April 9, 2007 8:06PM

IBD Argues Against Back‐​Door Capital Gains Tax Hike

With the support of some Republicans, revenue‐​hungry politicians are contemplating a tax hike on the “private equity” industry. These firms help ensure the efficient allocation of capital. And as Investor’s Business Daily explains, part of their reward for successful investing is a share of the capital gain. In an ideal tax system, there is no capital gains tax. Investments, after all, are made with after‐​tax dollars. It certainly would be a mistake, therefore, to move in the other direction by more than doubling the rate:

With the Sarbanes‐​Oxley regulatory regime making life miserable for many public companies, a number of troubled firms have innovatively turned to private equity to better their fortunes — or even save themselves. …So why do prominent members of both parties in Congress, and even the Bush administration’s Justice Department, seem poised to declare war on private equity? …It’s not surprising that Democrat Barney Frank, chairman of the House Financial Services Committee, plans hearings on private equity. More alarming, Charles Grassley, ranking Republican on the Senate Finance Committee, is considering joining that panel’s Democratic chairman, Max Baucus of Montana, in pounding the PE industry with a massive tax increase. Private equity firms usually take a 20% profit share, or “carry,” on their complex deals. Under current law, the carry is subject to the 15% long‐​term capital gains tax. Grassley wants it taxed at the 35% rate for ordinary income. The New York Times has hailed this “Grassley Tax” on jobs and capital as the first step toward a general capital gains tax hike — a surefire means of pulling the rug out from under the vibrant economy. …Congress will get just $5 billion to $7 billion in annual revenues from the Grassley Tax — hardly worth its ruinous economic costs. …Does the senior senator from Iowa, who likes to tout himself as a tax cutter, really want his epitaph to end up being: “Sen. Chuck Grassley, R‑France”?

April 9, 2007 6:53PM

It’s the System, Comrade

In response to my recent Washington Post piece criticizing government‐​imposed curricula and standards, an ed prof. just wrote to say: “Yes, but.…”

His objection was that he did not see the need for market forces to drive excellence in education, citing a consortium of public schools in the Chicago suburbs as an example of high quality within the current monopoly system.

This not only misses my point, it inadvertently proves it.

My point is not that pockets of quality and thrift are impossible within a monopoly system, but that those pockets generally remain isolated and transitory. Monopolies lack a mechanism by which excellence is automatically and routinely encouraged, identified, disseminated and perpetuated. That mechanism is what markets provide, and is why, as I wrote in the WaPo piece, iPods have gone from 5 to 80 gigabytes, and televisions from 4″ black and white tubes to 4′ color panels.

While a monopoly school system can certainly have bright spots, they tend to be isolated and transitory. Brilliant government school teachers are at best given a plaque, and at worst driven out of the system (as happened to Jaime Escalante). Pointing to isolated public school successes from decades past — successes that were not replicated elsewhere, not expanded, and usually not even sustained for more than a generation — is proof that our government monopoly lacks the market’s excellence engine.

In education markets, like the Asian tutoring industry, top teachers are superstars who get to design curricula for thousands or even millions of students and train scores or hundreds of other teachers to use their effective methods. Quality providers expand and are emulated by competitors, and there is a powerful incentive for meaningful innovation.

One teacher in Korea’s private tutoring sector made $2 million last year because his web‐​based employer has profit sharing and he’s brilliant at what he does, so he gets tons of students. That’s what should have happened to Escalante. That’s the sort of success that should greet excellence in education at all levels. It doesn’t because we don’t have a market.

April 9, 2007 3:00PM

Enemy of the People!

Prof. Walter F. Murphy’s Letter, originally published on Mark Graber’s blog, 3/7/07:

On 1 March 07, I was scheduled to fly on American Airlines to Newark, NJ, to attend an academic conference at Princeton University, designed to focus on my latest scholarly book, Constitutional Democracy, published by Johns Hopkins University Press this past Thanksgiving.

