Indiana: Defender of “the Rule of Law”

While the majority of Chrysler’s senior creditors sacrificed their fiduciary duties and caved into political pressure in accepting the Obama Administration’s pre-packaged bankruptcy of Chrysler, a small group of state pension funds in Indiana has challenged the Obama plan and is asking the Supreme Court to review said plan. As in the 1930s, the protection of contractual rights, one of the most basic pillars of a free society, along with the rule of law, is now in the hands of the Supreme Court.

As discussed in today’s Washington Post, these pension funds believe their rights were infringed by the Administration’s placing of junior creditors in a preferred situation to senior creditors. It doesn’t take Ms. Manners to remind us that cutting in line, whether in traffic, at the grocery store, or in a bankruptcy, is plain rude. To have the government re-order the line for you is even worse.

To re-build confidence in our markets, trust in our institutions must be re-stored. Not simply in our private institutions, but also in our government. If players believe the game is going to be rigged, fewer will be willing to play. And while the Administration has portrayed Chrysler’s senior creditors as nothing more than greedy speculators, the Indiana request exposes that myth. President Obama should clearly articulate why retired state employees, such as teachers and firefighters, should have their pension funds raided solely for the benefit of the auto unions. Here’s to hoping Indiana goes all the way in this Court.

Drug Related Gun Battle in Acapulco Leaves 18 Dead

A wild shootout over the weekend in Acapulco indicates that the drug-related violence in Mexico is spreading.

The Washington Post reports:

Suspected drug traffickers trapped in a safe house fought a furious gun battle with Mexican soldiers early Sunday in the beach resort city of Acapulco. As terrified residents and tourists cowered in their rooms, the firefight raged for two hours, leaving 16 gunmen dead. Two soldiers were also killed and several bystanders were wounded.

The gunmen, suspected members of one of Mexico’s major cartels, threw as many as 50 grenades at the advancing soldiers, and both sides fired thousands of rounds from assault rifles.

Mexican officials have long argued that while there has been serious turmoil in some cities along the border with the United States, the main tourist resort areas are safe. Even before the Acapulco incident, though, events over the past year had cast some doubt on such complacent assurances. A few months ago, a retired general who had just been appointed to direct anti-drug efforts in Cancun was assassinated, and there have been other troubling developments. The main Gulf coast and Pacific resorts are certainly safer than the war zones in such places as Tijuana, Nuevo Laredo, and Ciudad Juarez, but American tourists should not be lulled into thinking that those areas are immune from the drug violence.

President Felipe Calderon’s decision nearly three years ago to launch a military offensive against the drug cartels has backfired. The strategy has not stemmed the flow of illegal drugs into the United States, it has merely caused a spike in the violence and made Mexico a more turbulent, dangerous place for everyone.

Kennedy’s Health Bill: A First Look

A draft of Sen. Ted Kennedy’s health care reform bill is finally available, and it is difficult to overstate how far he would move us to a government-run health care system. An initial read-through reveals among the key provisions:

  • An individual mandate, requiring that every American purchase a “qualified” insurance plan. (Sec. 161(a)) The mandate will be enforced through the tax code with Americans required to pay a penalty if they fail to comply.  In an extraordinary delegation of congressional authority, the Kennedy bill would give the Secretaries of Treasury and Health and Human Services the power to determine what this penalty should be. Individuals would be required to submit information on their insurance status over the previous year to the Secretary of HHS, along with “any such other information as the Secretary may require.” (Sec. 6055(b)(2) and (3)). Individuals who already have insurance could keep it. However, if they changed plans (or presumably changed jobs), their new insurance would have to meet the definition of “qualified.”
  • A “pay or play” employer mandate requiring employers to provide all workers with health insurance and pay a minimum amount of the premium, or pay a tax (Sec 162). Again, the amount of the new tax is left to the discretion of the Secretaries of HHS and Treasury. Some small employers would be exempt from the mandate, but the size of those firms remains TBA. (Sec. 3113(g)) Companies with fewer than 250 workers would be forbidden to self-ensure. (Sec. 2720)
  • A new federal bureaucracy, the Medical Advisory Council, which would determine what benefits will be required to be part of your “qualified” insurance plan. (Sec. 3103(h) and (i)). Lest anyone think Congress won’t get involved. The Council’s decisions can be disapproved by Congress if, say, they don’t mandate inclusion by a favored provider group or disease constituency. (Sec 3103(g)).
  • Massive new federal subsidies. Medicaid would be expanded to individuals earning 150 percent of the poverty level, and the federal government would pay all incremental costs of the increased enrollment. (Sec 152.) Single, childless adults would become eligible for Medicaid. Even more egregious, individuals and families with incomes between 150-500 percent of the poverty level ($110,250 for a family of four) would be eligible for subsidies on a sliding scale-basis.(Sec. 3111(b)(1)(A-G)).
  • Insurers would be required to accept all applicants regardless of their health (guaranteed issue) and forbid insurers from basing insurance premiums on risk factors (Community rating). There does not appear to be any exception for lifestyle factors, such as smoking, alcohol or drug use, diet, exercise, etc. Thus, not only will the young and healthy be forced to pay higher premiums to subsidize the old and unhealthy, but the responsible will be forced to pay more to subsidize the irresponsible.
  • A “public option” operating in competition with private insurance (Section 31__). How this plan would be funded, the level of premiums, etc. is left mostly TBA. In response to criticism, the Kennedy bill does require that the public plan pay providers 10 percent above Medicare reimbursement rates. (Sec 31__(B)). That would still allow for a considerable degree of cost-shifting to private insurance. And, we should recall that such promises are ephemeral. When Medicare began, proponents promised it would reimburse at the same rate as insurance. That promise didn’t last long.
  • States would be prodded to set up “gateways,” similar to Massachusetts’ “connector.” (Sec 3104(a)) If a state fails to do so, the federal government will set one up for them. (Sec. 3104(d)) The federal government would provide grants to states to help them set up these gateways. The amount of the grants is, you guessed it, left to the discretion of the Secretary of HHS. Gateways may also fund their operations by assessing a surcharge on insurers. Sec. 3101(b)(5)(A)/
  • A new federal long-term care program (Sec 171).

