April-May 1998


"THIS JUST IN"

May 29, 1998

Cato Institute launches Spanish-language Internet Web site
Institute’s ideas attracting growing interest in Latin America and Spain

The Cato Institute today launched a new Spanish-language Web site -- www.elcato.org -- featuring essays and studies produced by Cato scholars on a wide range of issues, many of which are of particular importance to Latin Americans, Spaniards, and Hispanics in the United States. The site features articles on international relations, the environment, drug policy, money and banking, economic development, fiscal policy, and Social Security. It was developed for Cato by journalist Luis Figueroa, an editor and economics writer at the Guatemalan newspaper Siglo Veintiuno, who is completing a year-long program for mid-career professionals at the University of Maryland.

"We hope this Web site will help satisfy the growing demand for libertarian ideas among Spanish speakers around the world," explained Ian Vásquez, director of the Project on Global Economic Liberty at the Cato Institute. He is one of several Spanish-speaking scholars at Cato who will be involved in operating elcato.

The Cato Web site in Spanish was launched as part of the Institute’s ongoing work relating to economic liberalization in Latin America and elsewhere, and because of the belief that market-liberal solutions to public policy problems are relevant not only to the United States but to other parts of the world as well.

"The ideas of limited government, individual liberty and free markets appeal to people throughout the region because of our long history of bad government, cronyism, and lack of property rights -- shortcomings that we are now trying to overcome," said Roberto Salinas-León, director of policy analysis at TV Azteca in Mexico City and a Cato adjunct scholar.

In an essay on pension reform, José Piñera, Chile’s former minister of labor and social security, describes the successful privatization of the Chilean public pension system in 1980, and how other countries in the region are patterning their pension reforms on that model. The site also features essays by Enrique Ghersi, Peruvian co-author of The Other Path; Ian Vásquez and L. Jacobo Rodríguez on the International Monetary Fund’s record in Mexico, the embargo on Cuba, and the international war on drugs; Solveig Singleton on Internet censorship; and much more.

The site also provides links to other Spanish-language market-liberal think tanks.

Cato en Español (http://www.elcato.org)

May 21, 1998

Prohibition of Internet gambling futile, scholar says
Internet gambling inevitable for both technical and political reasons

Attempts to prohibit Internet gambling will inevitably fail because "the nature of the Internet renders prohibition futile," according to Tom W. Bell, director of telecommunications and technology studies at the Cato Institute. Bell testified today before the National Gambling Impact Study Commission meeting in Chicago.

He told the members of the commission that, inevitably, "sooner or later Americans will legally gamble over the Internet."

As Bell explained, "The Internet's inherent openness already hobbles law enforcement officials, while relentless technological innovation ensures that they will only fall further and further behind."

In addition to technical considerations, Bell noted, political forces will frustrate attempts to prohibit Internet gambling. "The Internet offers an instant detour around domestic prohibitions," Bell said. "Principles of national sovereignty will prevent the United States from forcing other countries to enforce a ban on Internet gambling, and it takes only one safe harbor abroad to ensure that U.S. citizens can gamble over the Internet."

Furthermore, Bell explained, "consumer demand for Internet gambling and the states' demand for tax revenue will create enormous political pressure for legalization."

While such developments will no doubt frustrate prohibitionists, Bell said that legalized Internet gambling will offer considerable benefits. "Internet gambling will drive network development; it will provide a more wholesome environment than real-world casinos; and it will benefit consumers by increasing competition in gambling services."

Internet Gambling (http://www.cato.org/testimony/ct-tb052198.html)

May 19, 1998

Time has come to end South Korea’s dual dependence on U.S.
New study says it’s time for "a new political and strategic relationship"

"Washington should begin withdrawing its forces from South Korea and transfer primary responsibility for North-South relations to Seoul," Cato Institute senior fellow Doug Bandow recommends in a new Policy Analysis released today. "South Korea has matured as a nation," and "one characteristic of mature countries is that they defend themselves, rather than remain dependent on others."

In "Free Rider: South Korea’s Dual Dependence on America," Bandow points out that "the Republic of Korea’s continuing defense dependence seems to be leading, in turn, to economic dependence" on the United States. Unlike the U.S. foreign aid that poured into then-poor South Korea following the Korean War, today’s financial aid comes in the form of a $57 billion bailout from the International Monetary Fund and additional U.S. direct aid. "Exactly why America should spend so much more to help a nation that it has already helped so much for so many years is unclear," Bandow says.

