Clive Crook on the Massachusetts Plan

Clive Crook writes (note: link probably will expire in a month),

How to do national health reform worthy of the name? First, and most important, create a level playing field tax-wise for individuals and firms, so that nobody has a financial incentive to prefer employer-provided insurance to the individually purchased kind. You could do this by extending Connector-style tax relief to all taxpayers, or by abolishing it for employers. Abolition would be better. It would raise a lot of revenue (which will be needed in my plan) and would jolt people into changing their insurance arrangements.

Second, the free-rider problem makes the case for an individual mandate compelling, in my view. Massachusetts is right about that. And the mandate, in turn, makes health subsidies for the poor, which would be desirable in any case, unavoidable… . But to avoid the enormous problems of enforcing and administering the mandate … give everybody a voucher sufficient to buy stripped-down, Connector-style coverage.

Third, impose one other global restriction on insurance companies: If they offer a policy to anyone, they must offer that same policy to everyone, regardless of age, sex, current health, and other risk factors. Again, the Connector has provisions of this kind. This would preserve the risk-pooling feature of private insurance, while still allowing vigorous competition on price and offering.

I strongly disagree with the third point. As I pointed out here, it is these sorts of regulations that aggravate the problem of the uninsured in the first place. Force insurance companies to offer the same policy to everyone at the same price, and naturally health insurance will be a bad deal for young, low-risk people. Like Massachusetts, you will end up with a problem of such people being uninsured. As I said in my talk, the Massachusetts plan at best solves a problem that was created by regulation in the first place. Listen to the talk.

It’s Not Just Wages

Why do U.S. companies set up shop in countries such as China? Aside from trying to penetrate foreign markets, most people assume it’s the relatively low-cost labor abroad.

But the head of Intel Corporation, Craig Barrett, testified to Congress yesterday that relative tax costs are crucial to their choices regarding global investment locations.

Barrett said that “a critical issue we must now consider when deciding where to locate a new wafer fabrication plant is that it costs $1 billion more to build, equip, and operate a factory in the U.S. than it does outside the U.S. The largest portion of this cost difference is attributable to taxes.”

Why are taxes the biggest cost for Intel? As Barrett pointed out, “Semiconductor manufacturing is extremely capital intensive,” thus taxes on profits are a more important issue than wage levels.

Barrett noted that when Intel builds a plant in China, the firm get “a five-year tax holiday, followed by 50% of the normal tax rate for five more years. These are in comparison to the U.S., with its 35% corporate tax rate, lack of investment incentives, and relatively uneconomic and uncompetitive depreciation treatment.”

A story in the Wall Street Journal yesterday (sorry, subscriber-only site) noted that even Germany is now planning to sharply cut its corporate tax rate because of competitive pressures. That would leave United States with easily the highest corporate rate in the industrial world.

Conservatives on Executive Abuses

Here’s an interesting anecdote bearing on the dangers of unchecked surveillance powers. And it comes from a somewhat unlikely source: the Heritage Foundation’s Lee Edwards, a historian of the conservative movement and biographer of Barry Goldwater. 

Edwards tells the story of the FBI, at Lyndon Johnson’s request, placing bugs on Barry Goldwater’s campaign plane:

The bureau’s illegal surveillance was confirmed by Robert Mardian, when he was an assistant attorney general in Nixon’s first term. During a two-hour conversation with J. Edgar Hoover in early 1971, Mardian asked about the procedures of electronic surveillance. To Mardian’s amazement, Hoover revealed that in 1964 the FBI, on orders from the Oval Office, had bugged the Goldwater plane. Asked to explain the blatantly illegal action, Hoover said, “You do what the president of the United States orders you to do.”

Here’s another such anecdote from another conservative, federal judge Laurence Silberman, by way of Robert Novak. As a deputy attorney general in 1974, when the House Judicary Committee asked him to review secret files kept by J. Edgar Hoover. Silberman discovered a cache of “nasty bits of information on various political figures — some still active.”  According to Silberman, “Lyndon Johnson was the most demanding” when it came to requisitioning FBI political intelligence. In 1964, after D.C. police arrested LBJ aide Walter Jenkins for homosexual conduct, special assistant to the president Bill Moyers ordered Hoover to find something similar on Barry Goldwater’s campaign staff. 

Conservatives may get a kick out of Moyers’ discomfort at having his gutter tactics exposed (“I was very young. How will I explain this to my children?”), but there’s a larger point here beyond schadenfreude. When presidents get to exercise unchecked power in the national interest, they tend to have a hard time telling the difference between the national interest and their own political fortunes. The post-Watergate reformers made some mistakes, but many of their reforms — FISA among them — were aimed at changing the dynamic described by Mardian: “You do what the President orders you to do.”

Unfortunately, the Bush administration’s legal theories threaten to shift it back.   

Sorry, We Can’t ‘Grow’ Our Way out of the Social Security Problem

Many economists and lawmakers — especially conservatives — argue against tax hikes as solutions to entitlement shortfalls, saying the hikes would be counterproductive. According to this argument, higher taxes would retard growth, reduce federal revenues, and worsen entitlement shortfalls. 