Kennedy does not include any estimate of how much his plan would cost, nor any proposal for how to pay for it.

More details will undoubtedly emerge, but it is very clear that the Kennedy plan would put one-sixth of the US economy and some of our most important, personal, and private decisions firmly under the thumb of the federal government.

Buy American Hurts Most Americans

Earlier today, Doug Bandow weighed in with some commentary on the problems that Buy American provisions are creating for both Canadian and American businesses. Let me reinforce his view that such rules are anachronistic and self-defeating with some thoughts from a forthcoming paper of mine about the incongruity between modern commercial reality and trade policies that have failed to keep pace.

Even though President Obama implored, “If you are considering buying a car, I hope it will be an American car,” it is nearly impossible to determine objectively what makes an American car. The auto industry provides a famous example, but is really just one of many that transcends national boundaries and renders obsolete the notion of international competition as a contest between “our” producers and “their” producers. The same holds true for industries throughout the manufacturing sector.

Dell is a well known American brand and Nokia a popular Finnish brand, but neither makes its products in the United States or Finland, respectively. Some components of products bearing the logos of these internationally recognized brands might be produced in the “home country.” But with much greater frequency nowadays, component production and assembly operations are performed in different locations across the global factory floor. As IBM’s chief executive officer put it: “State borders define less and less the boundaries of corporate thinking or practice.”

The distinction between what is and what isn’t American or Finnish or Chinese or Indian has been blurred by foreign direct investment, cross-ownership, equity tie-ins, and transnational supply chains. In the United States, foreign and domestic value-added is so entangled in so many different products that even the Buy American provisions in the recently-enacted American Recovery and Reinvestment Act of 2009, struggle to define an American product without conceding the inanity of the objective.

The Buy American Act restricts the purchase of supplies that are not domestic end products.  For manufactured end products, the Buy American Act uses a two-part test to define a domestic end product: (1) The article must be manufactured in the United States; and (2) The cost of domestic components must exceed 50 percent of the cost of all the components. Thus, the operational definition of an American product includes the recognition that “purebred” American products are increasingly rare.

Shake your head and chuckle as you learn that even the “DNA” of the U.S. steel industry, which pushed for adoption of the most restrictive Buy American provisions and which has been the manufacturing sector’s most vocal proponent of trade barriers over the years, is difficult to decipher nowadays. The largest U.S. producer of steel is the majority Indian-owned company Arcelor-Mittal. The largest “German” producer, Thyssen-Krupp, is in the process of completing a $3.7 billion green field investment in a carbon and stainless steel production facility in Alabama, which will create an estimated 2,700 permanent jobs. And most of the carbon steel shipped from U.S. rolling mills—as finished hot-rolled or cold-rolled steel, or as pipe and tube—is produced in places like Canada, Brazil and Russia, and as such is disqualified from use in U.S. government procurement projects for failure to meet the statutory definition of American-made steel.

Whereas a generation ago the cost of a product bearing the logo of an American company may have comprised exclusively U.S. labor, materials, and overhead, today that is much less likely to be the case. Today, that product is more likely to reflect foreign value-added, regardless of whether the product was “completed” in the United States or abroad. Accordingly, Buy American rules and trade barriers of any kind (as appealing to politicians as they may be) hurt most American businesses, workers, and consumers.

It’s time to wake up and scrap these stupid rules.


Which Is Greener?

Which uses less energy and emits less pollution: a train, a bus, or a car? Advocates of rail transportation rely on the public’s willingness to take for granted the assumption that trains – whether light rail, subways, or high-speed intercity rail – are the most energy-efficient and cleanest forms of transportation. But there is plenty of evidence that this is far from true.

