Archives: 06/2009

Obama’s Back-Door Tax Hike on American Workers

A column in the Washington Post makes an excellent general observation about how taxes on business are actually paid by people. The piece also cites a couple of examples, including an explanation of why the Administration’s big tax hike on American multinational firms will backfire - which is the same argument I made in this video. The moral of the story, of course, is that a bigger burden of government is good for politicians, but bad for regular people.

Geoff Colvin explains:

The average citizen had to conclude that most big U.S. companies are tax cheats. Only a dedicated student of accounting would figure out that the term “tax haven” as defined by the Treasury Department means any country with a lower corporate tax rate than America’s, which is all countries except Japan.

The reality is that the administration is lashing out against perfectly legal behavior. A U.S. company that makes money in Country X pays Country X’s taxes on that money. If the company ever brings the money back to the United States, it must also pay the tax that would be due under America’s higher rate. The administration argues that because the United States has almost the world’s highest corporate tax rate (and even Japan’s is only a fraction of a point higher), current rules create incentives for U.S. companies to operate anywhere but here, at the cost of U.S. jobs. The White House therefore proposes charging all American companies full freight – the whole difference between their overseas taxes and the U.S. corporate rate – on all their profits as soon as they’re earned, no matter where. This measure, in their minds, would bring jobs home.

If the logic eludes you, you’re not alone. The bottom-line effect of the change would be a steep tax hike – more money vacuumed out of corporate coffers. Would that make U.S. companies competing in a global economy more inclined to hire additional workers in the highly expensive United States? The answer is clear. It’s why Microsoft chief executive Steve Ballmer said recently that if the change is enacted, “we’re better off taking lots of people and moving them out of the U.S. as opposed to keeping them inside the U.S.”

…Tax-wise, a company is just a bunch of incorporation papers; all taxes are paid by people – customers, shareholders and employees. And guess who would bear most of the burden of these tax increases? It’s the U.S. employees of the companies being taxed.

Research has shown that when business taxes are raised by a dollar, 70 to 92 cents comes out of employees’ pay. When workers wake up to that fact, they may decide this is one time they don’t want the White House beating up on business.

Don’t Count on Getting Your “Investment” Back from Government Motors

The president and his appointees have expressed their hope that Government Motors will eventually pay back taxpayers for their “forced investment” in the company.  But there aren’t many cases of this sort of lemon socialism actually paying off.

Now most everyone connected with GM is admitting the same thing.  Reports the Washington Post:

If a new General Motors emerges from bankruptcy as planned, U.S. financial aid for the company will expand to nearly $50 billion, but neither the government nor the company is forecasting how much of the public money will be repaid.

It’s sure to be a stretch. For the United States to fully recover its investment, the value of General Motors stock will have to reach levels it has never before attained.

“I’m not going to predict it – that’s not my job today,” GM chief executive Fritz Henderson said in a recent interview.

“I don’t know how much we’re going to recover,” a senior Obama administration official said as the company headed into bankruptcy last month.

This uncertainty stems from the difficulty in valuing the 60 percent GM stake that the United States will receive in exchange for the public investment. The government also gets preferred shares and other compensation.

The stake will be worth enough to fully cover the government’s direct investment only if GM’s stock rises above $68 billion. Even at its recent 2000 peak, GM’s stock was worth only $56 billion.

“I don’t see GM hitting those benchmarks in a very long time,” said Maryann Keller, a veteran automotive analyst and author of “Rude Awakening: The Rise, Fall, and Struggle for Recovery of General Motors,” which was published in 1989.

She noted that global competition will continue to squeeze American automakers. Though the world’s factories can produce about 100 million vehicles a year, demand for them only stands at about 55 million, and the gap will push prices and profits down, she said.

“It’s very unlikely” that the government will recover its money, said David Whiston, auto equities analyst at Morningstar. “GM will be a smaller company after the bankruptcy and there are going to be more foreign automakers entering the market that will make GM’s efforts more difficult.”