For example, Stephen Moore in his June 12 Wall Street Journal column “Don’t Know Much About History…” alludes to a presumed beneficial impact of faster (wage) growth on the financial problems of entitlement programs. Unfortunately, that presumption is incorrect, especially as regards Social Security.

The claim that faster wage growth would reduce Social Security’s financial shortfall is an artifact of the standard (but flawed) 75-year-ahead Social Security financial projections that count payroll taxes through that period but ignore benefit obligations those taxes would create beyond the 75th year. The projections make it look as though robust wage growth would shrink the gap between Social Security revenues and obligations. But the picture changes over a longer timeframe.

The Social Security trustees have in recent years begun publishing estimates of the present value of Social Security’s financial shortfall in perpetuity. This is the correct measure to use in assessing the impact of faster wage growth on Social Security’s financial status because it is comprehensive — it accounts for all future taxes and benefits. Unfortunately, the trustees do not provide any analysis of how sensitive the perpetuity measure is to changes in various underlying assumptions. 

Whether faster economic growth would improve or worsen Social Security’s actuarial deficit depends on the balance between two opposing forces: demographics and wage growth. 

Concerning demographics, as retirees grow more numerous relative to workers, Social Security’s finances would worsen — which is easy to see if benefits depend on current wages. 

Concerning wages, in each time period, benefits mostly depend on past wages. That’s because under current Social Security laws, once a person’s benefit level is determined at the time of retirement, its real value remains constant during the rest of the person’s retirement years because it is indexed to prices. (The real value of benefits would grow were post-retirement benefits indexed to wages instead.) Because current benefits depend mostly on past wages, faster growth in current wages won’t lead to a proportionate increase in current benefits. Benefits would begin to grow faster only after a considerable time lag. Hence, faster wage growth magnifies the financial advantage associated with this time lag and reduces Social Security’s actuarial deficit.

It has been shown that in the case of U.S. Social Security, the force of worsening demographics dominates: The system’s actuarial deficit (i.e., the ratio of the present value of the system’s financial shortfall to the present value of the payroll tax base when both are calculated in perpetuity) increases with faster wage growth — a result opposite to that obtained under 75-year-ahead calculations. 

Thus, based on a comprehensive measure, the view that faster wage growth would deliver us from our Social Security problem is misguided. But many have repeatedly cited it to argue against reforming the program, e.g., Sen. John Kerry during his 2004 presidential bid. 

The Social Security debate would be better served if we put this view in its rightful place: the trash bin.

Of course, the conclusion should not be that we should strive for slower wage growth to improve Social Security’s finances! Mr. Moore’s distaste for growth-retarding tax hikes is correct. But the negative implications of faster wage growth for Social Security’s finances do not provide any purchase for his argument. Indeed, the twin imperatives of maintaining high economic growth and resolving Social Security’s financial shortfall indicate — even more strongly — that reforms should be weighted more heavily toward future benefit cuts rather than tax hikes.

Frontline on the War

Readers may be interested in a well done PBS Frontline documentary on the birth of the war on terror and the war in Iraq. The entire documentary can be viewed online.

If you only have a bit of time, start with Part III, in case you held any doubts that the Bush administration took its eye off al Qaeda in Afghanistan as they refocused on invading Iraq. Several gravelly CIA types (some of whom were on the ground in Afghanistan) come forward to make clear that they feel they had al Qaeda hemmed in in the winter of 2001–2002, but they did not get the resources they needed—and asked for—to snap its neck.

There’s also a lengthy workup describing the mishandling of intelligence before the Iraq war. There’s not much new material on that topic, but the documentary is a good synopsis of what we now know. The whole documentary is riveting stuff, well worth a watch.

It’s Not Just About No-Knocks

Jacob Sullum writes:

Hudson v. Michigan, the recent decision in which the Supreme Court said evidence from a search in which police failed to follow the “knock and announce” rule is admissible in court, ostensibly hinged on how close the connection between a Fourth Amendment violation and the discovery of evidence must be to trigger the exclusionary rule. The dissenters argued that the failure of police to wait more than a few seconds for the suspect, Booker Hudson, to answer the door rendered the whole search invalid, making the evidence police obtained “fruit of the poisonous tree.” Writing for the five-justice majority, Antonin Scalia said the exclusionary rule did not apply in this case because the Fourth Amendment violation was not essential to the discovery of the evidence. Had police waited, say, 15 seconds and given Hudson the opportunity to answer the door, Scalia reasoned, they still would have found Hudson’s drugs and gun.

Yet as Scalia also noted, if the police believed that wasn’t the case, that waiting 15 seconds would have allowed Hudson to get rid of the evidence, the “knock and announce” rule would not have applied. So the nexus between barging in and finding the evidence does not really matter. Whether or not a knock-and-announce violation is necessary to preserve evidence, the evidence can be admitted an easy rule for police to remember but not one that is likely to encourage respect for the knock-and-announce requirement.

