Today at Cato

Op-Ed: “Obama’s ‘$4 Billion for Exxon’ Myth,” by Alan Reynolds in The Wall Street Journal.

In the final days of the campaign, Barack Obama continues to land the same sucker punch on taxes he used in the debates – and John McCain continues to take it on the chin.

Op-Ed: “Renewables Aren’t the Answer,” by Robert J. Michaels in USA Today.

America needs lots of clean, low-cost, secure electricity. Unfortunately, renewable sources don’t fill the bill, and a national requirement wouldn’t change things.

Article: “Talking Down the Banking System and the FDIC,” by Vern McKinley on

The lesson learned during the banking crisis of the 1980s and 1990s when thousands of institutions failed and were taken over by the RTC and FDIC was not to talk down the condition of the banking system - a lesson that seems forgotten.

Podcast: “Nightly Morphin’ Bailout Dangers,” featuring William A. Niskanen.

Keep Virginia Red?

At John McCain’s rally Saturday in Springfield, Virginia, the audience chanted “Keep Virginia Red!” as McCain denounced Barack Obama for being a socialist. Say what?

It was very clever of the TV networks back in 2000 to insist on red for Republicans and blue for Democrats; it had often been the reverse in earlier elections. David Brinkley spoke of Ronald Reagan’s “sea of blue” in 1980, and Time wrote in 1984, “On NBC’s national map, a spreading sea of blue represented Reagan’s triumph, and little islands of red symbolized Mondale’s meager winnings; on ABC and CBS maps, the color symbolism was reversed.” NBC that year – like other networks in previous years – was in keeping with the worldwide use of political colors, where typically red represents communism, socialism, and social democracy and blue is associated with conservative parties. But when the dominant U.S. media all decided to paint the Democrats blue and Republicans red, they got rid of that pesky, lingering association of red with socialism.

And it’s worked so well that Virginia Republicans chant “Keep Virginia Red!”

Tax Competition Pushing Down Personal Tax Rates

Politicians love to figure out ways to rape and pillage minorities in order to win votes from majorities, and this is why class-warfare tax policy is a common tactic. Fortunately, globalization is making it more difficult for politicians to implement punitive tax laws. When rates become too high, it is now increasingly easy for productive resources - including labor - to escape across national borders. This is leading politicians, even in places such as France and Germany, to lower top tax rates. In our new book, Global Tax Revolution, Chris Edwards and I explain how this process of tax competition is an amazing liberalizing force in the world economy. But for those of you who inexplicably don’t want to buy our book, this excerpt from a report in provides ample evidence:

Top personal income tax rates around the world have fallen by an average of 2.5% in the past six years, as governments strive to balance their need for revenue with the impact of increasing global labor mobility, a new study from KPMG International has found. Worldwide, top personal tax rates have fallen from an average of 31.3% in 2003 to 28.8% in 2008. But European Union (EU) taxpayers still pay the highest rates, at an average of 36.4%, followed by taxpayers in the Asia Pacific countries with an average of 34.6% and those of Latin America at 26.9%, KPMG said. At a country level, the highest tax rates in the world are paid by the people of Denmark, with a top rate of 59% for the whole six years, followed by those of Sweden, whose rate came down last year from 57% to 55%, and those of the Netherlands, who have paid 52% for the whole period. Excluding those countries which levy no tax at all, the lowest EU rate is in Bulgaria, with a newly introduced flat rate of 10%, down from 24%. In Asia Pacific the lowest is in Hong Kong, with 16% and in Latin America it is in Paraguay with 10%. Of the 87 countries surveyed, 33 have cut their rates in the past six years and only seven have a higher top rate in 2008 than they did in 2003. Among the large western European economies, France has made the most significant cut in its rates, from 48.1% in 2003 to 40% in 2007. Germany has gone from 48.5% to 45%, having briefly stood at 42% in 2005 and 2006. But across the EU it has been the introduction of flat rate taxes in the Eastern European states that has had the most impact, KPMG said. As well as Bulgaria’s new flat rate of 10%: Estonia has cut its rates from 26% in 2003 to a flat 21% in 2008; Slovakia has gone from 38% to a flat 19%; Lithuania last year fell 6 points to 27% and this year a further 3 points to a flat 24%; Romania has cut rates from 40% to a flat 16%; and the Czech Republic, this year, introduced a flat rate tax set at 15%. In the Asia Pacific region, tax competition between Hong Kong and Singapore has led Singapore to cut its rate from 22% for 2003 to 21% in 2006 and 20% in 2007. …”Australia also cut its personal tax rate by two points to 45% last year,” said Rosheen Garnon, head of KPMG’s International Executive Services practice and a partner in the Australian firm, “but if the intention was to attract back high value Australian workers who have temporarily moved to Hong Kong or Singapore, it may not be enough.” …Mexico and Panama stand out for their steady, year-on-year reductions. In the past six years, Panama has gone in stages from 33% to 22%, while Mexico has gone from 34% to 28%. …”We do not foresee a time when personal income taxes will fall so far that they become irrelevant to people moving from country to country. But it is entirely possible that the relative level of indirect taxes will begin to play a much greater part in people’s decisions on where in the world to go for work,” Garnon concluded.

