Archives: 12/2009

Schools and Rotten Meat

LunchladydorisUSA Today has been running a lengthy series on the condition of food sold through federal school lunch programs, and today’s installment is particularly interesting. It turns out that fast-food chains like Jack in the Box and Burger King – predatory capitalists who want nothing more than to make filthy lucre off of unsuspecting hungry people – have much higher meat quality standards than does the selfless government sworn to protect the public.

How can that be? Oh right: As I wrote in my paper “Corruption in the Public Schools: The Market Is the Answer,” companies that have to attract and keep customers to stay in business have a huge incentive to avoid such things as, you know, sending their customers to the hospital! Not so government bureaucrats or educationists, who are getting your tax dollars no matter what.

This is a basic, basic reality that is all but totally ignored by people who insist we need government to protect us from evil corporations. And it is doubly ignored (if that’s logically possible) in education, where the assumption is that government must provide the schools if they are to be any good, and that profit-seekers are handmaids of the devil.

And so I ask (only slightly tongue-in-cheek): How many more children have to get E. coli before we allow freedom in education?

FEHBP Plan Is No ‘Moderate Compromise’

Senate Majority Leader Harry Reid (D-NV) has announced that he has reached a super secret compromise on how to deal with the so-called public option for health reform.  While Reid said the agreement was too important to actually tell anyone what is in it, most of the details have been leaked to the press.

Rather than set-up a completely government-run insurance plan to compete with private insurance, Congress would establish a program similar to the Federal Employees Health Benefit Program (FEHBP), which currently covers government workers, including Members of Congress.  The FEHBP offers a variety of private insurance plans under a program managed by the US Office of Personnel Management (OPM).  Each year OPM uses the Federal procurement process to solicit bids from insurance companies to be one of the plans offered.  Premiums can vary, but participating plans operate under stringent rules.   As a model, the FEHBP is apparently acceptable to moderate Democrats because the insurance plans are private rather than government entities, while liberals like it because it is government regulated and managed.

In addition, the compromise plan would expand Medicare, allowing workers ages 55 to 65 to “buy in” to the program, and may also expand Medicaid.

A few reasons to believe this is yet another truly bad idea:

  1. In choosing the FEHBP for a model, Democrats have actually chosen an insurance plan whose costs are rising faster than average.   FEHBP premiums are expected to rise 7.9 percent this year and 8.8 percent in 2010.  By comparison, the Congressional Budget Office predicts that on average, premiums will increase by 5.5 to 6.2 percent annually over the next few years.  In fact, FEHBP premiums are rising so fast that nearly 100,000 federal employees have opted out of the program.
  2. FEHBP members are also finding their choices cut back.  Next year, 32 insurance plans will either drop out of the program or reduce their participation.  Some 61,000 workers will lose their current coverage.
  3. But former OPM director Linda Springer doubts that the agency has the “capacity, the staff, or the mission,” to be able to manage the new program.  Taking on management of the new program could overburden OPM.  “Ultimate, it would break the system.”
  4. Medicare is currently $50-100 trillion in debt, depending on which accounting measure you use.  Allowing younger workers to join the program is the equivalent of crowding a few more passengers onto the Titanic.
  5. At the same time, Medicare under reimburses physicians, especially in rural areas.  Expanding Medicare enrollment will both threaten the continued viability of rural hospitals and other providers, and also result in increased cost-shifting, driving up premiums for private insurance.
  6. Medicaid is equally a budget-buster. The program now costs more than $330 billion per year, a cost that grew at a rate of roughly 10.7 percent annually.  The program spends money by the bushel, yet under-reimburses providers even worse than Medicare.
  7. Ultimately this so-called compromise would expand government health care programs and further squeeze private insurance, resulting in increased costs and higher insurance premiums, and provide a lower-quality of care.

No wonder Senator Reid wants to keep it a secret.

A Trade Proposal Unworthy of an Economist

Just when you have a pretty good sense of who is dishing protectionist nonsense and from where, along comes Robert Aliber, who – according to the byline of his commentary in yesterday’s Financial Times – is professor emeritus of international economics and finance at the University of Chicago.  Et tu, Chicago?

Aliber considers the US-China trade imbalance unsustainable and, because the Chinese government continues to prevent the value of its currency from rising sufficiently, proposes that the United States impose an across-the-board duty of 10 percent on all Chinese imports, which (after 6 months) would ratchet up 1 percentage point per month every month until the Chinese trade surplus with the United States declines to $5 billion per month. 

We’ve heard this tune before – but from politicians who are presumably far less adept at economics than a University of Chicago economics professor ought to be.  Yet, even Chuck Schumer ultimately acknowledged the banality of his (and Lindsey Graham’s) thrice-introduced legislation to impose a 27.5 percent tariff on Chinese imports as a proxy and incentive for renminbi appreciation.

