Archives: April, 2012

From Cybercrime Statistics to Cyberspying

Someone finally decided to examine “cybercrime” statistics, and here’s what they found:

The cybercrime surveys we have examined exhibit [a] pattern of enormous, unverified outliers dominating the data. In some, 90 percent of the estimate appears to come from the answers of one or two individuals. In a 2006 survey of identity theft by the Federal Trade Commission, two respondents gave answers that would have added $37 billion to the estimate, dwarfing that of all other respondents combined. This is not simply a failure to achieve perfection or a matter of a few percentage points; it is the rule, rather than the exception. Among dozens of surveys, from security vendors, industry analysts and government agencies, we have not found one that appears free of this upward bias.

That’s Dinei Florêncio and Cormac Herley of Microsoft Research in a New York Times piece entitled: “The Cybercrime Wave That Wasn’t.”

You see, cybercrime statistics have been generated using surveys of individuals and businesses, but you can’t generate valid numerical results that way. An opinion poll’s errors will naturally cancel out—there are a roughly equal number of wrongly stated “thumbs-up”s and “thumbs-down”s.

When you ask people to estimate losses, though, they can never estimate less than zero, so errors will always push results to the high side. High-side errors extrapolated society-wide drive the perception that cybercrime is out of control.

There are more drivers of excess insecurity than just bad loss estimates. There are also data breach notification laws, which require data holders to report various kinds of personal data spillage. These reports are the high-tech, grown-up version of a favorite schoolyard taunt: “Your epidermis is showing!” Epidermis is, of course, a scientific name for skin. It often doesn’t matter that one’s epidermis is showing. The questions are: What part of the epidermis? And what social or economic consequences does it have?

Most breached data is put to no use whatsoever. A 2005 study of data breaches found the highest fraudulent misuse rate for all breaches under examination to be 0.098 percent—less than one in 1,000 identities. (The Government Accountability Office concurs that misuse of breached data is rare.) Larger breaches tend to have lower misuse rates, which makes popular reporting on gross numbers of personal data breaches misleading. Identity frauds are limited by the time and difficulty of executing them, not by access to data.

Why does excess cyber-insecurity matter? Doesn’t it beneficially drive companies to adopt better security practices for personal data?

It undoubtedly does, but security is not costless, and money driven to data security measures comes from other uses that might do more to make consumers better off. More importantly, though, data breach agitation and distended crime statistics have joined with other cybersecurity hype to generate a commitment in Congress to pass cybersecurity legislation.

Cybersecurity bills pending in both the House and Senate could have gruesome consequences for privacy because of “information sharing” provisions that immunize companies sharing data with the government for cybersecurity purposes. The potential for a huge, lawless cyberspying operation is significant if anyone can feed data to the government free of liability, including the privacy protections in property law, torts, and contract. Congress would not improve things by regulating in the name of cybersecurity, and it just might make things a lot worse.

It is ironic that overwrought claims about cybercrime and data breach could be privacy’s undoing, but they just might.

The Laffer Curve Shows that Tax Increases Are a Very Bad Idea – even if They Generate More Tax Revenue

The Laffer Curve is a graphical representation of the relationship between tax rates, tax revenue, and taxable income. It is frequently cited by people who want to explain the common-sense notion that punitive tax rates may not generate much additional revenue if people respond in ways that result in less taxable income.

Unfortunately, some people misinterpret the insights of the Laffer Curve. Politicians, for instance, tend to either pretend it doesn’t exist, or they embrace it with excessive zeal and assume all tax cuts “pay for themselves.”

Another problem is that people assume that tax rates should be set at the revenue-maximizing level. I explained back in 2010 that this was wrong. Policy makers should strive to set tax rates at the growth-maximizing level. But since a growth-generating tax is about as common as a unicorn, what this really means is that tax rates should be set to produce enough revenue to finance the growth-maximizing level of government - as illustrated by the Rahn Curve.

That’s the theory of the Laffer Curve. What about the evidence? Where are the revenue-maximizing and growth-maximizing points on the Laffer Curve?

Well, ask five economists and you’ll get nine answers. In part, this is because the answers vary depending on the type of tax, the country, and the time frame. In other words, there is more than one Laffer Curve.

With those caveats in mind, we have some very interesting research produced by two economists, one from the Federal Reserve and the other from the University of Chicago. They have authored a new study that attempts to measure the revenue-maximizing point on the Laffer Curve for the United States and several European nations. Here’s an excerpt from their research.

