Archives: 11/2010

Will the Deficit Compel Congress to Cut Military Spending?

Over at National Journal’s National Security Experts blog, Megan Scully notes the military spending cuts contained within a proposal by Erskine Bowles and Alan Simpson, the co-chairs of the president’s deficit reduction commission. Scully asks: “How feasible would it be for lawmakers to make these kinds of cuts to defense?…What kind of sway will fiscal hawks have in the next Congress - and will it be enough to push through sweeping defense cuts over the objections from pro-defense members of their party?”

Government spending across the board must be cut, I explain, beginning especially with entitlements.  I continue:

Other spending must also be on the table, however, and that includes the roughly 23 percent of the federal budget that goes to the military. This often poses a particular challenge for Republicans given their traditional support for military spending and their professed commitment to fiscal discipline. But it need not be particularly difficult. If Republicans reaffirm that the core function of government, many would say one of the only core functions of government, is defense (strictly speaking), then the path to a politically sustainable and economically sound defense posture is clear: a military geared to defending the United States and its vital national interests, and not permanently deployed as the world’s policeman and armed social worker. Such a posture would allow for a smaller Army and Marine Corps as the wars in Iraq and Afghanistan are drawn to a close (as they should be), deep cuts in the Pentagon’s civilian work force, which has grown dramatically over the past 10 years, and sensible reductions in the nuclear arsenal. More modest cuts are warranted in intelligence and R&D. Finally, significant changes in a number of costly and unnecessary weapons and platforms, including terminating the V-22 Osprey and the Expeditionary Fighting Vehicle, and greater scrutiny of the F-35 program, for example, must also be in the mix….

Serious cuts to military spending… must be part of a broader strategic reset that ends the free-riding of wealthy and stable allies around the world, and that takes a more balanced and objective view of our relative strategic advantages and our enviable security.

 You can read the rest of my response here.

Ortega Picks On Costa Rica to Rally Support At Home

For the past couple of years, Nicaragua’s president Daniel Ortega has been desperately seeking to subvert his country’s constitution and feeble democratic institutions in order to stand for re-election next year. Since the Nicaraguan constitution bars him from running for a third term (he was president in 1985-1990), Ortega tried unsuccessfully to have the constitution amended by the National Assembly, where his Sandinista party lacks a majority to do so. However, through judicial shenanigans facilitated by a Supreme Court and an Electoral Tribunal packed with Sandinista allies, Ortega is likely to run again next year. Mary O’Grady of the Wall Street Journal and The Economist have documented the case.

Despite seemingly getting away with it, Ortega faces strong challenges at home from the independent media, civil society groups, and the opposition parties, which have all bitterly denounced his illegal maneuvers. His candidacy might be assured; his re-election not so.

Enter my home country: Costa Rica.

Unfortunately throughout both countries’ histories, it has become a norm that the Nicaraguan political class picks conflicts with Costa Rica in order to distract attention from domestic problems and rally nationalist support at home. Ricardo Jiménez, a Costa Rican president in the early 20th century, once said that Costa Rica had three seasons during the year: the rainy season, the dry season, and the season of conflicts with Nicaragua.

This time around hasn’t been different. Approximately 20 days ago, a dredging project of the San Juan River, whose right bank serves as the border between both countries, led to an incursion of the Nicaraguan army into Costa Rican territory. The conflict area is an uninhabited island (approximately 60 square miles) at the mouth of the San Juan River. Aerial pictures show the destruction of tropical forest in the island—which is part of a protected area in Costa Rica—in what seems like an effort to detour the San Juan River at the expense of Costa Rican territory.

Costa Rica has had no army since 1949, so the government of president Laura Chinchilla has to rely on international pressure to get the Nicaraguan army out of the occupied territory. Costa Rica’s bitter complaints at the Organization of American States have been met with calls from other members, and from the ineffectual secretary general of the organization, José Miguel Insulza, for both countries to engage in endless dialogue and solve this “border dispute.” This is not a border dispute, though. Costa Rica has provided dozens of official documents and maps, including maps produced by Nicaragua’s own government, the official texts of the Cañas-Jeréz Treaty that defined the border and subsequent arbitration awards, and a recent ruling by the International Court of Justice. They all show that the occupied area is indeed Costa Rican territory. As the OAS shows its incompetence, Nicaragua continues its military presence and deforestation works on Costa Rican soil.

Unfortunately Ortega’s move has paid off. Nicaragua’s independent media is now full of headlines supporting their government against what they call “Costa Rica’s expansionist agenda.” The opposition parties have also rallied behind Ortega, providing their votes for the unanimous approval of an increase in the military’s budget (this is the first time Ortega has gotten a unanimous vote in Congress). Pro-government mass rallies have been staged in Managua. Facing no external pressure to withdraw, Ortega is likely to continue or even expand the occupation of Costa Rican territory well into next year when he heads to the polls for reelection.

