elected. You have to blame the intellectuals who shape public opinion. Blame my field, political science, which has largely decided to avoid studying such unsophisticated questions as the requirements of our defense (and hiring those who do), leaving security debates short of truly independent experts. Blame the beltway pundits who avoid challenging the post September 11 explosion of militarism or lead the parade.

The good news is that bad things, the Iraq war and the growth of entitlements’ cost, are waking people up to the idea that maybe this isn’t the best use of tax dollars. DoD plans and insiders say FY 2009 will be a peak year for defense spending, and that we are about to hit a downward trend. Here’s hoping.

Patents, Injunctions, and Uncertainty

There’s some fantastic back and forth between Chicago law professor Richard Epstein (a Cato adjunct scholar) and Berkeley law professor Peter Menell about the similarities and differences between physical property and what’s often called intellectual property—patents and copyrights. The exchange is a response to Menell’s previous contribution to Regulation.

I think Menell has the better of the argument. They both devote a considerable amount of ink to the eBay v. MercExchange, which centered around the question of when it’s appropriate to grant injunctions for patent infringement. Epstein has generally advocated a rule that grants injunctions more freely, arguing that this creates more certainty for the patent holder. Menell, in contrast, has argued that damages are often more appropriate.

The reason this matters is that if an injunction is granted, it can often drive the losing party into bankruptcy. In 2006, for example, Research in Motion, makers of the popular BlackBerry mobile device, was forced to pay $612 million to a company called NTP that had no employees, no products, and patents that were subsequently ruled invalid by the patent office. By rights, NTP shouldn’t have gotten a dime (because there was ample prior art for its “inventions”) but because RIM would have been forced to shut down its BlackBerry network before it had exhausted its appeals, NTP was able to extort hundreds of millions of dollars from the firm.

Interestingly, Epstein alludes to the biggest flaw in his argument, but doesn’t stop to ponder its implications. He writes:

This set of institutional arrangements [from real property] does not carry over perfectly to patent cases where the fact of infringement is harder to determine outside the piracy context, owing to the lack of clear boundaries that surround any patent.

This is a gross understatement. The boundaries of many patents—especially those relating to software, which is what the MercExchange case was focused on—are so fuzzy that it’s basically impossible for even the most experienced patent lawyer to predict accurately which of the hundreds of thousands of software patents in existence might be related to a given software product. Microsoft, for example, has darkly hinted that the Linux operating system had infringed several hundred software of its patents, but the company has refused to say which patents they are and the Linux develop community hasn’t been able to figure it out.

I share Epstein’s goal to create “a system of secure property rights that allows people to transact at low cost and high reliability,” but I think he fails to appreciate how completely our current patent system fails that test. In many cases, an inventor wishing to identify the patents his new invention might infringe has no low-cost or high-reliability means of doing so. This introduces uncertainty and litigation that greatly reduces the potential rewards for inventive activity. Strengthening these vague patents even further by making injunctions even easier to obtain will only make the problem worse, because the disincentives created by the patent system will be magnified.

It’s also worth noting the important contrast between patents and physical property: if a court fails to grant you an injunction against someone who’s using your land, you are thereby deprived of the opportunity to use the land yourself. In contrast, if the court fails to grant an injunction against a patent infringer, you have lost nothing other than potential licensing revenues. This means that unlike with physical property, there’s no compelling reason to impose the potentially devastating remedy of an injunction any earlier than absolutely necessary.

Just How Much Is This Online Gambling Ban Costing Us?

My friend Radley Balko has a post over at Reason’s Hit & Run blog about a recent attempt to discover the terms of a trade deal reached in December between the United States and the European Union. The negotiations started because of America’s wish to withdraw its prior commitment to open its market to overseas gambling service providers. (WTO members are within their rights to do that, but they must offer compensatory market openings in other areas). Recall that the details of that deal were, to put it charitably, vague at the time it was announced.

In an effort to shed some light on the agreement, a fellow named Ed Brayton submitted a Freedom of Information Act request to the Office of the United States Trade Representative asking for the details. No joy – the USTR refused his request on the grounds that the “information…is properly classified in the interest of national security pursuant to Executive Order 12958.”