"South Korea’s recent economic travails actually highlight its long-term success: it has become a major participant in the global economy. The ROK has simply paid the price of extensive government subsidies to the major chaebols, or industrial conglomerates," Bandow observes. "The crisis, though serious, has made possible reforms that were until now politically inconceivable." South Korea will "pay the price for decades of crony capitalism," but "there is no reason to believe that IMF lending is necessary for reform."

While the military threat from North Korea is not to be taken lightly, Bandow points out that South Korea’s economy is 24 times larger, it has twice the population of the North, an extensive financial and industrial infrastructure, and strong trade relations with North Korea’s one-time military allies China and Russia. In contrast, the North cannot feed its own people. Seoul currently plans to spend nearly $20 billion on a new bullet train system for the South—an amount equal to the North’s entire gross national product. In short, "the matchup between the two looks like the battleship Bismarck versus a Chinese junk." And yet, "All told, Americans spend as much to defend the ROK, about $15 billion annually, as the South Koreans spend."

"The reality is that the ROK has only modest strategic value to the United States," Bandow declares, and "letting manpower-rich South Korea take over its own defense would reduce the likelihood of America’s finding itself at war." 

Policy Analysis no. 308 (http://www.cato.org/pubs/pas/pa-308es.html)

May 10, 1998

IMF threatens the stability of the world financial system, expert finds
Crises show that agency’s "lender of last resort" role is unjustified

International Monetary Fund bailouts in Asia and Mexico are "undermining the natural process of reform"—especially in the banking sector—and "are examples of dangerous short-sightedness," according to Charles Calomiris, writing in the new issue of the Cato Journal. Calomiris, a professor of finance and economics at Columbia University, argues that if the new doctrine of international financial bailouts prevails, "the efficiency of global capital markets will suffer, and the incidence and severity of financial crises will grow."

In "The IMF’s Imprudent Role as Lender of Last Resort," Calomiris shows that instead of encouraging policies to address systemic financial problems, "IMF programs in Mexico and Asia are now microeconomic bailouts that restore the solvency of clearly insolvent financial institutions." Little has been done, for example, to introduce market discipline into the Mexican banking system, and "in Korea, the IMF has not even been able to prevent the immediate misuse of its funds, much less reform the long-term structure of bank-industry relationships."

Calomiris says that IMF bailouts promote excessive risk taking and inefficient investment and lead to an upward redistribution of wealth. When the crises eventually pass, "the big winners are the wealthy, politically influential risk takers, and the biggest losers are the taxpayers in countries like Mexico or Indonesia." The IMF thus delays reform. "If oligarchs can avoid true liberalization but still maintain access to foreign capital," Calomiris asks, "where is the incentive for them to relinquish the rule of man in favor of the rule of law, or to allow competition and democracy to flourish?"

In practice, he says, IMF money is rescuing bankrupt institutions rather than providing liquidity to solvent ones, which is the proper role of a lender of last resort. In the interest of market-oriented reform and international financial stability, Calomiris recommends that Congress refuse to increase the IMF’s pool of capital, since "it would do real harm by signaling an intention to provide bailouts in the future." And he adds that "Congress should abolish the Exchange Stabilization Fund -- a legacy of the Great Depression which has no legitimate role in U.S. monetary policy today."

"Countries that have achieved successful banking reform have done so over many years and as the result of a strong domestic commitment to improve banks’ incentives, not in response to IMF conditions," he concludes.

The IMF's Imprudent Role as Lender of Last Resort (http://www.cato.org/pubs/journal/cj17n3-11.html)

May 7, 1998

Kyoto pact will have no discernible effect on global climate, study finds
Full compliance will reduce global temperature less than one-fifth of one degree

Last December’s Kyoto agreement, under which the United States would reduce emissions of greenhouse gases by 7 percent below 1990 levels, will "reduce mean planetary warming by a mere 0.19 degree Celsius over the next 50 years," according to a new study from the Cato Institute.

In "The Consequences of Kyoto," climatologist Patrick J. Michaels finds that "the Kyoto Protocol will have no discernible effect on global climate—in fact, it is doubtful that the current network of surface thermometers could distinguish a change on the order of 0.19 degree from normal year-to-year variations."

Michaels notes that computer models used as the principal justification for international action to reduce carbon dioxide emissions are seriously deficient. In 1990, when the United Nation’s Intergovernmental Panel on Climate Change (IPCC) issued its first Scientific Assessment, "global climate models in use at the time predicted that the globe’s mean temperature should have already risen by 1.3° C to 2.3° C since the major greenhouse emissions began in the late 19th century. The observed warming since the late 19th century is 0.6° C, or about one-third of the predicted warming." The IPCC, in its second full assessment in 1995, acknowledged that "most [climate models] produce a greater mean warming than has been observed to date." The newest models, which fit the observed history more accurately, are consistent with the conclusion that "it’s simply not going to warm as much as the earlier projections had indicated."

