Archives: 05/2009

Are Health Care Industry Lobbyists Really Proposing to Reduce Their Members’ Revenue by $2 Trillion?

I smell a rat.  Lobbyists never advocate less revenue for their members.  Ever.  If they did, they would be fired and replaced with new lobbyists.

The industry wants universal coverage, because that means more customers and more revenue.  But universal coverage is expensive: it could cost $2 trillion itself.

If you tax your way to $2 trillion, the people revolt.  If you try to “free up” the money by cutting payments to the industry, the industry revolts.  Senate Finance Committee Chairman Max Baucus (D-MT) says he has reforms that will reduce health care spending over time, but the Congressional Budget Office won’t recognize those assumed savings.

So the industry may simply be trying to help Sen. Baucus cook the books by signaling, “Hey CBO – we’ll make sure those reforms work!” – with every intention of fighting those spending reductions later on.

Why Egypt?

President Obama will give a speech in Egypt on June 4 about America’s relations with the Muslim world. Why Egypt? I suspect many Americans think that Egypt is the largest Muslim country, but the White House and the State Department surely know that it’s not even in the top 5. I think White House press secretary Robert Gibbs touched on the reason when he was asked “Why Egypt?” and he responded that Egypt “represents the heart of the Arab world, and I think [the trip will be] an opportunity for the President to address and discuss our relationship with the Muslim world.”

Americans forget that the Muslim world and the Arab world are not synonymous. In fact, only 15 to 20 percent of Muslims live in Arab countries, barely more than the number in Indonesia alone and far fewer than the number in the Indian subcontinent. It seems to me that Obama would be better off delivering his message to the Muslim world somewhere closer to where most Muslims live. Perhaps even in his own childhood home of Indonesia.

Not only are there more Muslims in Asia than in the Middle East, the Muslim countries of south and southeast Asia have done a better job of integrating Islam and modern democratic capitalism. Obama has received some criticism for giving his speech in a repressive country and seeming to embrace Hosni Mubarak’s autocracy. But the criticism ought to go deeper: He should give his speech on U.S.-Islamic relations in the region of the world where most Muslims live, and where Muslims are successfully joining the modern world. Egypt is a fine place for a speech on the Arab-Israeli conflict. But in Indonesia, Malaysia, India, or Pakistan he could give a speech on America and the Muslim world surrounded by rival political leaders in a democratic country and by internationally recognized business leaders. It would be good for the president to draw attention to this more moderate version of Islam.

According to this chart based on the CIA World Factbook, Egypt is the seventh-largest Muslim country. Another chart shows Egypt fifth, but still far behind the Asian countries. Americans should take a close look, as we tend to associate Islam with the Arab world and its discontents. 

Country Muslim Population
1 Indonesia 182,570,000
2 Pakistan 134,480,000
3 India 121,000,000
4 Bangladesh 114,080,000
5 Turkey 65,510,000
6 Iran 62,430,000
7 Egypt 58,630,000
8 Nigeria 53,000,000
9 Algeria 30,530,000
10 Morocco 28,780,000
 
Source: CIA World Factbook

Hayek and Development

Friedrich Hayek’s 110th birthday today offers a good opportunity to reflect on his growing influence in the field of economic development. Here’s a short video from a Cato policy forum featuring William Easterly, one of the world’s leading development economists, explaining Hayekian insights that have shaped Easterly’s own influential thinking.

Hayek’s appeal to students of development economics is due not only to the sorry record of foreign aid and the top-down development approach of so many poor country governments; more recent, constructivist efforts to promote economic freedom or democracy, as through IMF conditionality or war and occupation (e.g., Iraq) have proved equally discouraging. As Hayek noted, “To plan or organize progress is a contradiction in terms.”

In the field of international economics, Money, Markets and Sovereignty is the latest, important book that I regard as Hayekian. Authors Benn Steil of the Council on Foreign Relations and Manuel Hinds, former finance minister of El Salvador, make the timely case that the extreme form of monetary nationalism that exists today is incompatible with globalization, prone to crises, and poses the greatest threat to globalization. For those of you not interested in monetary policy, chapter two on “A Brief History of Law and Globalism” is well worth the price of the book.

Or you can come hear the authors at Cato on May 19 present their book at a forum. (For a case study of how El Salvador is becoming an economic success story, see here.)

Real Cost of Obama’s Foreclosure Plan Is Showing up on Fannie’s Balance Sheet

One of the pillars of President Obama’s plan to turn around the housing market is to allow current homeowners, who are neither late on their mortgage or having trouble paying their mortgage, to refinance into a lower rate if their loan is held by Fannie Mae or Freddie Mac.

All sounds good and well, and was touted by the administration as a plan that would help millions of homeowners at no cost to the taxpayer. However, with Fannie Mae’s recent SEC filings, the true cost of Obama’s plans is starting to show up, and in a way that could potentially cost the taxpayers billions more.

Highlighted in a recent Bloomberg story, Fannie Mae is requesting an additional $19 billion in aid from the Treasury in order to restore its solvency. One of the reasons why Fannie needs additional cash is the cost of “Future activities that our regulators, other U.S. government agencies or Congress may request or require us to take to support the mortgage market and help borrowers may contribute to further deterioration in our results of operations and financial condition,” as stated by Fannie Mae in its SEC filing.

