Archives: 02/2009

Defense Spending Correction

In the podcast posted today on Cato’s main site, I say that it appears likely that Obama will accept a massive increase in defense spending foisted on him by the Pentagon for its FY 2010 budget. It did appear that way a week ago when I recorded the podcast. Bill Lynn, the Raytheon lobbyist Obama nominated to be Bob Gates’ number two at the Pentagon, had said as much, and I figured he knew what the administration was planning.

Turns out, he didn’t. Over the weekend, various news outlets reported that the Office of Management and Budget told the Pentagon to forget the $70 billion bump they hoped for, which would have brought non-war defense spending from about $513 billion to $584 billion, and accept a far smaller increase - about $14 billion, which is about what Pentagon plans called for before this gambit.

As I wrote here a couple months ago, the Pentagon, and the services within it, presumably hoped that they could present Obama with a fait accompli. If he ordered the Pentagon to roughly hold spending level, neoconservatives on the Hill and the Washington Post’s oped page could spin it as a cut and scream “surrender!” Bob Kagan, Max Boot, and others fell right into line.

Boot defends himself here by saying A. he doesn’t know enough about defense spending to know when FoxNews is misleading him, so it’s not his fault, and B. $584 is what the Joint Chiefs say they need to defend the nation, so it really is a cut. He asks, “Are Obama and his budget director prepared to say they understand the military’s needs better than the senior military leadership?” One would certainly hope so, given the concept of civilian control of the military. Boot is apparently unaware that the military organizations usually ask for what they think they can get and call it what they need.

Missing from all this discussion is a fact I only see hidden behind a subscription wall at Inside the Pentagon – the Obama team is going to increase the planned amount of spending over five years. Rather than the leveling off in defense spending that Bush administration had planned, the Obama administration plans to keep it growing mildly.

Hopefully that report is premature or the decision will be reconsidered – and historically these plans rarely hold up. The Pentagon’s budget should be drastically reduced. See the defense budget chapter of the Cato Policy Handbook for details. The bottom line is that it starts with restraint. Do less to spend less. That would avoid needless wars, which is the category of most of those we might fight these days, and the cost incurred by preparing for so many.

*I also say in the podcast that: “We spend more on research and development on new weapons systems than any other country other than China.”

I meant to say “We spend more on researching and developing new weapons than any other country spends on its entire military, other than China.”

Big difference.

Show Your Opposition to the Stimulus Plan

The Cato ad showing that there is no consensus among economists about the stimulus plan is still running in print and online publications nationwide. To spread the word even further, we’ve created a special widget that you can post on your blog or website.

We’re calling on all bloggers who agree that lessening the burden of government is the best way to boost economic growth to post the widget on your site.

It’s easy: Grab the code on by clicking “Spread the word.”  Post it on your blog and let readers know where you stand on stimulus.

Deciphering the ‘Buy American’ Dispute

Many of you may have heard the argument that the United States already has Buy American laws, so therefore all of the whining about the provisions in the spending bill is nothing but bluster. Well, that’s not really an argument. That’s just the pep rally speech that Steel Caucus representatives give before sympathetic, unquestioning fans.

A short (but by no means complete) summary of Buy American laws might help give some perspective to the significance of the language in the spending bills.

Yes, since 1933, Buy American laws have been used to limit competition for government procurement projects to domestic firms. Under current law, there are general Buy American restrictions affecting all government procurement of supplies and materials for use within the United States. And there are even more restrictive Buy American provisions governing Transportation Department procurement rules for highway and related projects. In a nutshell, the language in the spending bill would subject its appropriations to the more restrictive Buy American process, while denying the waivers we currently grant to most major trade partners.

The “general” Buy American provision requires all “unmanufactured” products (essentially, raw materials) procured to be mined or produced in the United States and that all manufactured articles procured fit the definition of a “domestic end product,” which is an article manufactured in the United States from components, which are at least 50 percent (by value) U.S.-produced.

Those Buy American restrictions can be waived if any one of three conditions applies: (1) a waiver would be in the public interest; (2) the products are not available from domestic sources in sufficient quantity or of satisfactory quality, or; (3) the cost of using U.S.-made products is deemed “unreasonable.” Under the Federal Acquisition Regulations, “unreasonable cost” is defined as a situation where foreign supplies and materials are offered at a price that is six percent or more below the price of domestic supplies and materials.