Figure 6 shows the comparison for the US and EU-14. …Interestingly, the capital tax Laffer curve is affected only very little across countries when human capital is introduced. By contrast, the introduction of human capital has important effects for the labor income tax Laffer curve. Several countries are pushed on the slippery slope sides of their labor tax Laffer curves. …human capital turns labor into a stock variable rather than a flow variable as in the baseline model. Higher labor taxes induce households to work less and to acquire less human capital which in turn leads to lower labor income. Consequently, the labor tax base shrinks much more quickly when labor taxes are raised.

There’s a bit of jargon in this passage, so here are the charts from Figure 6. They look complex, but here are the basic facts to make them easy to understand.

The top chart shows the Laffer Curve for labor taxation, and the bottom chart shows the Laffer Curve for capital taxation. And both charts show different curves for the United States and an average of 14 European nations. Last but not least, the charts show how the Laffer Curves change is you add some real-world assumptions about the role of human capital.

Some people will look at these charts and conclude that there should be higher tax rates. After all, neither the U.S. or E.U. nations are at the revenue-maximizing  point (though the paper explains that some European nations actually are on the downward-sloping portion of the curve for capital taxes).

But let’s think about what higher tax rates imply, and we’ll focus on the United States. According to the first chart, labor taxes could be approximately doubled before getting to the downward-sloping portion of the curve. But notice that this means that tax revenues only increase by about 10 percent.

This implies that taxable income would be significantly smaller, presumably because of lower output, but also perhaps due to some combination of tax avoidance and tax evasion.

The key factoid (assuming my late-at-night, back-of-the-envelope calculations are right) is that this study implies that the government would reduce private-sector taxable income by about $20 for every $1 of new tax revenue.

Does that seem like good public policy? Ask yourself what sort of politicians are willing to destroy so much private sector output to get their greedy paws on a bit more revenue.

What about capital taxation? According to the second chart, the government could increase the tax rate from about 40 percent to 70 percent before getting to the revenue-maximizing point.

But that 75 percent increase in the tax rate wouldn’t generate much tax revenue, not even a 10 percent increase. So the question then becomes whether it’s good public policy to destroy a large amount of private output in exchange for a small increase in tax revenue.

Once again, the loss of taxable income to the private sector would dwarf the new revenue for the political class. And the question from above bears repeating. What should we think about politicians willing to make that trade?

And that’s the real lesson of the Laffer Curve. Yes, the politicians usually can collect more revenue, but the concomitant damage to the private sector is very large and people have lower living standards. So that leaves us with one final question. Do we think government spending has a sufficiently high rate-of-return to justify that kind of burden? This Rahn Curve video provides the answer.

What Would Reagan Do?

Peggy Noonan, who once worked with Ronald Reagan to shape his words, has some useful advice for today’s Republicans in Saturday’s Wall Street Journal:

Finally, in foreign affairs the Republican candidates staked out dangerous ground. They want to show they’re strong on defense. Fine, we should have a strong defense, the best in the world. But that is different from having an aggressive foreign policy stance, and every one of the GOP candidates, with the exceptions of Ron Paul and Jon Huntsman, was aggressive. This is how their debates sounded: We should bomb Iran Thursday. No, stupid, we should bomb Iran on Wednesday. How could you be so foolish? You know we do all our bombings on Monday. You’re wrong, we send in the destroyers and arm the insurgents on Monday.

There was no room for discretion, prudence, nuance, to use unjustly maligned terms. There was no room for an expressed bias toward not-fighting. But grown-ups really do have a bias toward not-fighting.

They are allowing the GOP to be painted as the war party. They are ceding all non-war ground to the president, who can come forward as the sober, constrained, non-bellicose contender. Do they want that? Are they under the impression America is hungry for another war? Really? After the past 11 years?

The GOP used to be derided by Democrats as the John Wayne party: It loved shoot-‘em-ups. Actually, John Wayne didn’t ride into town itching for a fight, and he didn’t ride in shooting off his mouth, either. He was laconic, observant. He rode in hoping for peace, but if something broke out he was ready. He had a gun, it was loaded, and he knew how to use it if he had to.

But he didn’t want to have to. Which was part of his character’s power. The GOP should go back to being John Wayne.

When Ronald Reagan’s speechwriter tells you you need to be less trigger-happy and more like John Wayne, you probably need to recalibrate.