Oh, well.  As they say, it’s only money!

Some Thinking on “Cyber”

Last week, I had the opportunity to testify before the House Science Committee’s Subcommittee on Technology and Innovation on the topic of “cybersecurity.” I have been reluctant to opine on it because of its complexity, but I did issue a short piece a few months ago arguing against government-run cybersecurity. That piece was cited prominently in the White House’s “Cyberspace Policy Review” and – blamo! – I’m a cybersecurity expert.

Not really – but I have been forming some opinions at a high level of generality that are worth making available. They can be found in my testimony, but I’ll summarize them briefly here.

First, “cybersecurity” is a term so broad as to be meaningless. Yes, we are constructing a new “space” analogous to physical space using computers, networks, sensors, and data, but we can no more secure “cyberspace” in its entirety than we can secure planet Earth and the galaxy. Instead, we secure the discrete things that are important to us – houses, cars, buildings, power lines, roads, private information, money, and so on. And we secure these things in thousands of different ways. We should secure “cyberspace” the same way – thousands of different ways.

By “we,” of course, I don’t mean the collective. I mean that each owner or controller of a prized thing should look out for its security. It’s the responsibility of designers, builders, and owners of houses, for exmple, to ensure that they properly secure the goods kept inside. It’s the responsibility of individuals to secure the information they wish to keep private and the money they wish to keep. It is the responsibility of network operators to secure their networks, data holders to secure their data, and so on.

Second, “cyber” threats are being over-hyped by a variety of players in the public policy area. Invoking “cyberterrorism” or “cyberwar” is near-boilerplate in white papers addressing government cybersecurity policy, but there is very limited strategic logic to “cyberwarfare” (aside from attacking networks during actual war-time), and “cyberterrorism” is a near-impossibility. You’re not going to panic people – and that’s rather integral to terrorism – by knocking out the ATM network or some part of the power grid for a period of time.

(We weren’t short of careless discussions about defending against “cyber attack,” but L. Gordon Crovitz provided yet another example in yesterday’s Wall Street Journal. As Ben Friedman pointed out, Evgeny Morozov has the better of it in the most recent Boston Review.)

This is not to deny the importance of securing digital infrastructure; it’s to say that it’s serious, not scary. Precipitous government cybersecurity policies – especially to address threats that don’t even have a strategic logic – would waste our wealth, confound innovation, and threaten civil liberties and privacy.

In the cacophony over cybersecurity, an important policy seems to be getting lost: keeping true critical infrastructure offline. I noted Senator Jay Rockefeller’s (D-WV) awesomely silly comments about cybersecurity a few months ago. They were animated by the premise that all the good things in our society should be connected to the Internet or managed via the Internet. This is not true. Removing true critical infrastructure from the Internet takes care of the lion’s share of the cybersecurity problem.

Since 9/11, the country has suffered significant “critical-infrastructure inflation” as companies gravitate to the special treatments and emoluments government gives owners of “critical” stuff. If “criticality” is to be a dividing line for how assets are treated, it should be tightly construed: If the loss of an asset would immediately and proximately threaten life or health, that makes it critical. If danger would materialize over time, that’s not critical infrastructure – the owners need to get good at promptly repairing their stuff. And proximity is an important limitation, too: The loss of electric power could kill people in hospitals, for example, but ensuring backup power at hospitals can intervene and relieve us of treating the entire power grid as “critical infrastructure,” with all the expense and governmental bloat that would entail.

So how do we improve the state of cybersecurity? It’s widely believed that we are behind on it. Rather than figuring out how to do cybersecurity – which is impossible – I urged the committee to consider what policies or legal mechanisms might get these problems figured out.