Rail advocates often reason like this: the average car has 1.1 people in it. Compare the BTUs or carbon emissions per passenger mile with those from a full train, and the train wins hands down.

The problem with such hypothetical examples is that the numbers are always wrong. As a recent study from the University of California (Davis) notes, the load factors are critical.

The average commuter car has 1.1 people, but even during rush hour most of the vehicles on the road are not transporting commuters. When counting all trips, the average is 1.6, and a little higher (1.7) for light trucks (pick ups, full-sized vans, and SUVs).

On the other hand, the trains are rarely full, yet they operate all day long (while your car runs only when it has someone in it who wants to go somewhere). According to the National Transit Database, in 2007 the average American subway car had 25 people in it (against a theoretical capacity of 150); the average light-rail car had 24 people (capacity 170); the average commuter-rail car had 37 people (capacity 165); and the average bus had 11 (capacity 64). In other words, our transit systems operate at about one-sixth of capacity. Even an SUV averaging 1.7 people does better than that.

When Amtrak compares its fuel economy with automobiles (see p. 19), it relies on Department of Energy data that presumes 1.6 people per car (see tables 2.13 for cars and 2.14 for Amtrak). But another Department of Energy report points out that cars in intercity travel tend to be more fully loaded – the average turns out to be 2.4 people.

“Intercity auto trips tend to [have] higher-than-average vehicle occupancy rates,” says the DOE. “On average, they are as energy-efficient as rail intercity trips.” Moreover, the report adds, “if passenger rail competes for modal share by moving to high speed service, its energy efficiency should be reduced somewhat – making overall energy savings even more problematic.”

Projections that high-speed rail will be energy-efficient assume high load factors (in the linked case, 70 percent). But with some of the routes in the Obama high-speed rail plan terminating in such relatively small cities as Eugene, Oregon; Mobile, Alabama; and Portland, Maine, load factors will often be much lower.

Even if a particular rail proposal did save a little energy in year-to-year operations, studies show that the energy cost of constructing rail lines dwarfs any annual savings. The environmental impact statement for a Portland, Oregon light-rail line found it would take 171 years of annual energy savings to repay the energy cost of construction (they built it anyway).

Public transit buses tend to be some the least energy-efficient vehicles around because agencies tend to buy really big buses (why not? The feds pay for them), and they run around empty much of the time. But private intercity buses are some of the most energy efficient vehicles because the private operators have an incentive to fill them up. A study commissioned by the American Bus Association found that intercity buses use little more than a third as much energy per passenger mile as Amtrak. (The source may seem self-serving, but DOE data estimate intercity buses are even more efficient than that–compare table 2.12 with intercity bus passenger miles in this table).

When it comes to energy consumption per passenger mile, the real waste is generated by public transit agencies and Amtrak. Instead of trying to fill seats, they are politically driven to provide service to all taxpayers, regardless of population density or demand. One of Amtrak’s unheralded high-speed (110-mph) rail lines is between Chicago and Detroit, but it carries so few people that Amtrak loses $84 per passenger (compared with an average of $37 for other short-distance corridors).

Meanwhile, transit agencies build light-rail lines to wealthy suburbs with three cars in every garage. With capacities of more than 170, the average light-rail car in Baltimore and Denver carries less than 15 people, while San Jose’s carries 16. For that we need to spend $40 million a mile on track and $3 million per railcar (vs. $300,000 for a bus)?

If we really wanted to save energy, we would privatize transit, privatize Amtrak, and sell highways to private entrepreneurs who would have an incentive to reduce the congestion that wastes nearly 3 billion gallons of fuel each year (p. 1). But of course, the real goal of the rail people is not to save energy but to reshape American lifestyles. They just can’t stand to see people enjoying the freedom of being able to go where they want, when they want to get there.

Denying ‘Terrorists’ the Label

The killing of abortion docter George Tiller is an interesting microcosm of how terrorism works – and how it can be suppressed. I wrote here the other day denying that Tiller’s killer is a terrorist. Refusing to call him a terrorist will deny him strategic gains and reduce violence in the future.

Now the AP reports the killer’s claim from jail that similar violence is planned across the nation. This kind of statement is not likely prediction, but rather an appeal to like-minded people to join him. Like terrorists, he has a strong ideological commitment but almost no way to advance his cause other than by inducing missteps on the part of his opponents.

Letting Dr. Tiller’s killer wear the mantle of terrorism would enthuse people who might be inclined to join his cause and carry out future attacks on abortion providers. The best strategic response is to downplay his claims, refuse to call him a terrorist, and let the criminal process run its course.

The Cost of Health Care

From a patient’s point of view, the ideal health insurance policy would offer unlimited access to medical services at no charge. Unfortunately, it is not feasible to offer this to everyone.

The key to sustainable health care reform is restraining the use of services that have high costs and low benefits, says Cato adjunct scholar Arnold Kling.  In the video below, Kling examines the challenges facing health reformers and the feasibility of alternative proposals.