Okonjo-Iweala vs. Lying Prices

Nigeria’s finance minister Ngozi Okonjo-Iweala is making a strong bid to be the next president of the World Bank.  In looking at her record, it is striking that she has attacked one of the great economic plagues that hinder economic growth: lying prices.  Those are the type of non-free-market prices that are prevalent in many emerging market countries.  Subsidized fuel prices are a prime example.

For example, Indonesia’s fuel subsidy largess amounts to  a whopping 2.5% of Indonesia’s GDP.  Talk about price distortions and lying prices.  Unfortunately, the Indonesian government’s attempt to inject more honesty into the market for fuel failed on April 1st.

Since last December, Dr. Okonjo-Iweala has taken on the Nigerian establishment, delivering a detailed plan to eliminate fuel subsidies and lying prices in Nigeria, and in January, Nigeria’s fuel subsidies were slashed.  This medicine is just what the doctor ordered.  Maybe it’s time for the World Bank to be directed by someone who embraces free market prices.

Welfare and Private Charity

A new policy paper from my colleague Michael Tanner analyzes the growth in the American welfare state and concludes that “throwing money at the problem has neither reduced poverty nor made the poor self-sufficient.” Michael makes an important point that—in my experience—most journalists don’t seem to appreciate:

In addition, whatever the intention behind government programs, they are soon captured by special interests. The nature of government is such that programs are almost always implemented in a way to benefit those with a vested interest in them rather than to actually achieve the programs’ stated goals… Among the nonpoor with a vital interest in antipoverty programs are social workers and government employees who administer the programs and business people, such as landlords and physicians, who are paid to provide services to the poor. Thus, anti-poverty programs are usually more concerned with protecting the prerogatives of the bureaucracy than with actually fighting poverty.

That’s one reason why you have federal officials actually celebrating the fact that more and more Americans are signing up for food stamps. Sure, adding millions of people to the food stamps roll is good for the Department of Agriculture’s budget, but is it good for the country? Perhaps if one thinks that government bureaucracies are ideally suited to provide for the less fortunate. However, that’s a tough claim to make given the fraud, abuse, and wasteful bureaucratic overhead costs associated with the government model. And let’s not forget that the government is not a charity; rather, it must resort to compulsion and force in order to carry out its politically-inspired objectives.

Instead of celebrating government dependency, we ought to be celebrating those private charities that are effectively meeting the needs of the less fortunate through voluntary donations. For example, Congressman Ron Paul (R-TX) recently went to the House floor to laud a private charity called Convoy of Hope. From Paul’s speech:

Unlike government bureaucracies and many top-heavy private charities, Convoy of Hope applies a uniquely results-oriented approach to serving people. You won’t find bloated salaries or patronage jobs at Convoy of Hope, nor will you find tony offices in New York or Los Angeles like so many nonprofits. In fact, the organization regularly spends only about 10% of its budget on overhead (a very low ratio in the nonprofit world), while employing a small staff of approximately 85. Watchdog group Charity Navigator consistently gives Convoy of Hope high marks for both its financial acumen and transparency.

Convoy of Hope also stretches its resources by developing strategic partnerships with private sector corporations, many of which provide in-kind donations of goods or services. This allows Convoy of Hope to offer a win-win proposition to prospective corporate donors: companies benefit from donating needed goods or services already in their inventory or area of expertise, while Convoy of Hope benefits from receiving the supplies and services it needs without paying retail prices. Its corporate donors—including Coca Cola; Nestle; Proctor & Gamble; Nestle; Georgia Pacific; Cargill; Del Monte; and FedEx—donate everything from building supplies to bottled water to toiletries. These partnerships with successful private companies demonstrate an entrepreneurial mindset that enables Convoy of Hope to help more people with less overhead.

Its massive distribution center and headquarters are located strategically in Missouri, where its fleet of trucks can dispatch quickly anywhere in America. It also operates six international distribution centers for logistical efficiency. By contrast, many government agencies purposely locate offices and facilities in different states at the clear expense of efficiency, solely to curry funding support from as many members of Congress and Senators as possible.