I talked about a hierarchy of sorts. First, contract and contract liability. The government is a substantial purchaser of technology products and services – and highly knowledgeable thanks to entities like the National Institutes of Standards and Technology. Yes, I would like it to be a smaller purchaser of just about everything, but while it is a large market actor, it can drive standards and practices (like secure settings by default) into the marketplace that redound to the benefit of the cybersecurity ecology. The government could also form contracts that rely on contract liability – when products or services fail to serve the purposes for which they’re intended, including security – sellers would lose money. That would focus them as well.

A prominent report by a working group at the Center for Strategic and International Studies – co-chaired by one of my fellow panelists before the Science Committee last week, Scott Charney of Microsoft – argued strenuously for cybersecurity regulation.

But that begs the question of what regulation would say. Regulation is poorly suited to the process of discovering how to solve new problems amid changing technology and business practices.

There is some market failure in the cybersecurity area. Insecure technology can harm networks and users of networks, and these costs don’t accrue to the people selling or buying technology products. To get them to internalize these costs, I suggested tort liability rather than regulation. While courts discover the legal doctrines that unpack the myriad complex problems with litigating about technology products and services, they will force technology sellers and buyers to figure out how to prevent cyber-harms.

Government has a role in preventing people from harming each other, of course, and the common law could develop to meet “cyber” harms if it is left to its own devices. Tort litigation has been abused, and the established corporate sector prefers regulation because it is a stable environment for them, it helps them exclude competition, and they can use it to avoid liability for causing harm, making it easier to lag on security. Litigation isn’t preferable, and we don’t want lots of it – we just want the incentive structure tort liability creates.

As the distended policy issue it is, “cybersecurity” is ripe for shenanigans. Aggressive government agencies are looking to get regulatory authority over the Internet, computers, and software. Some of them wouldn’t mind getting to watch our Internet traffic, of course. Meanwhile, the corporate sector would like to use government to avoid the hot press of market competition, while shielding itself from liability for harms it may cause.

The government must secure its own assets and resources – that’s a given. Beyond that, not much good can come from government cybersecurity policy, except the occassional good, long blog post.

Iraq’s Future Is Up to Iraqis

The U.S. is not yet out of Iraq, but American forces have pulled back from Iraqi cities.  Iraq’s future increasingly is in the hands of Iraqis.  And most Iraqis appear to be celebrating.

Reports the Washington Post:

This is no longer America’s war.

Iraqis danced in the streets and set off fireworks Monday in impromptu celebrations of a pivotal moment in their nation’s troubled history: Six years and three months after the March 2003 invasion, the United States on Tuesday is withdrawing its remaining combat troops from Iraq’s cities and turning over security to Iraqi police and soldiers.

While more than 130,000 U.S. troops remain in the country, patrols by heavily armed soldiers in hulking vehicles as of Wednesday will largely disappear from Baghdad, Mosul and Iraq’s other urban centers.

“The Army of the U.S. is out of my country,” said Ibrahim Algurabi, 34, a dual U.S.-Iraqi citizen now living in Arizona who attended a concert of celebration in Baghdad’s Zawra Park. “People are ready for this change. There are a lot of opportunities to rebuild our country, to forget the past and think about the future.”

On Monday, as the withdrawal deadline loomed, four U.S. troops were killed in the Iraqi capital, the military announced Tuesday. No details about the deaths were provided. Another soldier was killed Sunday in a separate attack.

The Bush administration never should have invaded Iraq.  The costs have been high: more than 4,000 dead American military personnel.  Tens of thousands more have been injured, many maimed for life.  Hundreds more military contractors and coalition soldiers have died.  And tens of thousands of Iraqis – certainly more than 100,000, though estimates above that diverge wildly. 

The U.S. has squandered hundreds of billions of dollars and the ultimate cost is likely to run $2 trillion or more, as the government cares for seriously injured veterans for the rest of their lives.  America’s fine fighting men and women have been stretched thin and America’s adversaries, most notably Iran, have been strengthened.  Yet another cause has been added to the recruiting pitch of hateful extremists seeking to do Americans and others harm.