This is one of the inherent contradictions in the policy of no-knocks and the use of SWAT teams.

After Wilson v. Arkansas, in which the Court ruled that the Fourth Amendment generally but not always requires police to knock and announce themselves before entering a private home, several states passed laws requiring announcement, banning no-knock warrants issued from the bench. Since Hudson, there’s some talk that yet more states will pass similar laws (Indiana is considering it, for example). But these laws are meaningless, for a couple of reasons:

First, the “exigent circumstances” exceptions still allow police to decide at the scene to enter without announcement if they think the suspect will dispose of the drugs, or that he poses a threat to police. Before Hudson, whether or not the police made the right call was determined after the fact, at trial. (If they found nothing incriminating, the entire raid was chalked up to “oops,” except in the rare case where the person on the receiving end of the raid brought suit.) After Hudson, there’s little reason to make such an after-the-fact evaluation, given that the evidence will be admitted either way.

Second, defenders of SWAT teams and dynamic entry tactics say they’re necessary to take suspects by surprise. This, they say, prevents violence. I’d argue it encourages violence and confrontation, but for the sake of argument, let’s say they’re right.

But the same people say that Hudson won’t really change anything. Police will still observe the rule, and knock and announce before entry. But the purpose of the knock-and-announce rule is to give the suspect the opportunity to answer the door, and avoid the destruction of property and violence of a forced entry. You can’t have it both ways. You can’t say we need SWAT teams to take suspects by surprise, but that most SWAT teams are also observing the letter and spirit of the knock-and-announce requirement.

That requirement is to give notice and opportunity to answer. And that, of course, is incompatible with “surprise.”

This is illustrated by the fact that these raids are commonly conducted late at night, or very early in the morning. If you’re asleep — perhaps in an upstairs bedroom — and police knock and announce just seconds before breaking in, for all practical purposes the difference between “no-knock” and “knock-and-announce” is nil.

But don’t take my word for it. California has had a law against no-knock warrants for some time. After a 1999 dynamic entry raid in which El Monte police shot and killed Mario Paz — an innocent man — the assistant chief of police told the Los Angeles Times: “We do bang on the door and make an announcement — ‘It’s the police’ — but it kind of runs together. If you’re sitting on the couch, it would be difficult to get to the door before they knock it down.”

I’ve been outspoken on the Hudson case. But the truth is, it’s a peripheral issue. The main problem here is not no-knock raids, legal or otherwise. The main problem is the paramilitary tactics, and this relatively recent fervor to break down the doors and storm the homes of suspects who, even if guilty of what’s suggested in the warrant (generally drug crimes), aren’t an immediate threat to the public, the community, or anyone else.

Dick Cheney, Dove?

Rumors continue to swirl that North Korea is about to conduct a test of its long-range Taepodong 2 missile, which would be capable of reaching targets in the United States. The prospect of Pyongyang having not only a small nuclear arsenal but the means eventually to deliver such weapons at great distances has understandably generated agitated commentary in the United States and East Asia.

The latest entry is a Washington Post op-ed by former Clinton administration defense department officials Ashton B. Carter and William J. Perry. Carter and Perry suggest that if the North Koreans do not heed U.S. warnings to refrain from conducting the missile test, the Bush administration should launch preemptive air strikes to take out the missile while it is still on the launch pad. Surprisingly, Vice President Dick Cheney rejected their idea.

It is clear that extremist and reckless proposals have come to dominate a policy debate when Dick Cheney is the resident dove. The Carter-Perry article provides more evidence (as if we needed it) that foreign policy irresponsibility is not confined to neoconservatives in the Republican Party.

Those who propose attacking North Korea need to sit down and take a deep breath. First of all, the rumors about a missile test may or may not be true. On at least two occasions since Pyongyang announced a moratorium on testing in 1999, there have been reports that the test of a long-range missile was imminent. Those reports proved unfounded. This one may as well.

Even if North Korea does conduct a test of the Taepodong 2, it is not the end of the world. Granted, every sensible person would wish that the weird hermit kingdom did not have either nuclear weapons or long-range missiles. But the United States has thousands of nuclear weapons and the means to deliver them with pinpoint accuracy. We’ve deterred other weird regimes in the past, most notably Stalinist Russia and Maoist China. We should be able to deter the likes of Kim Jong-il. The North Korean regime, while bizarre and brutally repressive, has never shown signs of suicidal behavior. And attacking a nation that possesses thousands of nukes would definitely be suicidal.

The decision to launch preemptive air strikes would certainly be more dangerous than relying on deterrence. If the Bush administration follows the advice of Carter and Perry and attacks North Korea, it could easily trigger a general war on the Korean Peninsula. The last Korean war cost the lives of millions of Koreans and more than 50,000 Americans. We should spurn any proposal that risks a repetition. 

Dick Cheney is right to be a dove on this issue. One only wishes that the viewpoint becomes habit forming.