Cato Institute
1000 Massachusetts Ave, NW
Washington, DC 20001-5403
Phone (202) 842 0200
Fax (202) 842 3490
 Contact Us
Support Cato

Cato Policy Report, November/December 1999
Vol. 21, No. 6

Cato Studies:

Microsoft Finds Itself in “Orwellian World”

The antitrust case brought by the U.S. Department of Justice against Microsoft is “the most important and manifestly the least justified antitrust crusade of our generation,” writes Robert A. Levy in “Microsoft Redux: Anatomy of a Baseless Lawsuit” (Policy Analysis no. 352). In examining the DOJ’s twisted logic, Levy points out that we have entered “the postmodern world of high-tech antitrust where big is once again bad, lofty profit margins are a wake-up call to government regulators, executives are brought to heel for aggressively worded e-mails, pricing too high is monopolistic, pricing too low is predatory, propping up politically wired competitors is the surreptitious aim, bundling products that consumers want is illegal, and successful companies are rewarded by dismemberment. That’s the Orwellian world in which Microsoft finds itself.” The fundamental questions that must be asked in the case against Microsoft, Levy says, are “whether Microsoft has a monopoly, whether it’s misusing its market power, and whether government can find a cure that isn’t worse than the disease. The answers are no, no, no.” Levy, senior fellow in constitutional studies at Cato, points out that “the market moves faster than antitrust could ever move. The assumption of would-be regulators—that inefficiencies, especially in high-tech markets, can lock a company into a position from which it can’t be unseated—is a complete myth. Consumers rule, not producers.” Microsoft faces stiff competition on many fronts, especially from Web-based software, which has already overlaid, and may eventually displace, major parts of Windows. “Microsoft has zero leverage in a world where applications are written so that any browser can run them and any operating system can access them,” Levy notes.

Workers Should Welcome Imports
Imports pose little risk to job security for U.S. workers, writes Dan Griswold in the new Cato Institute study “Trade, Jobs, and Manufacturing: Why (Almost All) U.S. Workers Should Welcome Imports” (Trade Briefing Paper no. 6). Griswold, associate director of Cato’s Center for Trade Policy Studies, debunks claims about how workers are threatened by trade, pointing out that “the vast majority of Americans work in sectors of the economy that do not face significant import competition.” Griswold finds that trade is not the most significant cause of job displacement. “Technology and other nontrade factors account for most workers displaced from their jobs each year,” Griswold writes. He concludes by warning that “presidential and congressional candidates who talk about ‘saving jobs’ by raising barriers to free trade are really talking about dragging down the real incomes of the vast majority of Americans for the temporary benefit of a small fraction of American workers.”

Chile’s Private Pension System Turns 18
Chile’s privatized pension system is “an astounding success,” notes L. Jacobo Rodríguez in “Chile’s Private Pension System at 18: Its Current State and Future Challenges” (Social Security Paper no. 17). Established in 1981 to replace the government-run pay-as-you-go retirement program, Chile’s private system “has allowed workers to retire with better and more secure pensions” and enjoy an average real rate of return of approximately 11.3 percent per year. More than 95 percent of Chilean workers have their own pension savings accounts. The new system has allowed Chile and other Latin American countries that have followed the Chilean example to defuse the “fiscal time bomb” that is ticking for countries with pay-as-you-go systems, as fewer and fewer workers have to pay for the retirement benefits of more and more retirees. Rodríguez traces the development and the implementation of the current private system and examines complaints from some U.S. critics who argue, among other things, that the system’s administrative costs are high. The study recommends changes that would improve the performance of Chile’s system, including steps to liberalize the commission structure, allow banks and other financial institutions to enter the industry, and let pension fund management companies manage more than one fund.

Antidumping Law: Rhetoric versus Reality
The U.S. antidumping law “all too frequently punishes normal marketplace behavior that has nothing to do with ‘unfair trade’ under any plausible definition of that term,” according to “The U.S. Antidumping Law: Rhetoric versus Reality” (Trade Policy Analysis no. 7). Brink Lindsey, director of Cato’s Center for Trade Policy Studies, argues that the current law “does not reliably identify either price discrimination or below-cost sales.” Lindsey reviewed all Department of Commerce final determinations through the end of 1998 in original antidumping investigations initiated since January 1, 1995—a total of 141 company-specific dumping findings in 49 different cases. Lindsey says that the evidence shows clearly that “there is a disconnect between the rhetoric of antidumping supporters and the reality of antidumping practice.” Lindsey proposes specific reforms that would eliminate the worst abuses under the current law. In its present form, the antidumping law cannot be justified as ensuring a “level playing field” for American companies and their foreign competitors. “On the contrary,” Lindsey concludes, “the law actively discriminates against foreign goods by subjecting them to requirements not applicable to American products.”

Feeling a Draft?
Worry about recruitment and retention problems in the military has led to recent calls for a return to a draft. But Doug Bandow, senior fellow at the Cato Institute, concludes in a new Cato study that conscription not only would fail to improve retention of skilled personnel; it would be “unfair and unjust—sacrificing the very constitutional liberties that the military is charged to defend.” In “Fixing What Ain’t Broke: The Renewed Call for Conscription” (Policy Analysis no. 351), Bandow contends that although advocates of conscription have usually based their arguments for a draft on national survival, a draft “certainly isn’t needed now. The United States is at peace. No major war threatens. Washington stands astride the globe as a colossus—its enemies are pathetic and its allies are secure.” The military is having trouble retaining skilled soldiers, such as pilots and computer technicians, but a major reason for retention problems is that frequent and frivolous deployments are driving skilled personnel away. If the United States returned to a foreign policy “appropriate for a republic rather than an empire,” the All-Volunteer Force would have little difficulty attracting qualified soldiers and would save taxpayers some money as well, Bandow argues. The AVF “is providing the best military personnel that America has ever had, [and] for that reason, few leaders in the armed services would like to return to conscription,” Bandow explains.