Nevertheless, let us hope that Iraqis take advantage of the opportunity they now enjoy.  It will take enormous statesmanship and restraint to accommodate those of different faiths and ethnicities, forgive past crimes committed by Sunni and Shia forces, eschew violence for retaliation and revenge, resolve even bitter disagreements peacefully, and accept political defeat without resort to arms.

Other peoples who have suffered less have failed to surmount similar difficulties.  But it is no one’s interest, and especially that of the Iraqis, to lapse back into sectarian conflict and political tyranny.  Let us hope – and dare I suggest, pray? – that they prove up to the challenge.

Citizens United Case to Be Reargued in Supreme Court

The U.S. Supreme Court has decided not to decide in its current term the campaign finance case, Citizens United v. Federal Election Commission. Instead, the Court issued an order that the case should be reargued. The parties in the reargument should address the question of whether the Court should overrule two of its earlier decisions. In the Austin v. Michigan Chamber of Commerce, the Court held that state legislatures may prohibit spending by businesses on electoral speech. In McConnell v. Federal Election Commission, the Court validated limitations on electoral speech in McCain-Feingold.

The Court could have decided Citizens United on relatively narrow grounds. Instead, it has explicitly drawn into question two of its precedents upholding limitations on political speech. It seems likely that five members of the Court are prepared to overrule both precedents, but at least one justice was unwilling to do so without a formal argument.

We appear to be on the brink of a significant liberalization of campaign finance law.

For more on this important case, see below:

Finally, an Ally That Doesn’t Wait for America

Washington’s willingness to toss security guarantees about the globe like party favors has encouraged other nations to do little for their own defense.  From the European, Japanese, and South Korean standpoint, why spend more when the Americans will take care of you?

But it looks like Australia takes a different view, and is willing to do more to defend itself and its region.  Reports the Daily Telegraph:

The latest defence White Paper recommends buying 100 advanced F-35 jet fighters and 12 powerful submarines equipped with cruise missiles, a capability which no other country in the region is believed to possess.

The “potential instability” caused by the emergence of China and India as major world powers was cited as the most pressing reason for this military build-up. In particular, Australian defence planners are believed to be concerned about China’s growing naval strength and America’s possible retreat as a global power in the decades ahead.

Chinese officials say their country’s growing power threatens no-one. Behind the scenes, Beijing is thought to be unhappy about Australia’s White Paper, with one Chinese academic saying it was “typical of a Western Cold War mentality”.

But the Chinese navy has almost doubled the number of secret, long-distance patrols conducted by its submarines in the past year. The reach of its navy is extending into Australian waters. China is also acquiring new amphibious assault ships that can transport a battalion of troops.

So instead of calling Washington to deal with Beijing, the Australians are building up their own navy.  Novel approach!  Now, how can we implant a bit of the Aussie character in America’s other friends around the globe?

Honduras’ President Is Removed from Office

Honduran President Manuel Zelaya is just the latest democratically elected Latin American leader to violate his country’s constitution in order to achieve his political goals. Both he and the practice of democracy in Honduras are now paying the price.

The removal from office of Zelaya on Sunday by the armed forces is the result of his continuous attempts to promote a referendum that would allow for his reelection, a move that had been declared illegal by the Supreme Court and the Electoral Tribunal and condemned by the Honduran Congress and the attorney general. Unfortunately, the Honduran constitution does not provide an effective civilian mechanism for removing a president from office after repeated violations of the law, such as impeachment in the U.S. Constitution. Nonetheless, the armed forces acted under the order of the country’s Supreme Court, and the presidency has been promptly bestowed on the civilian figure – the president of Congress – specified by the constitution.

Restoration of stable democracy in Honduras could benefit from two things: one, the Electoral Tribunal and Congress calling for general elections earlier than they are scheduled in November; and two, an international condemnation of moves by strongarm figures like Zelaya to undermine democratic institutions and the rule of law.