Freddie Mac has also reported that the impact of the president’s foreclosure plan may amount to some $30 billion in losses from the reduction in value of mortgage-backed securities held by Freddie. Given Fannie’s substantial portfolio holdings of similar assets, it is likely that Fannie’s loss from the Obama plan will also top $30 billion.

It would be bad enough if these losses were simply borne by Fannie and Freddie. But given the continued injection of taxpayer dollars into the two GSEs, it is clear that most of those losses will be passed along to the taxpayer. So next time you’re refinancing your Fannie- or Freddie-held mortgage, remember to put aside some of that savings to cover the inevitable tax bill that will be coming to cover it.

Happy Hayek’s Birthday

Today is the 110th anniversary of the birth of F. A. Hayek, who honored the Cato Institute by serving as a Distinguished Senior Fellow, and in whose honor the F. A. Hayek Auditorium is named. “It is hardly an exaggeration to refer to the twentieth century as the Hayek century,” John Cassidy wrote in the New Yorker. If we’re lucky, the 21st century will also be a Hayek century.

Hayek spoke at Cato several times.  Before his 1982 Distinguished Lecture, he sat down for an interview with Cato Policy Report.  Here’s another interview by our late board member Jim Blanchard that appeared in Cato Policy Report. Senior fellows Tom Palmer and Gerald O’Driscoll have offered appreciations of his work. O’Driscoll more recently applied Hayek’s business cycle theory to the current financial crisis.

Cato adjunct scholar Ilya Somin ponders Hayek’s continuing relevance in this essay from just before the crisis announced itself last fall. Somin notes that Hayek’s critique of socialism gets most attention from scholars, but his critique of conservatism is also worth pondering.

As the world suffers from the aftereffects of another Federal Reserve-created bubble, it’s a good time to reread Hayek on the boom-and-bust cycle. But it’s also a good day to reflect that Hayek lived just long enough to see the demise of the totalitarian socialist system that he spent his life analyzing and criticizing. The world is freer today, partly because of Hayek’s great work.

Wow. Just…. Wow!

The Alliance for School Choice shot some video during the rally to save the D.C. voucher program that you simply must see. Two young men, voucher high school students, speaking out in favor of school choice for all D.C. kids.

I’ve said it before and I will keep saying it: if Democrats do not wake up from their current contented complacency and realize that school choice is the future of their party, history will bury them.

Defense Spending and “Global Public Goods”

Matt Yglesias picks up on a discussion between Will Wilkinson and Joseph Heath about American conservatives’ curious enthusiasm for providing “global public goods” (GPGs) in the form of enormous military spending to attempt to secure sea lines of communication (SLOCs) and do other things that are dubbed GPGs.

I think Matt is onto something bigger when he writes that

a considerable portion of American defense spending is genuinely wasteful. If we didn’t do it, it just wouldn’t be done. After all, it’s important to understand that excess capacity in military equipment is about as close as you can get to a real-world example of entirely wasteful public sector activity.

The economists tell us that one of the main properties of public goods is that they ought to be under-provided.  As Matt writes, it seems like we’re over-providing what are being called “public goods” here.  To my mind, this strongly implies that they aren’t public goods.

(Then again, if we’re going to accept that the entire globe is the jurisdiction to which the U.S. government is supposed to be providing public goods, you’re back to public goods – that is, we’re under-supplying the GPG of global security.)

While I’m not sure what my views are on traditional GPGs like a stable monetary or trading order, I’m very skeptical that anything related to security can be dubbed a GPG.  The two key properties of public goods are nonrivalrousness and nonexcludability.  Nonrivalrousness means that my consumption of the good doesn’t conflict with yours.  Nonexcludability refers to the idea that if you’re living within the jurisdiction of the provider of the public good, it’s impossible to opt out of consuming it.

Economists teach defense as the example of the quintessential public good.  For two people living in a country, one’s consumption of defense doesn’t conflict with the other’s and neither can be excluded from its benefits.

But I’m pretty sure you can’t move from the idea of a bounded jurisdiction like that of a state to the entire globe and still have public goods in a meaningful sense.  For example, the Japanese will recall from their experience in the 1930s that the control of SLOCs is very much excludable.  Our inability to supply truly global security means that we have to pick and choose to whom we allocate resources.  Our provision to one country of a formal alliance, for example, is very much rivalrous with neighboring countries’ security.

More generally, in the context of the defense budget at home, I’m more inclined to think that a big chunk of U.S. defense spending constitutes a public bad: transfer payments from taxpayers to defense companies.  Think about it for yourself; what is the marginal benefit to you of an extra F-22?  An extra nuclear warhead?  To whom is the social surplus (or more accurately, rents) allocated?

As is probably clear, my views aren’t terribly well formed here, but the problem is an interesting one.  Chris Preble discusses GPGs in The Power Problem, and a case against the defense budget as a pure public good is Jeffrey Rogers Hummel and Don Lavoie’s “National Defense and the Public-Goods Problem,” in Robert Higgs, ed., Arms, Politics, and the Economy (New York: Holmes & Meier, 1990), pp. 37-60.