The more restrictive Buy American provision governing Transportation Department procurement requires that all of the iron, steel, and manufactured products used be produced in the United States. The definition of U.S.-manufactured products is the same here as under the general Buy American provision, and the same thresholds for public interest and short supply waivers also apply. However, the unreasonable cost waiver is considerably different. Under this provision waiving the restriction on the basis of unreasonable cost requires that the total project cost (not the input cost) be at least 25 percent higher. That is an enormous cushion for domestic suppliers.

For example, under the general provision, a domestic supplier has to be mindful of the world price for steel. The domestic offer could be rejected in favor of a foreign supplier if there is more than a six percent price differential. But under the more restrictive Transportation Department provisions, the domestic supplier’s price is not even remotely disciplined by the potential of foreign participation in the bidding process because it is the total cost of the project—and not a competitor’s bid—that would trigger the waiver. So, if the steel in a highway project constitutes about 10 percent of the total cost of the project—say $10 million out of $100 million—then the steel price can rise from $10 million to $260 million before the project cost increases by 25 percent. Effectively, suppliers under the more restrictive Buy American rules can charge whatever they want to charge.

There is another set of waivers that are perhaps the most effective at ensuring some competition in the U.S. government procurement market. Under the Trade Agreements Act of 1979, the president is authorized to invoke the public interest waiver of the Buy American rules and exempt countries which reciprocally waive their own buy-local restrictions for U.S. firms. Those countries include signatories to the World Trade Organization’s Government Procurement Agreement or parties to U.S. free trade agreements (like the North American Free Trade Agreement) that contain full government procurement chapters.

The Buy American provisions in the recently-passed House bill and the still-pending Senate bill seek to apply the more restrictive Transportation Department rules to all public works projects funded by the legislation—with the exception that in the House version manufactured goods are excluded. Not only would the unrealistic 25 percent “unreasonable cost” waiver threshold apply, but the waivers granted to U.S. trade partners under obligation of international agreement would not apply. And that is why there has been so much resistance and opposition to this proposal from overseas.

Now we can properly assess the meaning of language inserted into the Senate bill last night. The amendment simply inserts the “assurance” that the Buy American provision will be “applied in a manner consistent with United States obligations under international agreements.” That is no doubt a subjective and therefore vague assurance. It doesn’t preclude the promulgation of new regulations that intend, but fail, to administer the law in a manner consistent with U.S. obligations under international agreements. It would be clear, objective, and reassuring to stipulate that the same waivers that firms in foreign countries enjoy now will be honored with respect to the appropriations authorized under the legislation. That would make things right with Canada, Europe, Mexico, Japan and about 12 other important trading partners, and the talk of trade retaliation would subside.But it still stinks for U.S. taxpayers (and will foster some ill-will abroad) because the U.S. government procurement market will be made even less accessible to suppliers from countries that are not signatories to the various procurement agreements. The more rigid cost waiver will exclude bids from, among others, Chinese suppliers of iron, steel, and manufactured goods (in the Senate version). And with low-cost suppliers of crucial materials effectively excluded from the process, U.S. suppliers will be less restrained in their cost proposals. And that means fewer projects, fewer higher, and more wasted resources.

New Cato Study Cautions against Taxpayer-Funded Comparative-Effectiveness Research in “Stimulus” Bill

Tomorrow, the Cato Institute will release my latest paper, “A Better Way to Generate and Use Comparative-Effectiveness Research.” But since there’s $1.1 billion for comparative-effectiveness research in the, uh, stimulus bill currently before the Senate, we thought we’d sneak it online now.

The high-level executive summary is this: the $1.1 billion for comparative-effectiveness research in the, uh, stimulus bill will be a complete waste of time and money.

The plain-old executive summary is this:

President Barack Obama, former U.S. Senate majority leader Tom Daschle, and others propose a new government agency that would evaluate the relative effectiveness of medical treatments. The need for “comparative-effectiveness research” is great. Evidence suggests Americans spend $700 billion annually on medical care that provides no value. Yet patients, providers, and purchasers typically lack the necessary information to distinguish between high- and low-value services.

Advocates of such an agency argue that comparative- effectiveness information has characteristics of a “public good,” therefore markets will not generate the efficiency-maximizing quantity. While that is correct, economic theory does not conclude that government should provide comparative- effectiveness research, nor that government provision would increase social welfare.

