Cato Policy Report, May/June 1999
Vol. 21, No. 3
University of Chicago economist Randy Kroszner discussed banking regulation at Cato’s 1998 monetary conference and in a new Cato paper.
The time has come to reform antiquated federal laws to permit “commercial banks to engage in a wide variety of financial services and to permit other financial services firms to engage in commercial banking,” writes University of Chicago professor Randall S. Kroszner in a new Cato study. In “Bank Regulation: Will Regulators Catch Up with the Market?” (Briefing Paper no. 45), Kroszner argues that “it is imperative that the regulatory system that has governed banking with little change since the 1930s be modernized.” Repeated congressional attempts at fundamental reform in each of the past dozen years have failed, Kroszner notes. As the proposed merger between Citibank and the Travelers Group reveals, “the markets simply cannot wait any longer for legislative reform and are taking deregulation into their own hands.” Kroszner also argues for the repeal of the Glass-Steagall Act of 1933 and suggests that no new obstacles to the consolidation and rationalization of the financial services industry should be imposed. Today’s investors “would not be harmed by an end to Glass-Steagall and could benefit from the convenience of one-stop shopping for financial services.”
Benefits of Kyoto Not Worth the Costs
The models predicting the cost of implementing the Kyoto Protocol should be “discounted,” says Peter VanDoren, the editor of Regulation magazine, in a new Cato study. Because the various economic models predicting the cost of the treaty use different assumptions about the way in which electricity will be generated in the United States, their conclusions are bound to vary, VanDoren writes in “The Costs of Reducing Carbon Emissions: An Examination of Administration Forecasts” (Briefing Paper no. 44). “If past experience is any guide, the predictions should be discounted. The use of large-scale models to predict the future costs of policy options does not have a very good track record,” he says. Regardless of which model is correct, VanDoren writes, the benefits are not worth the costs. “The almost totally symbolic benefits of the Kyoto Protocol are not worth the real costs it would create,” concludes VanDoren.
Build One New Fighter, Not Three
The Pentagon should cancel two of its fighter aircraft programs (the F-18E/F and the F-22) and concentrate its efforts on the more futuristic Joint Strike Fighter (JSF), argues Williamson Murray in “Hard Choices: Fighter Procurement in the Next Century” (Policy Analysis no. 334). Murray, professor emeritus at Ohio State University, says that the expensive programs (more than $300 billion) cannot be justified in light of the reduced post–Cold War threat environment. “In the current budgetary environment, there are no easy choices among weapons systems.” But trying to avoid hard choices among fighter programs, “may well have a disastrous impact on the ability of the United States to defend its vital interests in the next century.” Murray contends that a realistic assessment of the threat the United States will face over the next few decades is missing. “A real peer competitor seems a remote possibility for at least the next three decades and perhaps for as long as half a century. It is unlikely that any enemies that U.S. forces might confront will challenge the United States directly for control of the air.”
Dollarization for Argentina
Steve H. Hanke discusses Latin American monetary policy at a Cato Policy Forum.
Administrative Costs of Social Security Privatization
The latest criticism of privatized Social Security is that the administrative costs will be too high. In “Administration Costs and the Relative Efficiency of Public and Private Social Security Systems” (Social Security Paper no. 15), Robert Genetski says that under a privatized Social Security system, “administrative and money management expenses for a system of individual accounts could amount to roughly $35–$55 per worker for the first year,” a cost that is “slightly higher than that of the current government-run Social Security program.” However, Genetski notes, in exchange for slightly greater administrative costs, “workers in a privatized system would receive a greater rate of return on their investment and better and more secure retirement benefits.” Genetski, senior managing director of Chicago Capital, Inc., and former chief economist at Chicago’s Harris Bank, cautions that administrative costs will be influenced significantly by the way the new system is set up. To minimize those costs, he says, Congress should avoid limiting the size of accounts by moving to partial rather than full privatization and not pile on extensive new reporting requirements or other rules that would push up costs.
Aid to Russia Ineffective
U.S. aid to promote market reforms in Russia and Central and Eastern European countries since the collapse of the Soviet Union has been largely ineffective, writes Janine R. Wedel in a new Cato study, “Foreign Aid Failures in Russia and the Former Soviet Bloc: U.S. Aid Doesn’t Produce Market Reforms” (Policy Analysis no. 338). Wedel argues that “rather than help to dissipate the legacies of communism, U.S. economic aid has in some cases instead reinforced the legacies of suspicion, central planning, and political control over economic decisions.” She provides a detailed examination of the role played by U.S.-based consultants who were dispatched to help promote privatization and market reform. She argues that aid often goes to Western consultants whose advice is redundant or useless. For example, in Eastern Europe, “The majority of the consultants were ‘fly-in, fly-out’ advisers who visited the region for a short time, developed weak links with recipients, and knew little of the countries they were trying to help.” Wedel concludes that in Central and Eastern Europe, “aid has generated some cushy jobs for Western consultants but, in terms of development, has added little to what private, voluntary exchange could provide on its own.”
This article originally appeared in the May/June 1999 edition of Cato Policy Report.