If Aliber limited his argument to the assertions that the bilateral imbalance is unsustainable and that the Chinese government should allow the value of the renminbi to be determined by supply and demand, I’d have much less to quibble with.  I’d still be plenty skeptical that bilateral trade accounting tells us anything meaningful in this age of cross-border investment and transnational production and supply chains.  I’d still break from the implication that balanced trade should be an objective of policy or that it is more important than economic growth. And I’d still remain unconvinced that an increase in the value of the renminbi alone would have much of an impact on bilateral trade flows.  But I’d agree that a market-determined exchange rate would increase the likelihood that investment, consumption, and production decisions would better reflect underlying conditions in labor, financial, and goods markets, and in that regard would be a more useful guidepost for informed decisionmaking.

But Aliber’s proposal – and the numerous fallacies upon which it is predicated – goes well beyond that point, and appears to be the product of something like acute tunnel vision.  He is so fixated on the bilateral trade account that nothing else – including the impact of his proposal on the economy broadly – commands his attention. 

Aliber utters all of the classic fallacies about the insidious impact of China’s currency on U.S. manufacturing; the leverage and sway China allegedly holds over U.S. policymakers, as our banker of last resort; and, how China caused our trade deficit by purchasing U.S. securities.  I disagree with all of those assertions, vehemently, and have explained why in various places, but I want to focus presently on his proposal, which is one of the worst ideas in circulation.

Consider this passage, which Aliber apparently considers evidence of the cleverness of his plan (but really exposes its inanity):

Because many Chinese exports contain large amouts of embedded imports, the 10 per cent import tariff in effect is a tax of more than 30 per cent on Chinese value added. With electronics and other high-tech exports, where the import content may be 70 or 80 percent of their value, the  10 per cent tariff might be equivalent to a tax of 60 or 80 per cent on Chinese content.

Neat.  But isn’t the fact that Chinese exports contain so much import content enough to soundly reject Aliber’s plan in the first place?  Has he forgotten that we don’t import dangling Chinese value added?  What we import are products, some of which comprise 20 percent Chinese value added, some 80 percent, and according to the most recent research, an average of about 50 percent Chinese value added.  And what does that mean?

It means that on average 50 percent of the value of components, raw materials, and labor embedded in the typical cargo container from China unloaded in Long Beach, California is other countries’ value added.  It means that slapping a duty on imports from China is the same as restricting imports from countries indiscriminately (I know, non-discrimination is what the GATT/WTO rules are all about, but you get my point). It means restricting our own exports to China, which are embedded in the “high-tech” products that we import from China. (High tech is in quotes because the category consists mostly of computers and electronics, like cell phones and iPods, but protectionists like to exaggerate the security angle of our alleged trade follies by pointing to a bilateral deficit in “high tech,” even though Chinese value-added in those goods is well below average, and our imports of them support high-paying U.S. jobs). 

Having obviously not read my new paper, Aliber still sees global commerce as a competition between “Us” and “Them.”  He writes: “It should not take long for the Chinese to learn that they are much more dependent on access to the US market than Americans are dependent on Chinese goods,” and goes on to say that Americans can make those product here or buy them elsewhere.  Of course we could get them elsewhere, but the fact that we prefer to get them from China means that there would be costs associated with switching sources. 

Aliber is a fixed-pie-kinda-guy who fails to recognize the enormous wealth that has been generated by the elimination of political, trade, communications, and transportation barriers, and the highly stratified division of labor this barrier erosion unleashed.  He fails to recognize that Chinese labor and American labor are more often complementary than competing, and that the factory floor has broken through its walls and now spans oceans and borders. 

Imposing 10 percent duties on products invented and designed in the United States, consisting of components produced in Japan, Singapore, Thailand, and the United States,  consuming Australian minerals in the production process and Chinese labor in the assembly process is akin to taking a sledge hammer to a random station along a traditional production-assembly line.  It impedes the production process and raises the cost of bringing products to consumers, inflicting damage that is felt at all nodes in the design/production/assembly/supply chain, including those in the United States.

It means making it more difficult to support higher value-added U.S. manufacturing and service activities because with uncertain or compromised access to lower cost component production and assembly operations in China, it will be more difficult for ideas hatched in American labs to come to fruition in the form of the next gadget or convenience or life-saving device.

China’s position as the final point of assembly in so many different supply chains, as evidenced by the fact that 50 percent of the value of its exports to the United States consists of Chinese material, labor, and overhead, means that the impact of currency appreciation on the bilateral trade account is uncertain.  A stronger renminbi vis-a-vis the dollar means that Americans should pay more for imports from China, but a stronger renminbi also means that Chinese-based producers/assemblers will pay less for imported raw materials and components, lowering their cost of production/assembly.  That cost savings should enable Chinese exporters to lower their prices to American consumers, possibly compensating entirely for the higher renminbi-dollar exchange rate.