State-Building vs. Counterinsurgency

In the National Interest (online), Amitai Etzioni argues that, in Afghanistan, the United States should avoid building out the central state, and instead co-opt militia leaders, including the Taliban.

Amen. Americans, even those writing counterinsurgency manuals, conflate counterinsurgency and state-building.

Both presidential candidates’ plans for Afghanistan share this failing. They both support a surge of troops and effort in Afghanistan based explicitly on the idea that our objective should be to build the Afghan state to win the loyalty of the people in the insurgent, meaning Pashtun, areas.

A better plan is a rough replication of what we did in Iraq’s Anbar province. There, we paid off the main body of insurgents and allowed them to rule in their area, provided that they turned against Al Qaeda in Iraq. Don’t believe the myth of the surge. This tactic, which pre-dated General David Petraeus’ assumption of command and had nothing to do with higher troop levels, was the main cause of the pacification of Iraq’s Sunni regions.

You could call this counterinsurgency strategy “appeasement” or “state-breaking,” as opposed to state-building. Having bought peace by dividing authority, there is no obvious way to put Humpty Dumpty back together – the dilemma we now face in Iraq. But if (a big if in Iraq) the division of power is remotely stable, that is not necessarily a problem, at least from a US perspective. You prioritize; sacrificing cohesive central authority for counterterrorism and rough stability.

This strategy stems from the idea that the trouble is the central state itself. You limit its sphere and leave the insurgency, essentially an alternative state, to its. Doing so is only possible where the insurgency has limited geographic orbit and ambitions – a common condition in divided societies with weak governments. Saddam Hussein himself employed this tactic late in his rule, as Austin Long explains in Survival.

In Afghanistan, where power has always been decentralized, the state-breaking strategy has more obvious merit than Iraq. Extending central governance is to undertake a struggle of indeterminate length, which is likely to fail at tremendous expense, while feeding the insurgency by antagonizing the Pashtun population. As Nir Rosen’s informative Rolling Stone article points out, the Afghan state reaches many Afghans not through the provision of services but via predatory national police. Our effort in Afghanistan, with its limited ambitions and reliance on local powers, has always had an element of this strategy, rhetoric to the contrary notwithstanding. But Washington’s embrace of the idea that we have neglected state-building in Afghanistan in favor of Iraq threatens to change this.

Our enemy in Afghanistan is really three insurgencies, and even the main body of the Taliban is really a loose-knit group of militias. Summit-style meetings with purported Taliban leaders will not do the trick. Deals with Taliban commanders will be incremental.