When I tried to use the curb‐​side check in at the Sunport, I was denied a boarding pass because I was on the Terrorist Watch list. I was instructed to go inside and talk to a clerk. At this point, I should note that I am not only the McCormick Professor of Jurisprudence (emeritus) but also a retired Marine colonel. I fought in the Korean War as a young lieutenant, was wounded, and decorated for heroism. I remained a professional soldier for more than five years and then accepted a commission as a reserve office, serving for an additional 19 years.

I presented my credentials from the Marine Corps to a very polite clerk for American Airlines. One of the two people to whom I talked asked a question and offered a frightening comment: “Have you been in any peace marches? We ban a lot of people from flying because of that.” I explained that I had not so marched but had, in September, 2006, given a lecture at Princeton, televised and put on the Web, highly critical of George Bush for his many violations of the Constitution. “That’ll do it,” the man said.

After carefully examining my credentials, the clerk asked if he could take them to TSA officials. I agreed. He returned about ten minutes later and said I could have a boarding pass, but added: “I must warn you, they’re going to ransack your luggage.” On my return flight, I had no problem with obtaining a boarding pass, but my luggage was “lost.” Airlines do lose a lot of luggage and this “loss” could have been a mere coincidence. In light of previous events, however, I’m a tad skeptical.

I confess to having been furious that any American citizen would be singled out for governmental harassment because he or she criticized any elected official, Democrat or Republican. That harassment is, in and of itself, a flagrant violation not only of the First Amendment but also of our entire scheme of constitutional government. This effort to punish a critic states my lecture’s argument far more eloquently and forcefully than I ever could. Further, that an administration headed by two men who had “had other priorities” than to risk their own lives when their turn to fight for their country came up, should brand as a threat to the United States a person who did not run away but stood up and fought for his country and was wounded in battle, goes beyond the outrageous. Although less lethal, it is of the same evil ilk as punishing Ambassador Joseph Wilson for criticizing Bush’s false claims by “outing” his wife, Valerie Plaime, thereby putting at risk her life as well as the lives of many people with whom she had had contact as an agent of the CIA. …

I have a personal stake here, but so do all Americans who take their political system seriously. Thus I hope you and your colleagues will take some positive action to bring the Administration’s conduct to the attention of a far larger, and more influential, audience than I could hope to reach.

April 9, 2007 1:10PM

Politics and the English Language

Over at the Corner, Ramesh Ponnuru notes that a post of his,  reporting from a recent Club for Growth summit, occasioned much outrage on the left side of the blogosphere (as in this entry from Glenn Greenwald, who’s my kind of liberaltarian). Ponnuru explains:

What happened is that Ed Crane, the head of the libertarian Cato Institute, asked Romney and Giuliani on separate occasions a polemically‐​phrased question about the president’s authority to designate detainees as enemy combatants—or, as Crane put it, arrest citizens without review.

Giuliani said he’d only want to use the power “infrequently,” where Romney said he’d like to hear from some smart lawyers before deciding whether to eviscerate what Justice Scalia has, somewhat “polemically,” called “The very core of liberty secured by our Anglo‐​Saxon system of separated powers.”

I believe that the basis for Ed’s question was the Jose Padilla case, in which the Bush administration asserted the right to seize an American citizen on American soil and hold him without charges or access to counsel for the duration of the war on terror–in other words, perhaps forever. (Padilla has since been charged in civilian court, but the administration has never renounced the power it asserted). 

I wasn’t there, so I didn’t hear the exact phrasing of the question, but from the account above, Ponnuru seems to think that asking whether the president should have the power to “arrest citizens without review” is an example of polemical phrasing. Yet that was the very power asserted in the Padilla case. You can defend that constitutional theory or oppose it, but the description is neutral and accurate. In contrast, “designate detainees as enemy combatants” is a euphemistic word‐​cloud, obscuring what’s really at issue. 

