Archives: 04/2009

New at Cato

  • Will Wilkinson warns of problems with Obama’s budget on Marketplace.
  • Richard Rahn explains why the current tax system needs to be overhauled and replaced in The Washington Times.
  • In Wednesday’s Cato Daily Podcast, Swaminathan Aiyar discusses the future of the dollar.

Bob McDonnell Wants to Scare You and Take Your Money

Though I’m not a Virginia resident or voter, nor a donor to politicians, Virginia gubernatorial candidate Bob McDonnell (whose party affiliation I’m not aware of) has added me to his email list. His name is similar to a past roommate, and that affinity has caused me to open more of his emails than I ordinarily would.

Today’s is worth writing about: It’s a political candidate transparently trying to scare voters and use their fear for fundraising.

Dear Jim,

Terror suspects could be headed to Virginia…

With the closing of the detention center at Guantanamo Bay the federal government must find new locations in which to house and try the roughly 240 terrorist suspects currently held 90 miles from our shores. Recent news reports indicate that the Department of Justice is considering transferring a number of the detainees to the Commonwealth of Virginia. One specific location: Alexandria. And other Virginia locations could be possibilities as well.

There are security details to be worked out when prisoners are transferred out of Guantanamo Bay, but the prisoners themselves are not dangerous as such. They’re prisoners, and they will always be under heavy guard. Terrorists are not radioactive, and they do not have lasers built into their eyes.

The problems with housing prisoners in the past have been over-the-top security precautions that make a great show but don’t necessarily meet actual security problems associated with housing terror suspects.

Bills have been introduced to bar detainees from being transferred to various states.

A precious few Americans have exhibited cool in this fear-of-detainees brouhaha. Alexandria Sheriff Dana A. Lawhorne is quoted in this Washington Post article, at least saying “he would do what he can: ‘You can’t run the other way when your country calls.’”

But McDonnell, the politician seeking a prominent leadership position in the state, would “lead” by pretending that captured terrorists are too big a security risk for Virginia. It’s shameful fear-mongering meant to capitalize on the ignorance and weakness of Virginians who don’t understand terrorism. The only links in the text of the email are to the fundraising page on McDonnell’s Web site.

McDonnell exhibits leadership malpractice with this kind of campaigning.

Tarred by TARP

Government-backed equity was offered to adequately capitalized banks in order to remove the “stigma” from banks receiving TARP funds, and the management of these institutions took the bait and accepted the money.

Surprise, surprise: now they discover that the money came with strings.

Some banks want to pay back the TARP money to extricate themselves from government restrictions on compensation and pressure to make loans the banks view as unprofitable. Treasury Secretary Geithner has made it clear that the decision to pay back the funds early won’t be left to the banks, but to the Treasury: “My basic obligation is to make sure the system as a whole … has the ability to provide the credit that recovery requires.”

The banking system has thus become a tool for the government to further its policies. And the bankers themselves put their institutions in that position. While taxpayers may understandably feel the bankers got their comeuppance, there are at least two major problems with the Bush/Obama policy.

First, Mr. Geithner has misdiagnosed the problem.

We are in recovery from the effects of the bursting of a massive housing and finance bubble funded by debt. That boom in turn financed a consumption binge of monumental proportions.

The only resolution of a spending binge is restraint in the form of saving. Recovery requires not more credit and another boom, but a dose of economic sobriety.

Individuals and firms know that and are de-leveraging – unwinding what they now realize is excessive debt. That will take the rest of this year and the better part of 2010. Overall, credit is down because demand is down.

Second, and even more disturbing: it appears that the Obama Administration wants to control the financial sector in order to gain control over what Lenin called the “Commanding Heights” of the U.S. economy: the major industries and sources of employment. The auto industry is a prime example, and one in which the administration has involved itself directly. It is also pressuring major recipients of TARP funds to ease the terms of the loans they have made to firms such as Chrysler. Treasury is attempting to use the banks to conduct fiscal policy through credit allocation.

The bankers taking TARP funds got their firms into a mess and deserve no sympathy. Anyone believing in free markets, however, must oppose this power grab by the Obama Administration.

Let the banks pay the funds back and let it be a lesson for CEOs and their stockholders: If you take government funds, you have taken on an unreliable business partner.

The Way to Stop Discrimination on the Basis of Race Is to Stop Discriminating on the Basis of Race

Today the Supreme Court heard argument in Ricci v. DeStefano, the “reverse discrimination” case in which the city of New Haven refused to certify the results of a race-neutral promotion exam whose objective results would have required, under civil service rules, the promotion of only white and Hispanic (but no black) firefighters.

The firefighters who were thus denied promotions sued the city, claiming racial discrimination under Title VII of the Civil Rights Act and the Equal Protection Clause of the Fourteenth Amendment.

Remarkably, a panel of the Second Circuit Court of Appeals—including oft-mentioned Supreme Court contender Sonia Sotomayor—summarily affirmed the district court’s ruling against the firefighters, though Judge José Cabranes (a Clinton appointee) later excoriated the panel for not grappling with the serious constitutional issues raised by the case.

The Cato Institute filed a brief, joined by the Reason Foundation and the Individual Rights Foundation, pointing out the absurd incentives at play: if the lower court’s ruling stands, employers will throw out the results of exams (or other criteria) that produce racial disparity, even if those exams are race-neutral, entirely valid, and extremely important to the employer and (as in this case) the public.