Moreover, Michaels points out, "since 1986 the mean temperature of the earth has shown no significant warming, despite popular perceptions to the contrary. Three independent measures -- temperature measured at the earth’s surface, temperature of the lower atmosphere measured by weather balloons, and temperature of the lower atmosphere measured by orbiting satellites -- all show no statistically significant change."

Patrick J. Michaels is a professor of environmental sciences at the University of Virginia and senior fellow in environmental studies at the Cato Institute. He is a member of the IPCC.

Policy Analysis no. 307 (http://www.cato.org/pubs/pas/pa-307es.html)

 May 5, 1998

Congress shouldn’t approve additional funds for the IMF, Cato chairman says
Niskanen tells joint committee most loan recipients "have become loan addicts"

"IMF bailouts are a form of insurance for the foreign and domestic individuals, firms, and banks that had made high-risk investments in the country subject to the crises du jour," Cato Institute chairman William Niskanen told the Congressional Joint Economic Committee today. "Private bankers handled such problems for generations, long before the International Monetary Fund and the World Bank muscled their way into this role with our taxes," he noted, and, when "committing the assets of their own firms, are likely to handle such problems better than do public officials who play this game with other people’s money."

Niskanen, a former member of the Council of Economic Advisers, was one of three respected economists and former government officials discussing the IMF and international economic policy with members of the JEC. The others were former secretary of state and the treasury George Schultz and former Federal Reserve chairman Paul Volcker.

Current efforts to bail out Asian economies "will probably increase the number of similar future crises in these and other countries," Niskanen told the committee. "The historical record is clear: Most of the less-developed nations funded by the IMF have later returned for more funds. Mexico, for example, has had a financial crisis in each of the past four presidential election years." Eighty-four nations have been in debt to the IMF for 10 years or more and 43 nations for 20 years or more. Most such countries "have become loan addicts."

In suggesting that Congress reject the latest request for $18 billion for the IMF, Niskanen complained that the White House "has gone around the world making a series of promises and then asserts that congressional support of these promises is necessary to maintain U.S. leadership. The Clinton administration did not invent this gambit, but it has been especially consistent in using this argument to support its position on trade negotiations, global warming, NATO expansion, Iraq, and now the IMF."

The full text of William Niskanen’s testimony before the Joint Economic Committee can be found at the Cato Institute’s Web site: http://www.cato.org/testimony/ct-wn050598.html.

May 5, 1998

U.S. vulnerable to terror attack with weapons of mass destruction, study says
"Casually interventionist foreign policy" is real culprit in terrorist threat

"Even the weakest terrorist group can cause massive destruction in the homeland of a superpower," warns a new policy analysis from the Cato Institute. "A terrorist attack with weapons of mass destruction-almost impossible to deter, prevent, or mitigate-against a target in the United States could make the World Trade Center bombing, or even the Oklahoma City bombing, seem minor by comparison," according to the study's author, Ivan Eland.

In "Protecting the Homeland: The Best Defense Is to Give No Offense," Eland argues that "the only viable way to reduce the very real threat of such an attack is to reduce U.S. interference in the disputes and conflicts of other nations. Military intervention should be confined to the rare instances in which American vital interests are at stake." And he points out that American post-Cold War interventions in Somalia, Haiti and Bosnia have had "nothing to do with America's national security. Such a casually interventionist foreign policy only provokes hostility from factions or groups within other countries."

Eland provides a detailed overview of the main types of weapons available to terrorists:

"Terrorists and religious cults have an obsession with the United States because of its superpower status and behavior," Eland notes. "To avoid inflaming such groups and nations unnecessarily, the United States should intervene overseas only when its vital interests are at stake."

Policy Analysis no. 306 (http://www.cato.org/pubs/pas/pa-306es.html)

April 29, 1998

Medicare crisis was delayed, not defused, by 1997 reforms, expert says
Program cannot be saved by raising taxes and cutting benefits

Although the Balanced Budget Act of 1997 reformed Medicare and delayed its financial collapse, a new report from the Cato Institute concludes that Medicare remains in critical condition. Author Peter Ferrara argues that "Medicare's problems remain deep and intractable. Even after the 1997 reforms, by the time today's young workers retire, Medicare's current sources of funding will likely be sufficient to finance only 50 percent or less of the promised benefits."