April 9, 2007 10:30AM

Democrats and Civil Liberties

Back during a blogosphere brouhaha about “libertarian Democrats,” Jesse Walker of Reason offered this advice to Democratic candidates who wanted to attract libertarian votes:

The short answer — and this applies to Republican candidates too — is: (a) Don’t be as bad as the other guy, and (b) Be actively good on at least one important issue.

He went on to urge Democrats to “Be good on the issues where the left is supposed to be good.” Like, you know, peace and civil liberties. And the problem for libertarians who are tired of being yoked to an increasingly less libertarian Republican party is that the Democrats aren’t following this advice. Not only have they seized on their narrow 2006 victory to start pushing for national health insurance, more regulation, public housing, and a budget that implicitly requires a massive tax increase, they have dithered about the war in Iraq and completely ignored real civil liberties reforms. Democrats are far more concerned about the firings of eight U.S. attorneys than about the authority the president claims to arrest American citizens and hold them without access to a lawyer or a judge.

Now two leading lefty pundits have called the Democrats out on these issues. Arianna Huffington wants to know when the Democratic presidential candidates are going to say something about the war on drugs. She’s embarrassed to have to admit that a conservative Republican senator from Alabama, Jeff Sessions, thinks the penalties for crack cocaine use are excessive, while liberal Democrats look the other way.

And John Nichols of the Nation thinks Democratic candidates ought to be able to endorse a package of constitutional reforms being supported by the chairman of the American Conservative Union. The American Freedom Agenda, endorsed by several prominent conservatives, envisions such reforms as

  • Restore habeas corpus to prevent the illegal imprisonment of American citizens;
  • Prohibit torture and extraordinary rendition;
  • Prohibit unconstitutional wiretaps, email and mail openings via warrantless searches.

Nichols thinks Hillary Clinton, Barack Obama and John Edwards don’t endorse such goals because they’re cautious politicians. Maybe. Or maybe it’s because they want to be president, and they want to exercise just as much power as President Bush exercises.

So far it’s hard to find the issue(s) on which Democrats are “actively good.” Maybe their 2008 strategy for attracting moderates, centrists, and libertarian‐​leaning voters is to hope the Republicans keep on spending, centralizing, preaching, incarcerating, and struggling in Iraq.

April 9, 2007 9:12AM

Does Expanding Health Insurance Affect Health?

Ezra Klein describes me as “honest, thoughtful, and very, very wrong on health care issues” before going on to characterize an op‐​ed that Mike Tanner and I authored for the L.A. Times as “violently, even surprisingly, misleading… [and] simply and blatantly misleading.” Well.

Klein cites two claims Tanner and I make in that op‐​ed:

  1. [I]n reviewing all the academic literature on the subject, Helen Levy of the University of Michigan’s Economic Research Initiative on the Uninsured, and David Meltzer of the University of Chicago, were unable to establish a “causal relationship” between health insurance and better health.
  2. Believe it or not, there is “no evidence,” Levy and Meltzer wrote, that expanding insurance coverage is a cost‐​effective way to promote health.

Klein argues that with these two claims, Tanner and I are “misrepresenting [Levy and Meltzer’s] conclusions.”

Taking the second claim first, here is the full quote from Levy and Meltzer:

It is clear that expanding health insurance is not the only way to improve health… Policies could also be aimed at factors that may fundamentally contribute to poor health, such as poverty and low levels of education. There is no evidence at this time that money aimed at improving health would be better spent on expanding insurance coverage than on any of these other possibilities.

Thus our claim that there is no evidence that expanding coverage is a cost‐​effective way to improve health does not rest on a conclusion that expanding coverage produces no health improvements. It merely states that whatever health gains expanding coverage achieves could plausibly be achieved at a lower cost by other interventions.