In the meantime, impotency has taken hold in Costa Rica. Some murmur about the wisdom of giving up the army decades ago, although most Costa Ricans still pride themselves on being a pacifist country with a longstanding civilian tradition. However, calls are growing for the government to give up diplomacy and ask a third country to intervene with troops through the Inter-American Treaty of Reciprocal Assistance. There is a realization that San José needs to draw a line in the sand with Managua. Appeasing Ortega will probably result in more conflicts in the near future.

It is still too early to tell what’s next. Costa Rica says it will bring the case to the UN Security Council in case the OAS fails to deliver. However, Russia’s veto is likely given Ortega’s close relationship with the Kremlin. Tellingly, the Obama administration has stayed mostly silent on the issue.



Postal Service Announces $8.5 Billion Loss

The U.S. Postal service has announced a net loss of $8.5 billion for fiscal 2010. Since 2006, the USPS has lost $20 billion, and the organization is close to maxing out its $15 billion line of credit with the U.S. Treasury. Although the USPS has achieved some cost savings, they haven’t been enough to overcome a large drop in revenue due to the recession and the greater use of electronic alternatives by the public.

The USPS is required to make substantial annual payments to pre-fund retiree health care benefits. Last year, Congress allowed the USPS to postpone $4 billion of its fiscal 2009 into the future. However, Congress did not provide similar relief on this year’s required payment of $5.5 billion.

Critics of the retiree health care pre-funding requirement argue that no other federal agencies or private companies face such obligations. The argument is largely irrelevant for two reasons. First, the federal government’s financial practices are nothing to emulate. Second, very few private sector workers even receive retiree health care benefits.

In 2008, only 17 percent of private sector workers were employed at a business that offered health benefits to Medicare-eligible retirees, down from 28 percent in 1997. The actual number of private sector workers receiving these benefits is even lower as not all employees employed at the 17 percent of businesses that offers retiree health benefits are eligible to receive them.

The retiree health care benefit pre-funding requirement has become a rallying cry for the postal unions, as any threat to USPS solvency is a threat to the excessive compensation and benefits they’ve been able to extract from the postal service for their membership over the years.

Policymakers should properly view the retiree health care benefit as a symbol of postal labor excess, which continues to weigh the USPS down like an anchor. Therefore, they should avoid allowing the USPS to further postpone these payments into the future, which could lead to a taxpayer bailout. Instead, policymakers should recognize that the USPS’s financial woes require bolder action: privatization.

The Security Logic Clarifies the Question

A new post on the TSA blog gets the logic behind the strip/grope combination correct.

[I]f you’re selected for AIT and choose to opt-out, we still need to check you for non-metallic threats. That’s why a pat-down is required. If you refuse both, you can’t fly.

Any alternative allows someone concealing something to decline the strip-search machine, decline the intimate pat-down, and leave the airport, returning another day in hopes of not being selected for the strip-search machine. The TSA reserves the right to fine you $11,000 for declining these searches.

So the question is joined: Should the TSA be able to condition air travel on you permitting someone to look at or touch your genitals?

I’ve argued that the strip/grope is security excess not validated by risk management. It’s akin to a regulation that fails the “arbitrary and capricious” standard in adminstrative law. But the TSA is not so constrained.

Body Scanner Blues

I’ve got a piece in today’s New York Post that points out some inconvenient truths about the body scanners now installed at airports across the country. Building on Jim Harper’s excellent post, body scanners are not being installed because of a well-reasoned risk analysis.

As Timothy Carney pointed out in the Washington Examiner, this is a sop to the companies that make the body scanners. The machines don’t work as well as advertised – a March GAO Report determined that it is not certain the technology would have found Farouk Abdulmutallab’s suspicious package, and that a cost-benefit analysis needed to be conducted before spending $340 million each year to run the labor-intensive equipment.

The same report found that cargo screening was a weak spot that ought to be addressed, but it took terrorist cargo bomb plots to get the TSA to momentarily escape the clutches of regulatory capture and tend to this threat. The British have been much more candid about the limitations of this technology as applied to low-density explosives, noting that the scanners probably wouldn’t have stopped the 2006 liquid bomb plot at Heathrow.

Of course, you can always opt out of the body scanners in favor of a groping on par with the one that motivated my colleague Penn Jillette to report his sexual assault to the police.

You could opt out entirely. TSA Director John Pistole says you won’t fly, but if you publicize your objections, the TSA may try to fine you $11,000.

Keep a stiff upper lip. I’m sure that this will all be much smoother and less invasive when TSA screeners unionize.

The GM ‘Turnaround’ in Bastiat’s View

GM’s long-rumored initial public stock offering will take place Thursday and self-anointed savior of the U.S. auto industry, Steven Rattner, is pretty bullish about the prospect of investors turning out in droves. 