A small charity that I’m involved with, The Purple Feet Foundation, is about to celebrate its third year of helping inner-city six-graders think big about their futures in order to avoid succumbing to the social pathologies that are prevalent in their communities. We do not seek—nor do we accept—money from government, which sets a good example for children who have been raised in an environment where government programs are omnipresent. Our overhead is kept to a minimum because, unlike government programs, we must compete for donations (donors obviously don’t want their voluntary contributions blown on excess). Sure, there are wasteful charities out there. But the market for charitable donations has a built-in disciplining mechanism. In contrast, when a government program is exposed for wasting money, the consequence is usually nothing more than a congressional hearing in which pontificating politicians make empty promises to “protect the taxpayers.”

The Drug Debate at the Summit of the Americas

John Stuart Mill once said, “Every great movement must experience three stages: ridicule, discussion, and adoption.” It looks like the movement to end the failed war on drugs is about to enter the second stage, at least on a political level.

For the first time since Richard Nixon launched the international war on drugs more than 40 years ago, a U.S. president will face sharp criticism of this policy from his Latin American counterparts at a regional gathering this weekend. The setting is the Summit of the Americas, which will take in Cartagena, Colombia, on April 14-15.

As the Washington Post reported this week, some Latin American presidents, led by Guatemala’s Otto Pérez Molina, will bring to the table a discussion on alternatives to drug prohibition, including legalization. To be sure, there is no consensus among Latin American leaders on this issue. However, it will be the first time such a discussion will take place at this level.

The Obama administration has said that a regional debate on drug legalization is “legitimate,” but that U.S. support for prohibition won’t budge. However, there’s some evidence that Washington is pressuring some Central American countries to boycott the efforts of Guatemala to discuss this issue. At least that’s what Pérez Molina said after the presidents of El Salvador, Honduras, and Nicaragua skipped a Central American summit a couple of weeks ago where the Guatemalan leader expected to rally the region behind his proposal.

Colombia’s Juan Manuel Santos, the host of the upcoming summit, is a critical figure in this debate. He was the first president to come out in favor of a debate on legalization, a policy he says he would support as long as everyone else agrees to it. That, of course, is a big caveat. Santos, while remaining critical of the war on drugs, has been more cautious than Pérez Molina in proposing and advocating legalization. However, as Santos himself has stated, Colombia has lots of moral authority to bring up this discussion.

The other important person to watch is Brazil’s Dilma Rousseff. High-ranking officials have said in the past that her government would explore alternatives such as decriminalization, but only after “deep” analysis. However, Rousseff hasn’t commented yet on Guatemala’s proposal. Because Brazil is the second-largest consumer of cocaine in the world, and is a diplomatic heavyweight in the region, its stand on this debate matters significantly.

Both the Rousseff and Santos administrations have pointed to the importance of having a “deep” and “objective” discussion about the merits of alternative drug policies. This means that the United States will no longer be able to dismiss the debate first-hand.

For decades the Cato Institute has been a leading voice for drug legalization. Our studies and conferences have provided facts and arguments on the futility of prohibition and the merits of alternatives such as decriminalization and legalization. We are gratified that the debate on ending the war on drugs is now reaching the highest levels of government, and plan to continue providing analysis for policymakers to make informed decisions.

My Advice? Don’t Blame State Taxpayers

I don’t have any great advice to offer those going through the college acceptance wringer, other than to make sure that going to college—and doing college-level work—is really what you want to do. If it’s not, don’t waste your time and money; like so many who’ve gone before you, you’ll likely end up with no degree, a degree you don’t want to use, and quite possibly lots of debt.

That gets me to my main point: Blaming high tuition prices on state legislatures, as University of South Florida education professor Sherman Dorn—but hardly just Mr. Dorn—does is simply wrong. State and local appropriations to public colleges and universities have risen substantially over the last 25 years.

According to the latest data from the State Higher Education Executive Officers, inflation-adjusted state and local outlays to colleges for general operations rose from $57.7 billion in 1986 to $74.2 billion in 2011, a 29 percent increase. That’s “increase,” not “decrease.”

The one way you could characterize state and local funding as decreasing is on a per-pupil basis, but that doesn’t reflect the heartless budget cutting Mr. Dorn implicates. It reflects huge enrollment increases—enrollment that often ends with no degree or appreciable learning. And even on a per-pupil basis it would be wrong to write as if we’ve seen decades of constant cuts: Spending tends to go up and down with the business cycle, and 2001 saw record high state and local spending per pupil for the 25-year period.

I hope students waiting to hear from colleges have to sweat things out as little as possible. I also hope people will stop wrongly turning up the heat on state and local taxpayers. When you look at the data, high prices clearly aren’t their fault

C/P from the National Journal’sEducation Experts” blog.