In "The Next Steps for Medicare Reform," Ferrara concludes that Medicare cannot survive without fundamental systemic reform. Otherwise, "U.S. politics over the next two generations will be dominated by battles over draconian tax increases or draconian benefit cuts for Medicare." Ultimately, he argues, successful Medicare reform must take advantage of "the efficiencies, incentives, competition, and productivity of the private sector."

Last year's balanced budget act opened the door to effective Medicare reform, Ferrara says, by allowing retirees to use their Medicare funds to pay for private-sector coverage options such as medical savings accounts, health maintenance organizations, preferred-provider organizations, traditional fee-for-service arrangements, provider service networks and plans sponsored by associations. But he says that several additional steps must be taken as well. Each retiree's portion of Medicare funding should be adjusted for risk, varying by such factors as age, sex and location. And he proposes a critical change that will prevent financial collapse that the total amount of Medicare funds available to all retirees each year be limited to available resources.

Although competition resulting from giving retirees the option of using private-sector alternatives will reduce costs substantially, "Medicare's long-term financial shortfall is so huge that even the resulting cost reductions would not be enough to eliminate the projected future deficits." Thus, Ferrara proposes, workers should be allowed to save and invest the Medicare taxes assessed on them in personal "Health Bank IRA" investment accounts. "These accounts would, by retirement, provide the funds to finance the best private alternatives with no additional burden on retirees," he notes.

These reforms would have effects far more salutary than simply ending the funding crisis and heading off skyrocketing premiums. "Retirees would be able to get better benefits through private-sector alternatives. Retirees would also enjoy greater freedom of choice, power and control over their health and its care," Ferrara concludes.

Policy Analysis no. 305 (http://www.cato.org/pubs/pas/pa-305es.html)

April 27, 1998

Government-industry 'partnerships' waste money and subsidize the rich
79 Silicon Valley execs sign "Declaration of Independence from Corporate Welfare"

Corporate welfare programs worth $65 billion a year "harm U.S. industry in general and Silicon Valley in particular," according to Cypress Semiconductors CEO T. J. Rodgers, in a new Cato Institute Briefing Paper. The appendix to the paper is a "Declaration of Independence" from corporate subsidies, signed by Rodgers and 78 other top executives of Silicon Valley high-tech firms.

In "Silicon Valley Versus Corporate Welfare," Rodgers argues that "technology subsidies to corporations are sold using technobabble to camouflage unjustifiable investments, which typically fall into four categories: subsidizing the rich, competing unfairly with private industry, spending that provides no benefit, and spending that hurts the intended beneficiary."

Many people claim that American subsidy programs are necessary because Japan and Europe subsidize their corporations, but Rodgers notes that "Japan's programs have been consistent losers, [and] Western Europe's socialized economies are among the least healthy on the planet."

Although "many of the subsidies are intended to benefit America's high-technology industries," says Rodgers "the truth is that Silicon Valley firms would be mostly unscathed if they lost all federal subsidies.

Rodgers continues, "Making difficult technology decisions professionally is what Silicon Valley is about. Whenever a dollar is transferred from San Jose to Washington, that dollar's chances of being invested productively diminish greatly." A typical example, Rodgers says, is the NASA program aimed at manufacturing gallium arsenide chips in space. The cost is estimated at $10,000 per wafer, or 10 times that of the most expensive GaAs wafers now available. "Our government has taken several hundred million dollars from American taxpayers to subsidize an exotic technology manufactured in an exotic place for a super-high-tech industry that neither needs nor cares about the investment."

The "Declaration of Independence," signed by Rodgers and his fellow executives, declares, "The high taxes that our company and its employees pay to support the current local-state-federal government tax burden of 35% of GDP hurts our economy more than any possible corporate benefit from government spending. If an independent commission similar to the military base-closing commission identified a fair and substantial government spending cut in the area of so-called 'corporate welfare,' I would support that cut, even if it means funding cuts to my own company."

Cato Briefing Paper no. 37 ( http://www.cato.org/pubs/briefs/bp-037es.html)

April 24, 1998

America's trade deficit is a sign of "strength, not weakness," analyst says
Trade deficits mean more foreign investments and greater purchasing power

"No aspect of international trade is talked about more and understood less than America's perennial trade deficit," argues Daniel T. Griswold in a new study from the Cato Institute. In "America's Maligned and Misunderstood Trade Deficit," Griswold demolishes four myths of the trade deficit and demonstrates that the trade deficit is linked to many aspects of a healthy economy, such as rising employment, consumer spending, and manufacturing and production.