Regarding the first claim — that Levy and Meltzer were unable to conclude that the literature establishes a “causal relationship” between health insurance and better health — Klein counters by quoting Levy and Meltzer’s discussion of the literature:

Taken as a whole, these high‐​quality studies of the health effects of health insurance strongly suggest that policies to expand insurance can also promote health.

Elsewhere, Meltzer describes his work and conclusions:

Our work doesn’t argue that health insurance does not impact health, only that much of the evidence that claims to show that is less conclusive than one would like…

There are probably a thousand studies in the literature that show the correlation [between health insurance and better health], but less than a dozen really have a strategy that gets around interpreting this relationship as more than just being a correlation… 

The studies that have been done of so‐​called natural experiments or policy evaluations have in general suggested there are health benefits to expansions of insurance. The studies do suggest a connection. But the point is there are relatively few of them. They’ve looked at these expansions in relatively narrow contexts. A lot of them are focused around kids. Nevertheless, what we’ve got does seem to suggest that health insurance makes a difference; that it does improve health…

Do I really believe in the end that we’ll discover that health insurance will improve health? I do believe that, but it’s a belief. And I’m quite confident that beliefs won’t be the way to identify the perfect health insurance policy. [Emphasis added.]

In sum, there are a lot of studies that purport to show that having health insurance improves health, but in fact show no such thing. A handful of well‐​designed studies that focus on specific populations (children, the elderly, infants, people with HIV) do suggest a causal relationship between coverage expansions and improved health. As Klein notes, one well‐​designed study suggests no causal relationship. Levy and Meltzer do not dismiss that study; they merely note that it points in the opposite direction. Finally, the literature is still in its infancy.

Note the language Levy and Meltzer use. The literature suggests a causal relationship. Expanding coverage can improve health. This is the sort of language used by careful social scientists who do not want to make claims that go beyond the available evidence. Because the literature so far does not establish a causal relationship, Levy and Meltzer stop short of concluding that it does. Meltzer himself candidly admits that his belief that expanding health insurance will improve health is just that: a belief based on what little evidence is available — not an established fact.

For what it’s worth, I share the belief that policies that expand coverage will improve the health of some people. But I also believe that many such policies — including those that would expand coverage to everyone willy‐​nilly — would also reduce health outcomes for many people. (Proponents of universal coverage love to ignore those unintended consequences.)

Our claim that Levy and Meltzer “were unable to establish a ‘causal relationship’ between health insurance and better health” was, of course, a simplification of a very complex picture. But it was also a reasonable simplification given that this was a 650‐​word oped, and particularly since our topic was universal coverage — i.e., expanding coverage to the entire population, where there is even less evidence to establish a causal relationship between health insurance and health than there is for discrete groups. If Klein can suggest a better simplification in as many words — and with his talents, he probably can — we should be glad to hear it. 

However, we suspect that Klein’s negative reaction (as well as those we received from others) was motivated not by our failure to convey certain details about Levy and Meltzer’s research, but by our success at conveying its main thrust: that there is little evidence that expanding coverage improves health, and zero evidence that it is a cost‐​effective way of doing so. That is a fairly powerful argument against running into the arms of a Mitt Romney or a Hillary Clinton or an Arnold Schwarzenegger or a John Edwards or an Ezra Klein who argues that the government should guarantee universal coverage.

It is noteworthy that although Klein cites both claims as “misrepresenting [Levy and Meltzer’s] conclusions,” he only attacks the first. Yet the second is much more clear‐​cut and probably more damning to the cause of universal coverage.

April 9, 2007 9:07AM

Hollywood For the Stylish

I loved this. It seems that there is a push (led by a fashion lawyer and a fashion show consultant, no less) for Washington, D.C. to get its own version of Chicago’s Magnificent Mile. According to today’s Yeas and Nays column in the Examiner (second item), a few D.C. council members are pushing to create a “Commission on Fashion Arts and Events.” It will “recognize the achievements of D.C.‘s burgeoning fashion community” (really) and dedicate a section of the “city’s landscape” for fashion retail.