Conservatives warn that a federal comparative- effectiveness agency would lead to government rationing of medical care—indeed, that’s the whole idea. If history is any guide, the more likely outcome is that the agency would be completely ineffective: political pressure from the industry will prevent the agency from conducting useful research and prevent purchasers from using such research to eliminate low-value care.

The current lack of comparative-effectiveness research is due more to government failure than to market failure. Federal tax and entitlement policies reduce consumer demand for such research. Those policies, as well as state licensing of health insurance and medical professionals, inhibit the types of health plans best equipped to generate comparative-effectiveness information.

A better way to generate comparative-effectiveness information would be for Congress to eliminate government activities that suppress private production. Congress should let workers and Medicare enrollees control the money that purchases their health insurance. Further, Congress should require states to recognize other states’ licenses for medical professionals and insurance products. That laissez-faire approach would both increase comparative-effectiveness research and increase the likelihood that patients and providers would use it. 

Does Karen Davenport Owe Me $40?

At the National Medical Association’s 2008 Mazique Symposium in Atlanta, I made a bet with Karen Davenport.  Davenport is a lovely woman, the director of health policy at the Center for American Progress, a prominent member of the Church of Universal Coverage, and a really good sport. 

I bet Davenport $20 that I could convince her that the following two claims are true:

We agreed on three rules.  First, there would be no splitting the difference or agreeing to disagree – I would either succeed or I would fail.  Second, Davenport would be the ultimate arbiter of whether I succeeded or failed.  Third, if I failed, Davenport would have to explain why she was not convinced.

After my presentation and a subsequent exchange (mostly about the second claim), Davenport was unconvinced and she took the $40.  She made two arguments for why I failed:

  1. A crucial part of my argument – the claim by Helen Levy and David Meltzer that there is “no evidence” that expanding health insurance is a cost-effective way of improving health – is not necessarily true and is, in fact, controversial among health economists, and
  2. The lives that would be lost by adopting universal coverage (rather than a more cost-effective strategy for improving health), would be less than the lives lost during the time it would take to conduct experiments to determine which strategy is most cost-effective.

So I ask you, dear readers, to put on your thinking caps, watch the first 15 minutes of the following video, and tell me: were my arguments logically flawed, or does Karen Davenport owe me $40?

I should add that Davenport tried to give me back my $20 ante.  Naturally, I refused to accept my $20 unless it was also accompanied by her $20.

Barro on Stimulus

Harvard’s distinguished macroeconomist Robert Barro calls the stimulus bill “garbage.” From an interview in The Atlantic:

This is probably the worst bill that has been put forward since the 1930s. I don’t know what to say. I mean it’s wasting a tremendous amount of money. It has some simplistic theory that I don’t think will work, so I don’t think the expenditure stuff is going to have the intended effect. I don’t think it will expand the economy. And the tax cutting isn’t really geared toward incentives. It’s not really geared to lowering tax rates; it’s more along the lines of throwing money at people. On both sides I think it’s garbage. So in terms of balance between the two it doesn’t really matter that much.

Hat tip: John Samples

December Student Op-Ed Winners

Congratulations to the first winners of the Cato on Campus Op-Ed Contest: Mytheos Holt and Šimon Franěk! Their op-eds, both dealing with environmental policy, tied for the December 2008 Cato on Campus Op-Ed Contest.

Mytheos is a junior at Wesleyan University. Citing Cato Senior Fellow in Environmental Studies Patrick Michaels regarding the dangers of excessive environmentalism, Mytheos’s op-ed, “Burning the Greenbacks to Save the Greenhouse,” was published by the California Independent Voter Project.

Šimon is an 18-year-old student at Gymnasium Kladno in the Czech Republic. Citing Patrick Michaels to refocus the global climate debate, Šimon’s op-ed, “Climate Change vs. Liberty in Europe,” calls attention to the politics behind global warming and the need to consider the ramifications of policy decisions based on global warming.

Mytheos and Simon were each sent autographed copies of Patrick Michaels’ books Meltdown: The Predictable Distortion of Global warming by Scientists, Politicians and the Media and Climate of Extremes: Global Warming Science they Don’t Want You to Know (just released in January). Their op-eds will also be considered for the Cato on Campus Op-Ed of the Year, with a chance of receiving a full scholarship to Cato University.

Submit your work to one of three Cato student contests.