Myth 1: U.S. exporters face unfair trade barriers. A careful analysis of trade statistics shows that there is no relationship between protectionist barriers and trade deficits. Canada and Mexico, which are quite open to U.S. exports, are among the countries with which the United States has the largest bilateral trade deficits, while protectionist Brazil supplies America's third largest bilateral surplus.

Myth 2: America is losing its competitiveness. America has now enjoyed seven consecutive years of noninflationary growth coupled with historically large and rising trade deficits. "Meanwhile," Griswold notes, "Japan and Germany, the two export-driven juggernauts that were supposed to eclipse the United States in the 1990s, have struggled with slow growth and rising unemployment."

Myth 3: Trade deficits mean lost jobs. "In reality, larger trade deficits correlate positively with falling unemployment." Griswold demonstrates the close relationship between foreign investment and domestic employment, noting that "the unemployment rate fell in all but 2 of the most recent 14 years in which the trade deficit grew."

Myth 4: The trade deficit is a drag on economic growth. In fact, Griswold argues, without a trade deficit we would have to finance domestic investment exclusively from domestic savings, which would force up interest rates. "Attempts to reduce the trade deficit through

Trade Policy Analysis No. 2 (http://www.freetrade.org/pubs/pas/tpa-002.html)

April 23, 1998

Billion dollar United States "debt" to the United Nations doesn't exist
$11 billion in massive "voluntary" U.S. assistance has never been credited

"Claims that the United States owes the United Nations more than $1 billion are false," according to a new Policy Analysis from the Cato Institute. "Even the notion that the United States owes money in the sense of moral obligation is fallacious. It ignores the military and other assistance that the Clinton administration has provided the UN and for which the United States has not been properly credited or reimbursed. Over the past five years, that assistance has amounted to at least $11 billion, and perhaps as much as $15 billion."

In "The United Nations Debt: Who Owes Whom?" author and journalist Cliff Kincaid points out that the United Nations cannot legally compel payments from any nation. As former assistant secretary of state for international organizations John Bolton has observed, "The decision on whether and what amounts the United States should pay" to the United Nations is ultimately a political decision for Congress. Efforts by key congressional leaders to withhold payments to the United Nations in order to force it to undertake reforms have been thwarted by the Clinton administration, which has "redirected funds appropriated by Congress for functions of the U.S. military and other government agencies to support the United Nations."

Kincaid cites remarks by then-acting assistant secretary of state George Ward, who told the United Nations Association several years ago, "In 1994, when we were assessed $1.2 billion for peacekeeping, our nonassessed but voluntary contributions to peacekeeping-which almost all came from Defense Department resources-amounted to $1.5 billion."

"It is not precisely clear on what legal or constitutional basis, if any, the administration makes 'voluntary' contributions to UN military activities and then fails to seek reimbursement or credit for them," Kincaid notes. But by sending tens of thousands of U.S. soldiers wearing green (U.S. Army) helmets rather than blue (UN) helmets to implement UN Security Council resolutions, the administration provides "massive subsidies for UN operations, which dwarf regular payments to the world body."

The Cato study describes the efforts of Rep. Roscoe Bartlett (R-Md.) to "force a full accounting of where and how the money has been spent and then allow Congress to decide if those expenditures are truly in the national interest." In short, the United Nations does not have an automatic claim on the U.S. Treasury.

Policy Analysis no. 304 (http://www.cato.org/pubs/pas/pa-304es.html)

April 22, 1998

Global warming? Maybe. Global warming apocalypse? Certainly not.
An economist's view of the past and future impact of climate on human well-being

Environmentalists who are predicting disaster due to global warming fail to take into account that "history and research support the proposition that a warmer climate is beneficial. Past warm periods have seen dramatic improvements in civilization and human well-being," says economist Thomas Gale Moore in a new book published today by the Cato Institute. Moore, who was a member of the Council of Economic Advisers from 1985 to 1989, is now a senior fellow at the Hoover Institution at Stanford University and an adjunct scholar at the Cato Institute.

In Climate of Fear: Why We Shouldn't Worry about Global Warming, Moore notes that "evidence for the claim that the earth has grown warmer is shaky: the theory is weak and the models on which the conclusions are based cannot even replicate the current climate." Nevertheless, he argues that if any warming does occur, historical experience suggests that the results will be anything but catastrophic.