Today the Court seemed starkly divided.  The “liberal” justices hinted that an employer should be allowed to be “race conscious” to avoid Title VII lawsuits alleging “disparate impact” against minorities in hiring and promotions.  The “conservatives” were disturbed that the only reason the firefighters weren’t promoted was their race.  Nobody seemed persuaded by the government’s request—really an attempt to avoid taking a firm stand on a controversial issue—that the judgment be vacated and the case remanded for further factual development and legal rulings by the lower courts.  Justice Kennedy will likely be the swing vote, and I predict that he will side with the conservatives, albeit narrowly in a separate concurrence as he did in Parents Involved in Community Schools v. Seattle School District No.1, the race-based school assignment case from 2007.

It was in Parents Involved that Chief Justice Roberts wrote: “The way to stop discrimination on the basis of race is to stop discriminating on the basis of race.”

Quite so. The Supreme Court should thus reverse the Second Circuit, establishing that an employer can only discount test results when there is a “strong basis in evidence” that the test is somehow biased against a particular racial group.

The Compatibility of Growth and Human Rights

Do trade and economic growth conflict with human rights?

Too often, human rights advocates present development as incompatible with rights. So-called development agencies like the World Bank often ignore rights, including personal choice, when they push for top-down growth strategies around the world. Jean-Pierre Chauffour will speak at the Cato Institute tomorrow on his new Cato book, The Power of Freedom: Uniting Human Rights and Development, where he takes the human rights and development “communities” to task for working at cross purposes and muddled thinking.

Sign up here or watch online to hear him present a development agenda that respects the full range of human rights. Susan Aaronson of George Washington University will comment.

Springtime for U.S. Trade Policy?

In a Cato paper to be released on April 28 (here’s a link to related policy forum), Scott Lincicome and I explain how President Obama can help restore the pro-trade consensus in America. “How?” is one question, but a skeptic might also ask: Why would the president want to do that given his anti-trade campaign rhetoric and the preferences of many fellow Democrats in Congress for a moratorium on trade liberalization and a focus on enforcement?

The answer is quite simple: we believe the president understands the importance of both trade and U.S. trade leadership to the broader objectives of economic growth and good will among nations.  Since he is inevitably going to alienate some of the constituencies who helped get him elected by embracing trade openness, he could be forgiven for his perceived apostasy if he can articulate his rationale convincingly.

The most comprehensive and convincing articulation would begin with the moral case for free trade: that every American has the right to transact with whomever he chooses, regardless of the nationality or location of the other party.  Voluntary exchange between consenting parties is inherently fair, while government coercion in that process on behalf of some citizens at the expense of others is inherently unfair, inefficient, and subversive of the rule of law. We are not holding our breath that this president will make this principled case for free trade.  But his articulation of other pro-trade arguments, after so many years of hyperbole, myth-making and fear-mongering from his colleagues on Capitol Hill, could go a long way toward correcting and reversing Americans’ artificially-induced aversion to trade.

Why are we so sure that President Obama is going to embrace trade openness? Well, we’re not so sure, but it’s more than a hunch. Here are two broad reasons:

First, like all presidents in the modern era, Obama takes a national perspective on economic matters, and not a local or regional perspective, as most members of Congress do. Unlike a candidate or a member of the opposition party in Congress who is free to criticize the incumbent administration’s policy errors without having to seriously consider the pros and cons of the alternatives, the president has to concern himself with the consequences of policy changes. It’s potentially his mess to clean up. As a senator and presidential candidate, Obama promised to aggressively pursue remedies to China’s alleged currency manipulation. As president, Obama declined to act accordingly when given the explicit opportunity, knowing that provocation in that regard would inject more uncertainty into financial markets and could spark retaliation. A protectionist measure that briefly benefits producers in Illinois (which is why a Senator Obama might support it) could have consequences that penalize an array of interests across the country (which is why a President Obama might oppose it).

Second, President Obama—like all Democratic and Republican presidents in the post-WWII era—sees trade policy as a tool of foreign policy. And from his early trips abroad, Obama has learned that to many countries around the world, U.S. trade policy is the most consequential aspect of U.S. foreign policy. So a president who appears determined to repair the damage caused by eight years of unilateralist foreign policy can only embrace trade openness.

In our paper, Scott and I present several other reasons why we are “audaciously hopeful” that the president will help restore the pro-trade consensus. But some nascent support for our audacity can be found in the following examples:

1. President Obama spoke out against the protectionist Buy American provisions in the original “stimulus” package, and Congress subsequently removed its most egregiously protectionist aspects.

2. The president has encouraged Congress to resolve the Mexican trucking ban and bring the United States into compliance with its NAFTA commitments.

3. The Obama Treasury declined to label China a currency manipulator in its first semi-annual report on the topic

4. The president informed Mexican president Calderon last week that he did not think NAFTA would need to be reopened—contrary to his campaign rhetoric.

5. The president said as much to Canadian PM Stephen Harper back in February.

6. There are increasing signs of interest and promise from the White House and Congress that the long-frozen bilateral trade agreements with Colombia, Panama, and South Korea could start moving soon.

The pro-trade environment is not certain, and it could be fleeting, but there’s a case to be made that it’s not as dire as some predicted it would be. If the president intends to facilitate a liberal trade agenda, he should start laying the groundwork with strong pro-trade arguments now.