Of course, there are plenty of other reasons to eschew Aliber’s proposal, not the least of which is the fact that it certainly would be found WTO-illegal and would invite discrimination against U.S. exporters.  Considering that increased U.S. exports – and not just reduced imports – can help reduce the bilateral deficit, it is curious that Aliber would propose a remedy that would likely curtail U.S. exports.  It would also raise costs throughout the supply chain directly, and by introducing enormous uncertainty into the trading system.

Now that he’s seen the light, maybe Chuck Schumer should give Aliber a call.

Supreme Court Wastes Time, Money, and Opportunity to Protect Property Rights and Due Process

Yesterday the Supreme Court released its first four opinions in cases argued this term, the latest first-opinion release in recent history.  The only one that interests me – and it’s not Justice Sotomayor’s maiden effort – is the civil forfeiture case, Alvarez v. Smith.

Civil forfeiture, the practice in which the police seize cars, money and other kinds of property that they say has some connection to crime, can raise various legal and policy issues — from property rights to due process.  The question in Alvarez was the basic one of whether people seeking to get their property back are entitled to a prompt hearing before a judge.

I blogged about the case here, and Cato adjunct scholar Ilya Somin wrote about it here. Cato’s also filed a brief in the case supporting the individuals whose property was seized.

Unfortunately, because all underlying disputes had been resolved by the time of oral argument – cars had been returned and the individuals have either forfeited their cash or accepted the state’s return of some of it – the Court determined the case to be moot.  It thus vacated the lower court’s opinion and remanded with instructions for that court to dismiss the case.

And that’s a shame.  While the dispute does seem to be moot with respect to the particular petitioners, this is obviously a situation “capable of repetition” but “evading review” – along the lines of that little-known case of Roe v. Wade.  That is, just like the case of a pregnant woman is moot within nine months, disputes over civil forfeiture get resolved one way or the other long before the slow turn of litigation reaches the Supreme Court.  By avoiding the merits of this case, the Court guarantees that the important constitutional questions presented by this case remain perpetually unresolved.

What is more, by vacating the Seventh Circuit’s opinion – an extraordinary remedy – the Court deprives Illinoisans of a well-reasoned and just ruling that could be used as precedent in future cases.  It also – and this is no small matter – wastes the time, effort, and resources of the parties and their attorneys, taxpayers (who obviously paid for the petitioners’ legal work here, as well as that of the judiciary), and, of course, amici (including Cato).

Justice Stevens was correct in his partial dissent: if the Court disagrees with the argument I made in the preceding paragraph, it should have applied the general rule against vacating judgments that have become moot because the parties settled.  The proper disposition here would have been to DIG the case – dismiss the writ of certiorari as improvidently granted (which allows the lower court ruling to remain on the books undisturbed).

A Dubious Record in Mexico’s Drug War

In 2008, there were some 6,300 drug war killings in Mexico, double that of the previous year. El Universal newspaper in Mexico reports that deaths related to the drug war have just surpassed 7,000 since the beginning of 2009, with more than 1000 of those homicides in the last 48 days. That’s a daily rate of 21.3 deaths for the year.

Drug traffickers have long operated in Mexico, but the rise in drug violence is a direct result of President Calderon’s all out war on the drug trade, which he announced upon coming into office December 2006. Annual drug war deaths have more than tripled since then. As Washington starts to spend the bulk of the $1.3 billion Merida Initiative to help Mexico fight drugs (Washington has spent $24 million so far), we can expect the violence to continue increasing. (For a review of Mexico’s futile war on drugs, see Ted Carpenter’s study.)

Use Your Law Deferment to Work for Liberty!

Many law firms are asking their incoming first-year associates to defer their start dates (from a few months to a full year) and are offering stipends to these deferred associates to work at public interest organizations. Cato has been running a deferred associates program for the last few months and we are now extending it for as long as top-notch candidates want to ride out the economy with us.

The Cato Institute invites third-year law students and others facing firm deferrals to apply to work at our Center for Constitutional Studies. This is an opportunity to assist projects ranging from Supreme Court amicus briefs to policy papers to the Cato Supreme Court Review. Start and end dates are flexible. Interested students and graduates should email a cover letter, resume, transcript, and writing sample, along with any specific details of their deferment (timing, availability of stipend, etc.) to Jonathan Blanks at jblanks [at] cato [dot] org.

Please feel free to pass the above information to your friends and colleagues. For information on Cato’s programs for non-graduating students, contact Joey Coon at jcoon [at] cato [dot] org (jcoon [at] cato [dot] org.)