Moore conducts a careful survey of the historical record and finds that "mankind has benefited and will continue to benefit from an upward tick in the thermometer." During the Climatic Optimum of 8,000 to 3,000 years ago for example, global temperatures were "much warmer than today, perhaps 4 degrees F hotter, about the average of the various predictions for global warming after a doubling of carbon dioxide. Yet "people built the first cities and established city states and then empires . . . trade flourished, writing was invented, and the human population exploded." On the other hand, when the climate turned markedly cooler, as it did about 600 A.D. in Europe, "progress, civilization and trade came to a standstill."

In today's world, "most modern industries are relatively immune to weather. Climate affects principally agriculture, forestry, and fishing, which together constitute less than 2 percent of U.S. gross domestic product," Moore observes. But warming is hardly a threat to those industries. "Warm climates have longer growing seasons and higher productivity. Climatologists predict that a warmer world would enjoy more rainfall. The net result of warming and enhanced precipitation would be to boost farm output." In short, Moore concludes, "global warming would, in all probability, produce gains for most Americans. Somewhat higher temperatures would improve health, cut death rates, facilitate transportation, reduce heating bills, and help satisfy people's taste for warm weather. From an American point of view, spending anything to reduce the emissions of greenhouse gases is unwarranted."

To purchase this book, go to Cato's Online Store

April 20, 1998

Many regulatory functions should be handled by independent third parties
Better alternative than "reinventing government," which has increased regulation

"The federal government should consider transferring regulatory functions such as certification, inspection, monitoring, and product testing to independent third parties," according to a new study from the Cato Institute. Often overlooked is the fact that "much regulation in the American economy is private, produces and enforced by independent parties or trade associations." Shifting regulatory roles now assigned to government to independent agencies would "eliminate the existing command-and-control system and replace it with a flexible, responsive, and evolutionary process."

In "Private Regulation: A Real Alternative for Regulatory Reform," author Yesim Yilmaz also examines the failure of attempts by the Clinton administration to reduce regulatory burdens by "reinventing government." For example, the Environmental Protection Agency claimed to have eliminated 1,292 pages of regulations in the summer of 1996, despite the fact that its 14,690 pages of regulations were an increase of more than 300 pages over the previous year.

Moreover, the direct, "on-budget costs of federal regulation are only the tip of the iceberg," according to Yilmaz. While the annual cost of running federal regulatory agencies is about $17 billion, "traceable costs of regulations, including agency maintenance, compliance, and paperwork add up to around $710 billion per year," and that doesn’t even include hidden costs or "deadweight losses."

"It is a mistake to assume that ‘regulation’ necessarily involves government," she points out. "Much of the regulation in the American economy is entirely private, produced and enforced by trade associations or independent third parties." One well-known example is Underwriters Laboratories, which "enforces high standards for product safety without government regulation" and has at least a dozen competitors. For the kosher and halal food industries, more than 100 independent and nonprofit agencies certify compliance of food production with Jewish and Islamic dietary laws.

"Any regulatory reform that would reduce the burden of regulation while keeping America safe and prosperous must heavily depend on market incentives," Yilmaz concludes. "Private regulation by independent third parties is a real alternative that could serve as a model for such reform." Yesim Yilmaz is a Ph.D. candidate at George Mason University and a research fellow at the Center for Market Processes.

Policy Analysis no. 303 (http://www.cato.org/pubs/pas/pa-303es.html)

April 15, 1998

As you struggle to file your tax return today, ponder this: it's worse than you think
Why have real wages been stagnant for 20 years? Hidden taxes have absorbed pay

"More than one-quarter of every dollar employers pay for average manufacturing wage workers goes to the government, rather than to employees in take-home pay," according to a new Cato Policy Analysis. The government's bite totals $4.10 per hour for such a worker, and "while much of that amount is itemized on the employee's pay stub, almost half of it is not." Instead, it is collected "indirectly through a mind-numbing assortment of taxes, fees and levies."

In "The Hidden Burden of Taxation: How the Government Reduces Take-Home Pay," Cato fiscal policy analyst Dean Stansel notes that "one of the most confounding economic trends in the United States during the past 20 years has been the relative stagnation of workers' real wages." Few people realize that one of the primary reasons for the stagnation is that "taxes and government mandates on employers have been expanding steadily, crowding out the amount workers can put in their pockets and spend as they choose."

"The irony is that while take-home pay is flat, total employer compensation costs have been rising. There is a growing 'tax wedge' between how much employers pay and how much their employees receive," Stansel explains. Instead of being able to give workers extra compensation, employers are forced to pay the employer share of the payroll tax, unemployment insurance taxes, worker's compensation and the skyrocketing cost of complying with government regulations and "our hopelessly complex tax code."