Presumably the USTR would need to publicly disclose the terms of the deal when (if?) it is ratified by the WTO, but in the meantime Mr Brayton is appealing. Also in the meantime, Antigua and Costa Rica have filed (separate) arbitration requests to the WTO over their compensation package (more here, and a warning – some of the ads on this site are possibly not safe for work).

I will be speaking at a panel event at the Institute for Economic Affairs in London on Tuesday on this very subject.

Voters Refuse to Bear Teddy

Michael Tanner’s list of winners and losers from last night seems spot-on but it is incomplete in one regard – his list of losers leaves out the Kennedy clan. Despite the endorsement of Ted Kennedy, Massachusetts went for Clinton, surely one in the eye for the Bay State’s senior senator.

But then Ted Kennedy endorsements have never fared well in recent times. Since 1982 the Senator has had an unerring ability to back the loser when it comes to presidential races: those he supports either fail to win the party nomination or are beaten subsequently in the general election. Kennedy’s endorsements since 1982 have been: Dukakis, Mondale, Tsongas, Gore and Kerry. However, he did get it right in 1996, but that was an easy one.

The Kennedy clan was also dispatched to deliver latino votes in California for Barack Obama. A notable failure there, as well.

Thank You For Smoking

A central claim of those eager for restrictions on tobacco use is that smokers cost society more.

A new study from the Netherlands may help lay that oft heard chestnut to rest. The study shows that there would be no cost savings for governments and taxpayers from preventing obesity or reducing illnesses caused by smoking.

The study found, quite to the contrary, that healthy people cost more.

The study, undertaken by the National Institute for Public Health and the Environment in Holland, found that ultimately healthy people, who live on average four years longer than obese people and seven years longer than smokers, cost the health system about $417,000 from the age of 20 compared to $371,000 for obese people and $326,000 for smokers.

One of the economists working on the study commented: “if you live longer, then you cost the health system more.”

Super Tuesday Winners and Losers

A few thoughts in the wake of last nights elections:

Winners:

John McCain. He is clearly the front runner now. He might not have won big, but he won all the big states. And he benefits even more because his putative rival, Mitt Romney, was such a big loser. Now, can he mollify conservatives?

Mike Huckabee. He kept his vice presidential ambitions alive with a surprising showing. And he got to thumb his nose at Romney besides. But he is still a regional candidate with little appeal outside the south or evangelical circles.

Hillary Clinton. She held off the Obama wave (again), and won in the big states where she had to. The terrain going forward looks pretty good for her, with big states like Texas (Latino vote) and Pennsylvania (the Rendell organization) leaning in her direction.

Barack Obama. Both Democrats were winners. Obama won more states and may actually have won more delegates. The race will go on, which means there is more time for voters to reconsider the possibility of a Hillary (and Bill) presidency.

Losers:

Mitt Romney. He lost every contest he needed to win. Apparently, if you want to be the conservative alternative it helps to actually be a conservative. On issues ranging from health care to government spending, Romney was actually more liberal than McCain. Voters noticed.

Talk Radio. They said vote for Romney. Voters didn’t. They said a vote for Huckabee is a vote for McCain. Voters didn’t care.

Xenophobes. Once again the anti-immigration candidate didn’t win. The issue may play well on talk radio (see above) and on the far right of the Republican Party, but it doesn’t seem to move voters.

The Democrats. While attention has been focused on the divide in the Republican Party, Democrats are beginning to see fractures in their party. Exit polls showed that half of both Clinton and Obama supporters would be dissatisfied if the opposing candidate won. Michelle Obama says that she would “have to think about” whether she would support Hillary. If this goes the convention, it could get really nasty.

Pollsters. Obama with a 13 point lead in California? Romney leading by 7? Clearly, they need to go back and rework their models.

Limited Government. OK, John McCain is a fiscal conservative. But after that its pretty dismal. The choice on the Republican side was between three versions of big-government conservative. (Ron Paul was not a factor in any state). The Democrats seem to move further left every day. For those of us seeking limited government, it looks like a long election.

Larry Kudlow’s Question: “Is McCain Like Ike?”