Sooner or later, the United States needs to leave Afghanistan. The idea that we can only do so once it is a centralized, peaceful country that collects taxes and provides services throughout its territory is a recipe for staying forever. We invaded Afghanistan to deny anti-American terrorists haven and deter anyone from offering it. We can maintain those conditions without a strong central goverment, and therefore without a perpetual occupation, if we do something like what Etzioni suggests.

Anti-Socialism = Racism ?

At, Michael Lind asks and answers, “Is Barack Obama a socialist?  If he is, then so is John McCain.“ I have to agree.  McCain so often plays the class warrior that his “desperate use of the socialist smear is particularly shameless.” I might add that McCain is giving anti-socialism a bad name by associating it with hypocrisy, anger, piety, trigger-happiness, etc.

But I can’t go as far as Lind, who doesn’t really seem interested in the answer to his own question. Indeed, it appears Lind’s purpose is to teach McCain the true meaning of shameless. Lind writes:

McCain and Palin claim that Obama’s proposed healthcare system is socialist. It is nothing of the sort. It is a variant of the employer-friendly, insurance-friendly “play-or-pay” scheme discussed in the 1990s. Employers will be given the choice of providing tax-favored health insurance to their employees or being taxed to support a public insurance system. Over time the latter might expand, but for the foreseeable future our dysfunctional private insurance system will survive.

I’m sorry, but the fact that Obama would preserve private health insurance says absolutely nothing about whether his health-care plan is socialist. (If your jaw just hit the space bar, you probably need to read my paper, “Does Barack Obama Support Socialized Medicine?”) The Church of Universal Coverage loves pointing to the presence of “private” health care because it distracts attention from what they’re really doing.

Lind further attempts to innoculate Obama from the charge of socialism by associating the candidate with that great anti-socialist Friedrich Hayek. Lind describes Hayek’s Road to Serfdom as “the bible of free-market libertarians,” and refers to the part where Hayek writes:

Nor is there any reason why the state should not assist the individuals in providing for those common hazards of life against which, because of their uncertainty, few individuals can make adequate provision. Where, as in the case of sickness…neither the desire to avoid such calamities nor the efforts to overcome their consequences are, as a rule, weakened by the provision of assistance — where, in short, we deal with genuinely insurable risks — the case for the state’s helping to organize a comprehensive system of social insurance is very strong. There are many points of detail where those wishing to preserve the competitive system and those wishing to supercede [sic] it by something different will disagree on the details of such schemes; and it is possible under the name of social insurance to introduce measures which tend to make competition more or less ineffective. But there is no incompatibility in principle between the state’s providing greater security in this way and the preservation of individual freedom.

When Hayek wrote that in 1943, the world had little experience with health insurance at all, much less with market provision of health insurance. Today, we have lots of experience with the former and enough experience with the latter to know that markets “can make adequate provision” of health insurance for more than just a “few individuals.” In 1943, Hayek and his contemporaries also knew little about how health insurance affects the incidence of health “losses.” Today, we have lots of evidence to show that moral hazard is real and — as Hayek would predict — governments have only the bluntest of tools for dealing with it. Finally, universal-coverage schemes have come to consume such considerable shares of workers’ earnings, as well as other aspects of individual self-determination, that it is implausible to suggest that socialized medicine is compatible with individual freedom.

In short, Hayek was wrong here. (So much for the whole “bible” thing.) Even if Hayek were right, that wouldn’t make Obama’s health plan any less reliant on centralized planning — i.e., any less socialist.

“Another champion of healthcare socialism,” writes Lind, ”was the late Milton Friedman, [who] proposed that major costs be paid for by mandatory catastrophic healthcare coverage run by the federal government.” Lind cites Friedman’s support of a Negative Income Tax as further evidence of Friedman’s socialist tendencies. 