Many of those costs "cannot be found anywhere on workers' pay stubs," Stansel notes. Those hidden taxes "mask the true cost of government, leading Americans to believe that publicly provided services cost them less than they really do. Those hidden costs thereby distort the political process and create a bias in favor of expanding government," making it easier for politicians to expand the size and scope of government.

"A sound tax system should make all taxes visible to the electorate, so they can make rational decisions about whether they are getting their money's worth," Stansel says. Replacing the federal income and payroll taxes with a national sales tax would do just that. "Short of such fundamental tax reform, repealing withholding and encouraging employers to adopt the Right to Know Payroll Form would make the tax burden more visible," Stansel concludes.

Policy Analysis no. 302 (http://www.cato.org/pubs/pas/pa-302es.html)

April 13, 1998

'Electric Avenue' approach to utility deregulation misses most important target
Real source of monopoly power is local exclusive franchises, not transmission lines

"Virtually all industry observers" are convinced "that the business of generating electricity is largely competitive and that major reforms are now necessary," but the centerpiece of proposed regulatory changes is fundamentally flawed, according to a new Cato Institute Policy Analysis on electricity deregulation.

"The most popular reform idea is to force the utility companies to turn their wires into something akin to public streets," writes Clyde Wayne Crews Jr., a fellow in regulatory studies at the Competitive Enterprise Institute. "Any power generator would have a right to use the utilities' wires (known in the trade as a 'grid') to deliver electricity to its consumers. Public utilities would, for the most part, be confined to the role of delivering power produced by someone else. That idea, variously termed 'mandatory open access,' 'customer choice,' or 'retail wheeling,' has become synonymous with electricity deregulation."

The intentions are good, but the concept is flawed. Mandatory open access violates the property rights of electric utilities, dampens incentives to innovate, promises years of litigation and imposes a complicated scheme of "managed competition" on an industry that should be freed of regulatory micromangement, Crews argues. "Although the requirement that utilities open their lines is seemingly expedient, the true free-market alternative would eliminate today's exclusive territorial franchises and allow competitors to develop parallel distribution, provide on-site power, and negotiate voluntary agreements for access to the existing transmission and distribution system."

The Cato study finds that "the principles that should guide the restructuring of the electricity industry are the sanctity of the property rights of both producers and consumers and the integrity of the market that emerges from those property rights. Producers should have an unfettered right to sell to anyone, and consumers should have the right to buy from anyone, but neither has the right to use the resources of others without consent."

"Simply eliminating today's exclusive territorial franchises would allow market forces to sort out the best form of industry organization," Crews concludes.

Policy Analysis no. 301 ( http://www.cato.org/pubs/pas/pa-301es.html)

April 9, 1998

Cato study finds that 1872 mining law is an efficient method of privatization
Minor changes, not major overhaul, are needed

Critics of the 1872 Mining Law, which governs metal mining on federal lands, contend that it is an environmentally destructive giveaway to corporate mining interests. In a new study from the Cato Institute, however, Richard Gordon and Peter VanDoren conclude that the 1872 Mining Law needs minor market-oriented reform but not major alterations.

In "Two Cheers for the 1872 Mining Law," Gordon and VanDoren argue that the $2.50 per acre price to patent mining claims, set by the 1872 law is not, as critics of the law allege, underpricing that serves as corporate welfare. They argue that the purchase of such lands, when adjusted for risk, creates few if any excess profits, because a vast majority of mines are unprofitable. The purchase of mining claims "is best viewed as a lottery. . . . The ticket price paid by the winner tells us nothing about whether the lottery operator should raise or lower ticket prices in general."

The authors also take issue with the calculations of the Mineral Policy Center, which purports to show that $231 billion in metals has been given away to corporate interests since the passage of the 1872 law. Gordon and VanDoren show that the MPC’s calculations are "severely flawed." In fact, MPC’s report "clearly uses projected receipts without deducting projected costs and invalidly uses those values as a measure of the giveaway." They also note that the MPC makes a more general economic error: even if the initial, 19th-century buyers got a good deal, subsequent purchasers would have bought the land at market values shorn of big profits.

Gordon, professor emeritus at the Pennsylvania State University, and VanDoren, assistant director of environmental studies at Cato, conclude that future mining claims should be assigned by auction. Existing claims should remain unaltered, however, since their current holders likely paid market value for them. And the authors find that public ownership of land is at the root of many problems in natural resource policy: "We would never accept public ownership as a solution to whatever market failures existed in food markets. We also should not accept public ownership in land markets."