Larry Kudlow, on last night’s CNBC show, remarked that I had e-mailed him comparing John McCain to President Eisenhower. One guest, Jerry Bower, realized this was not necessarily a compliment. He noted that Eisenhower Republicans kept tax rates extremely high on both individuals and business, viewing that as the “fiscally responsible” way to finance a big defense budget. The economy was in recession almost as often as not in those days – in 1953-54, 1957-58 and 1960. John F. Kennedy, Bower rightly noted, campaigned on slashing [Republican] tax rates to get the economy moving again. When tax rates were finally cut in 1964, it worked (as always).

The two parties switched sides recently, with Republicans adopting JFK’s approach by cutting the most destructive tax rates in 1981-86, and Democrats sounding and acting more like Ike since 1993. Similarly, FDR ran against Hoover’s protectionism in 1932, but Republicans and Democrats have taken turns being the most protectionist in recent years (the word “populist” in both parties often means advocating tariffs on necessities to further impoverish the poor).

The Eisenhower-Nixon years defined the phrase “fiscal conservative.” If Democrats spent too much, a “fiscal conservative” would regard it as his duty to do the honorable thing and raise tax rates as much and as often as required, if only to protect the military budget.

My quick e-mail to Kudlow is reproduced below, warts and all. It is obviously more opinionated and political than my public writing, yet not really partisan:

Larry,

McCain would be eager and enthusiastic to join with past co-authors – Kennedy, Edwards, Lieberman and Feingold – to raise tax rates on high incomes, capital gains, dividends and estates.

McCain could surely be persuaded to remove the cap on the Social Security tax. That move, added to a state-local marginal rate above 45%, would make the top tax in the U.S. much higher than in any other civilized country, including Sweden (which has the least progressive tax system of them all). Many European countries allow the payroll tax to be deducted from the income tax, but it’s a nasty add-on for us. It’s loosely tied to benefits, but Social Security would become a pure redistribution scheme if they uncapped the tax.

All the Democrats need to do in exchange for such higher tax rates on the rich is to offer to “fix” the AMT (to make sure it just hits the rich) and cut the nominal corporate tax rate (after “closing loopholes” like quick depreciation), and also to fund any and all U.S. troops in the Middle East.

In McCain’s view, this would be another bold act of leadership, like pushing McCain-Feingold after being tarnished as a member of the Keating Five.

It would show how marvelously bipartisan he is, how fiscally responsible, unlike that upstart George W. Bush. I can see the smug grin even now.

Recall Ike’s excess profits tax and 90% tax rates to bankroll the Korean “police action.” McCain is a reincarnation of Ike. He sees great national honor in (taxpayer) sacrifice, compulsory national service, etc. You may recall a WSJ column I wrote calling the Rubin crowd “Eisenhower Democrats” in contrast with Kemp and the “J.F. Kennedy Republicans.” It caused Bill to yell at his staff, but they still didn’t get it.

All that matters to McCain is a big military/VA budget. He does hope to be frugal on domestic discretionary spending, but can’t accomplish nearly enough with a Democratic congress to offset even 10% of military spending at the Bush pace (which he sees as inadequate).

Besides, he feels, big corporations and greedy investors need to sacrifice for the common good. He always said so., and he hasn’t changed. The only reduction in tax rates he supported in recent years was cutting payroll taxes for the poor (nearly all of whom don’t work, so that’s a cheap gesture).

In a WSJ interview with Tunku, Milton Friedman once said some people are natural economists. I spent a couple of hours with Mitt and large group of the best economists I’ve ever seen in one room, even the White House. Romney held his own quite well. Very credible, wise and tough on big spenders.

I didn’t sign on to any candidate’s team (Doug called too), partly because I want to remain an unpredictable maverick. McCain is 100% predictable – no maverick at all.

If it ended up being a contest between McCain-Huckabee populists on the Republican ticket versus a familiar Obama-Richardson shift from defense to nondefense spending (always popular, always overdone), Republicans would not view my writing as helpful.

The only comfort is that if the Dems controlled the White House, Senate and House, they’d go overboard quickly and lose control of Congress after 2-4 years.

The 2011 tax time bomb would actually explode beneath John or Hillary, leaving the market in shambles in 2010 and the economy in ruin in 2011. Mitt is not that suicidal – he’d like a second term.

Alan Reynolds