Unlike Lind’s claims about Hayek, this is just silly. Friedman offered those ideas as second-best alternatives to prominent proposals that were far more socialist — some of which had already been enacted (socialized medicine for the elderly, the expanding welfare state) and some of which merely seemed inevitable (socialized medicine for all). Anyone looking for Friedman’s true preferences need only consult Free To Choose (which he coauthored with his wife Rose):

In our opinion, there is no case whatsoever for socialized medicine. On the contrary, government already plays too large a role in medical care. Any further expansion of its role would be very much against the interests of patients, physicians, and health care personnel.

Since Obama would vastly expand the federal government’s role in health care, I think we can guess where the Friedmans stand.

Lastly, Lind gets nasty:

McCain’s last-minute clarion call is really a racial “dog whistle.” The McCain campaign may appear to be debating public philosophy, when in fact it is making a disguised appeal to white racism. If that is the case, then “redistributionist” and “socialist” may be intended to be understood by white swing voters as code words that function the way that “welfare queen” did for the Reagan campaign. A “socialist” or “redistributionist” is a politician who taxes white people like Joe the Plumber and gives money to … you know who.

Does Lind mean to suggest that voicing opposition to “socialist” policies, “redistribution,” and “spreading the wealth around” is necessarily racist? If not, then is there any way an anti-socialist could say such things without Lind suspecting him of racism? Or of race-baiting?

And what’s with this eagerness to impute evil motives to those who disagree with you? That’s so … McCain-esque.

The ‘Business Case of the Century’

On Monday, the Supreme Court will hear the case of Wyeth v. Levine, which the U.S. Chamber of Commerce has called the “business case of the century.” A Vermont woman who had to have an arm amputated after a nausea drug was improperly administered sued the drug’s manufacturer, Wyeth (she also sued the clinic, physician, and physician’s assistant, but these parties settled). She won in state court, and Wyeth sought review in the U.S. Supreme Court under the theory of “preemption” — that states cannot regulate (by statute or common law) in fields, like pharmaceuticals, where the federal government already does. Here the FDA had approved Wyeth’s label, but Wyeth did not change that label to conform to Vermont’s particular (and stronger) laws.

I don’t know whether this is the “business” case of the century, but it may well be that for the pharmaceutical industry. The outcome turns on a close reading of the statute — as Dan Troy and Becky Wood detailed in the most recent Cato Supreme Court Review, the Court is much more likely to endorse “explicit” rather than “implicit” preemption — but everyone (especially patients) will be better off if the Court upholds FDA preemption here. The courts should not be micro-managing what goes on labels or we will end up with the “overwarning” problems that defeat the labels’ purpose. Moreover, litigation is a blunt regulatory instrument that tends to skew the FDA’s already warped incentives to give too much weight to rare side-effects at the cost of prohibiting or suppressing useful drugs. These incentives, and the related litigation costs, ultimately affect the development of new drugs.

Personal Accounts for Social Security: Still the Best Deal

With the stock market in turmoil, opponents of personal accounts for Social Security have once again raised the specter of Social Security “privatization” in political campaigns across the country. “Imagine if your Social Security taxes were invested in the stock market today,” they suggest ominously. The implication is that if we had allowed today’s seniors to privately invest a portion of their Social Security taxes when they were young, those seniors would be destitute today.

But let’s look at what would really have happened. Someone retiring today, who started paying Social Security taxes when they were, say, 22, would have begun investing 43 years ago, in 1965. As Figure 1 below shows, at that time, the Dow was at 969.26. Even adjusting for inflation, as shown in Figure 2, the Dow was at 43.25.

To show just how much better a deal private investment would have been, look at Figure 3. Assume you had invested a hypothetical $100 in 1965. The redline shows what would have happened if that money had annually earned Social Security’s imputed rate of return (about 2.2 percent for someone retiring today). The blue line represents what would have happened if you earned the actual market return. If you invested $100 in 1965 at Social Security’s rate of return, today you would have $254.91. But if you invested that $100 in the market, today, even with the current down market, you would have $4,135.92.

Any way you look at it, personal accounts are still a better deal.