Police or Paramilitaries?
“Over the past 20 years, Congress has encouraged the U.S. military to supply intelligence, equipment, and training to civilian police,” and the result has been the development of “a culture of militarism in American law enforcement,” writes Diane Cecilia Weber in “Warrior Cops: The Ominous Growth of Paramilitarism in American Police Departments” (Cato Briefing Paper no. 50). Weber notes that Congress opened the door to “a dramatic expansion of the role of the military in law enforcement activity” in 1981, when it passed the Military Cooperation with Law Enforcement Officials Act, which amended a post–Civil War law designed to keep military forces out of domestic law enforcement work and for the first time authorized the Pentagon to “assist” civilian police in enforcement of drug laws. Thus began a “dramatic expansion of the role of the military in law enforcement activity,” Weber reports. The Pentagon has been equipping police departments with M-16s, armored personnel carriers, and grenade launchers. In all, the Department of Defense issued 1.2 million pieces of military hardware to police departments between 1995 and 1997. Police paramilitary units train with active-duty Army Rangers and Navy SEALs. “The sharing of training and technology is producing a shared mindset,” Weber observes. “Confusing the police function with the military function can have dangerous consequences.”

Export Controls Can’t Stop Cryptography
Encryption technology, which allows people using electronic networks to ensure that the messages they send remain private, cannot—and should not—be controlled by government interference, writes Arnold G. Reinhold in a new Cato paper “Strong Cryptography: The Global Tide of Change” (Cato Briefing Paper no. 51). Reinhold, coauthor of the popular books E-Mail for Dummies and The Internet for Dummies Quick Reference, argues that “it is time to recognize the inevitability of strong, nonrecoverable cryptography and take steps to maximize that technology’s benefits to society and deal realistically with its less desirable attributes.” Reinhold notes that the government has long tried to control encryption technology to preserve its ability to intercept criminal communications. “Such claims usually invoke a troika of evils—drug dealers, terrorists, and child pornographers—though decades of wiretapping have not halted those crimes,” he writes. But cryptographic technology simply cannot be stopped. “If any major governments, terrorist organizations, or drug cartels are not now using strong cryptography, it is not because of lack of availability or lack of reliable suppliers. There are many firms overseas that are willing to provide cryptographic software.”

Unintended Consequences of the Fed’s LTCM Bailout
The Federal Reserve’s bailout of Long-Term Capital Management, a well-known hedge fund, was misguided and unnecessary. The bailout set the stage for trouble in the future, writes Kevin Dowd in a Cato study published on the first anniversary of the bailout. In “Too Big to Fail: Long-Term Capital Management and the Federal Reserve” (Cato Briefing Paper no. 52), Dowd notes that although the intervention did prevent LTCM’s demise, there have been many unintended negative effects: “It implies a major open-ended extension of Federal Reserve responsibilities, without any congressional mandate; [and] it implies a return to the discredited doctrine that the Fed should prevent the failure of large financial firms, which encourages irresponsible risk taking.” Dowd, professor of economics at the University of Sheffield and adjunct scholar at the Cato Institute, argues that “letting LTCM fail might well have had a salutary effect on financial markets: it would have sent a strong and convincing signal that no financial firm—however big—could expect to be bailed out from the consequences of its own mismanagement.”

Aid to Dependent Weapons Manufacturers
U.S. weapons suppliers get $7.9 billion a year in federal government subsidies that are tucked away in the defense and foreign aid budgets, notes William D. Hartung in a new Cato Institute study, “Corporate Welfare for Weapons Makers: The Hidden Costs of Spending on Defense and Foreign Aid” (Policy Analysis no. 350). This corporate welfare takes many forms, including “taxpayer-backed loans, grants, and government protocol activities that help U.S. weapons makers sell their products to foreign customers.” Hartung, a fellow at the World Policy Institute, argues that both political parties now appear ready to increase military spending in fiscal year 2000. But who will benefit? “Will it be the men and women of our armed forces, as President Clinton and Republican congressional leaders have claimed? Or will it be such weapons-making conglomerates as Raytheon, Boeing, and Lockheed Martin?” Corporate welfare for arms makers gets little public scrutiny because of the way it’s put in the budget, Hartung writes. “The U.S. government supplies arms export subsidies through various programs administered by separate agencies. Those subsidies are frequently listed under innocuous budget titles that don’t seem to have anything to do with weapons exports: excess defense articles, emergency drawdowns, and economic support funds, for example. That budgetary sleight of hand has made it difficult to keep track of U.S. arms export subsidies, much less reduce them.” In fact, he adds, of the $7.9 billion in U.S. arms export subsidies, just $1.2 billion comes from the Pentagon.

Bailing Out Creditors and Debtors Creates Economic Disorder
“A dysfunctional relationship has developed between lenders and borrowers in international finance,” and the International Monetary Fund is part of the problem, writes Ian Vásquez, director of the Cato Project on Global Economic Liberty, in “Repairing the Lender-Borrower Relationship in International Finance” (Foreign Policy Briefing no. 54). According to Vásquez, “Governments have gotten their countries into trouble with their creditors for hundreds of years, and periodic problems with paying back loans will surely continue to be a feature of global finance well into the future.” But he adds that current attempts to shield creditors and debtor nations from economic realities, largely the result of IMF efforts, create disorder and prolong the process of crisis resolution. Creditors should take losses during financial crises, and the IMF should not try to prevent countries from defaulting. Direct bargaining between creditors and debtors would reduce moral hazard and lead to faster debt renegotiations.

This article originally appeared in the November/December 1999 edition of Cato Policy Report.