I’ve been saying for a while that I thought the government’s exposure [euphemism for taxpayer losses] in the auto bailout was in the $10-billion to $20-billion range.

But since investor interest has pushed the initial price up from the $26-to-$29 per share range to the $32-$33 range, Rattner now believes:

[T]his exposure is in the single-digit billion range, and arguably potentially better.

I won’t argue with Rattner’s numbers.  After all, they affirm one of my many criticisms of the bailout: that taxpayers would never recoup the value of their “investment.”  My bigger problem is with Rattner’s cavalier disregard for the other enduring—and arguably more significant—costs of the auto bailouts.

Rattner is like the foil in Frederic Bastiat’s excellent, but not-famous-enough, 1850 parable, That Which is Seen and That Which is Unseen.    Rattner touts what is seen, namely that GM and Chrysler still exist.  And they exist because of his and his colleagues’ commitment to a plan to ensure their survival, along with the hundreds of thousands (if not millions, as some “estimates” had it) of jobs that were imperiled had those companies vanished.  (For starters, I very much question even what is seen here. I am skeptical of the counterfactual that GM and Chrysler would have disappeared and that there would have been significantly more job loss in the industry than there actually was during the recession and restructuring.  But I’ll grant his view of what is seen because, frankly, the specifics are irrelevant in the final analysis).

For what is seen, Rattner admirably admits of a cost.  And that cost is not insignificant.  It is anywhere from $65 billion to $82 billion (the range of the cost of the bailout) minus what is being paid back and what investors are willing to pay for GM shares—in the “single-digit billion range,” as Rattner says.  But Rattner is willing to stand by that trade-off, claiming his efforts and the billions in “government exposure” were a small price to pay for saving the U.S. auto industry, as it were.  It’s merely a difference in philosophy or compassion that animates bailout critics, according to this position.

No.  Not so fast.  All along (quite contemptuously in this op-ed, which I criticized here) Rattner has been unwilling to acknowledge the costs that are unseen.  Those unseen costs include:

  • the added uncertainty that pervades the private sector and assigns higher risks and thus higher costs to investing and hiring (whom might government favor or punish next?);
  • the diversion of resources from productive to political purposes in the business community (instead of buying that machinery to churn out better or more lawn mower engines, better to hire lobbyists to keep Washington apprised of how important we are or how this or that policy might be beneficial to the national employment picture!);
  • excessive risk-taking and other uneconomic behavior that falls under the rubric of moral hazard from entities that might consider themselves too-big-to-fail (perhaps, even, the New GM!);
  • growing aversion to—and rising cost of—corporate debt (don’t forget what happened to Chrysler’s “preferred” bondholders in the bankruptcy process!);
  • the sales and market share that should have gone to Ford or Honda or VW as part of the evolutionary market process;
  • the fruitful R&D expenditures of those more disciplined companies;
  • the expansion of job opportunities at those companies and their suppliers;
  • productivity gains passed on to workers in the form of higher wages or to consumers as lower prices;
  • the diminution of the credibility needed to discourage foreign governments from meddling in markets, often to the detriment of U.S. enterprises.

 The list goes on.

 Yet, Rattner, seemingly oblivious to the fact that the economy remains stuck in the mire, speaks triumphantly of the successful auto bailout.  But nobody ever doubted that taxpayer resources in the hands of policymakers willing to push the bounds of legality could “rescue” GM from a fate it deserved.  The concern was that policymakers would do just that, leaving behind wreckage to our institutions not immediately discernible.  But anemic economic activity, 9.6 percent unemployment, and a private sector unwilling to invest is pretty darn discernible at this point.

Rattner should take off the tails, put down the champagne flute, and acknowledge what was originally unseen.

RomneyCare’s ‘Connector’ a ‘Legal Pit Bull’ Forcing Fed-Up Mass. Residents to Pay

According to the Boston Herald:

The state’s health insurance connector — the highly touted agency that aims to bring cheap medical care to the masses — has turned into a legal pit bull by aggressively going after a growing number of Bay Staters who say they can’t afford mandated insurance — or the penalties imposed for not having it.

The Commonwealth Health Insurance Connector Authority is cracking down on more than 3,000 residents who are fighting state fines, and has even hired a private law firm to force the health insurance scofflaws to pay penalties of up to $2,000 a year.

All told, more than 7,700 people have appealed state fines for not having health insurance, according to connector spokesman Richard Powers. The agency has hired several private attorneys at $50 an hour to hear many of the appeals, and some 3,150 of them have been denied — and the losers told to pay up.

The connector has also hired the Hub law firm Bowman & Penski — at $125 an hour — to defend itself against 13 lawsuits filed by fed-up taxpayers who insist they can’t afford state required insurance premiums or the escalating fines.

For more on RomneyCare, see “The Massachusetts Health Plan: Much Pain, Little Gain.”