Policy Analysis no. 300 (http://www.cato.org/pubs/pas/pa-300es.html)

April 2, 1998

Fleet of 50 nuclear submarines can't be justified in post-Cold War world
Production should be consolidated at Newport News, Cato study says

America's nuclear attack submarine force remains too large, and the Navy's plans to push ahead with production of new subs is a waste of taxpayer dollars, according to a new study published today by the Cato Institute.

In Cato Foreign Policy Briefing no. 47, "Subtract Unneeded Nuclear Attack Submarines from the Fleet," director of defense policy studies Ivan Eland finds that "although the [Navy's] planned force of 50 submarines is half the size of the force during the Cold War, even that number is much too high." To justify keeping more submarines than are really needed, "the Navy began assigning 2 vessels to protect each of the 12 aircraft carrier battle groups," a mission that is "unnecessary and impractical."

The Navy is also pushing ahead with plans to produce a new line of 30 very quiet submarines, known as NSSNs, but "the recent elimination of U.S. attack submarines' outdated mission to hunt Russian ballistic missile submarines in the Arctic makes the requirement for very quiet submarines obsolete," Eland notes. Moreover, finishing construction of three new Seawolf subs and beginning production of the NSSN will require decommissioning Los Angeles-class subs well before the end of their lifetimes. "It is dubious logic for the United States to be scrapping usable high-quality nuclear attack submarines and replacing them with new ones when the U.S. Navy already has widely recognized undersea superiority," Eland says.

"A foreign policy that used military force sparingly and only as a last resort would allow the United States to reduce the number of submarines required for fighting wars. A smaller fleet of about 25 submarines . . . would be more than sufficient to fight one major theater war" and to serve as "a hedge against the improbable reconstitution of the Russian submarine fleet."

The Navy argues that continued submarine production is needed to protect the U.S. industrial base that builds the subs. But "the problem of safeguarding the ability to design and produce submarines in the long term can be solved with a needed downsizing of the nuclear shipbuilding industry," Eland points out. The author, who was an analyst for the Congressional Budget Office before joining Cato, says that "consolidating all nuclear shipbuilding-both carriers and submarines-at Newport News would save billions of dollars because having only one producer would provide maximum learning and economies of scale with minimum overhead."

"If the military requirement is reduced to a 25-submarine force and the justification of producing submarines to maintain the industrial base is eliminated, no ships need be built until about 2010," with the hiatus allowing the Navy to devote its efforts to developing better technology, Eland concludes.

Foreign Policy Briefing no. 47 (http://www.cato.org/pubs/fpbriefs/fpb-047es.html)

April 1, 1998

Will today’s "Big Bang" in Japan turn out to be a whimper?
Cato Institute joins Keidanren in Tokyo for conference on deregulation

"Today’s ‘Big Bang’ in Japan, the start of deregulation of the Japanese financial services industry, could—and should—be a major turning point for Asia’s largest and most important economy," according to Brink Lindsey, director of the Cato Institute’s Center for Trade Policy Studies. "But its ultimate success will depend on how it is implemented. Our joint conference with the Keidanren in Tokyo next Monday, following the launch of the ‘Big Bang’ by just a few days, will explore whether there’s a real commitment to deregulation."

The joint Cato-Keidanren conference, "Deregulation in the Global Marketplace: Challenges for Japan and the United States in the 21st Century," will be held at the Keidanren’s headquarters building in Tokyo on Monday, April 6 from 9 a.m. to 4:30 p.m. Speakers include top business leaders, academics and think tank experts from both countries. Program topics include "The Role of Government in the 21st Century," "Reforming Tax Policy," "Trade Policy: Breaking the Bilateral Mold," "Challenges to Capitalism in the 21st Century," "The ‘Big Bang’ of Financial Market Reform," "Pension Reform and the Savings Imbalance," and "Japan-U.S. Economic Relations in the New Global Economy."

Pubic pension reform, a challenge that faces both Japan and the United States, will be a major topic at the conference, coming just a day before President Clinton hosts the first in a series of public forums on Social Security in Kansas City on April 7. Demographic trends are driving both the Japanese and American systems toward insolvency. A recent report from the Japanese Ministry of Health and Welfare stated that if no changes are made, Japanese children aged 10 or younger today will end up paying 10 million yen more into the Japanese system than they will receive in benefits. In the U.S., young people now entering the work force will get back less from Social Security when they retire than they paid in.

The man who successfully privatized the public pension system in Chile in 1980, José Piñera, will explain to the Tokyo audience how a similar approach would transform both the retirement systems and the economies of Japan and the United States Piñera is co-chairman of the Cato Institute Project on Social Security Privatization, which has led the effort to promote privatization of the U.S. Social Security system.