December 2009

December 31, 2009 2:55PM

Predictions for 2010

I was just listening to the December CatoAudio interview with Tom Palmer and Ian Vasquez about the fall of the Soviet empire 20 years ago, and Tom mentioned that even as late as October 7, 1989, when the East German government held a gala celebration of its 40th year in power, no one anticipated that within a month the Wall would open and communism would come to an abrupt end in eastern Europe.

And then I looked at the predictions of various scholars and pundits at Politico’s Arena one year ago today and noticed how wrong most of them were — Terry McAuliffe would be elected governor of Virginia, Rod Blagojevich would still be governor in April, Iran would test a nuclear weapon, several Republican members of Congress would switch to the Democratic Party (!), Justice Stevens would retire. No one predicted the surge of small‐​government, anti‐​spending sentiment, which was arguably the top political story of 2009.

And then, looking up who said “Nobody knows anything” (screenwriter William Goldman, about Hollywood), I stumbled on this blog post from October 2008:

I pulled from my desk drawer a copy of the Wall Street Journal from Wednesday, May 23, 2007.

It was not a particularly notable day. The bull market was in force, and the Dow was hitting new highs … even though gasoline prices were at record levels. But here at Cabot we had been noting a growing divergence in the market; both the NYSE Advance‐​Decline Line and the Nasdaq had failed to confirm the Dow’s high. Also, we detected a high level of optimism among both investors and the general media. So I saved The Wall Street Journal, in part because of the lead article that announced, “Why Market Optimists Say This Bull Has Legs.”

The subhead of the article followed with, “They See Decade of Gain Fed by Global Growth; Skeptics Cite Big Doubts.”…

So I reread the article and what did I find? Fundamental talk about global growth, low interest rates and a technology revolution that would boost productivity. [One bull] even had the courage to utter the phrase that makes an experienced investor quail, ” … it really is different this time.”

Also given ink were the detractors, who claimed that reversion to the mean was inevitable, that low interest rates couldn’t last, and that the weak dollar and above‐​average P/E ratios would eventually pull the market down.

But here’s what I found interesting (in hindsight): Not once in the entire article did anyone mention credit!!!

Today, we know from our rearview mirror that credit was the culprit of a decline that has crushed the global financial system. But just 17 months ago, a reporter looking for reasons the bull might not last found no one mentioning credit!

All of which is to explain why you’re not going to find any predictions for 2010 in this post.

December 31, 2009 12:34PM

Watch‐​Lister to Review Watch‐​Listing

White House ethics counsel Norm Eisen’s conclusion that John Brennan should participate in the reviews of the attempted bombing of Northwest flight 253 is interesting.

Currently serving as assistant to the president for homeland security and counterterrorism, Brennan formerly worked at the Analysis Corp., a contractor that helped develop the watch‐​list system, one of many security measures that did not prevent the attacker from boarding a flight into the United States.

In my review of some of the security systems involved in the failed attack, I agreed that watch‐​listing failed, but I am at a loss to imagine how it could succeed.

On the merits of the ethical issue, Eisen cites Brennan’s long experience and the importance of this matter to national security as reasons that Brennan should be granted a waiver from the general two‐​year ban on political appointees having involvement in matters involving former employers and clients.

But these factors cut equally well, if not better, in the other direction: Long experience can bring a person too close to the problem to see solutions. And national security is too important to let insiders review their own work. 

I have no reason to doubt his good faith, but Brennan’s substantive judgment is likely to be obscured by familiarity with, and sympathy for, watch‐​listing. He will be unlikely to give sufficiently close examination to the question whether it provides security value given its failure here and its costs in dollars, constitutional principles, and privacy.

Kudos are due the White House and Norm Eisen for posting the ethics waiver on the White House blog. Brennan’s assessment of watch‐​listing should get similar airing so that the public can review his work aware of his probable sympathies. An outside review may lose something in inside knowledge, but make up for it with gains in substance and credibility.

December 31, 2009 10:18AM

Executed for Sorcery? In 2009?

A court in Saudi Arabia has sentenced a Lebanese television host to death for the crime of “sorcery.” Apparently Ali Hussein Sibat was recognized by Saudi religious police as he made a pilgrimage to Mecca. On his show, he gave advice to callers and made predictions about their future. He could be executed any day now. In an article in the Daily Star of Lebanon, the leading English‐​language newspaper in the Middle East, Cato senior fellow Tom G. Palmer and University of Chicago dean Raja Kamal call on King Abdullah to face down the religious police and release Ali Hussein Sabat to Lebanon:

This case illustrates the tremendous power of the religious police in Saudi Arabia. King Abdullah faces an uphill battle in his struggle against extremists; not only the Al‐​Qaeda terrorists who kill innocent people, but the religious police and judiciary, who kill innocents as well.…

The king and his supporters need to act decisively to eliminate the power of the extremists to carry out improper arrests, level false charges, coerce testimony, and conduct unjust trials, especially those culminating in murder. Sibat and others in his situation are being made into human sacrifices by the extremists in order to maintain their own power.…

Lebanon also has a responsibility to speak up for and to protect its own citizens. The government of Prime Minister Saad Hariri has a special relationship with the ruling family of Saudi Arabia. That’s why the government needs to show that, as the representative of a democratic Arab country with a strong broadcasting industry, it will support freedom of expression – particularly that of Ali Hussein Sibat and others who broadcast from Lebanon.

December 31, 2009 10:17AM

Horizontal Inequities in ObamaCare

In this week’s New England Journal of Medicine, Mark Pauly and Bradley Herring show that the employer mandates passed by the House and Senate — where employers can either “play” by providing health benefits or pay a penalty — would result in grossly unfair treatment of similar individuals. Regarding the House bill, they write:

[B]ecause each company’s decision to play or pay would bedriven by its average wages, heterogeneity within companieswould cause the subsidies for many individual workers to bemismatched with their level of need. Moreover, tax penaltiesand subsidies that depend on a company’s size would result infurther inequity among low‐​wage companies, because subsidiesfor workers with the same income would be larger if they workedfor small companies (which had to pay smaller penalties) thanif they worked for large ones.

What kind of inequities are we talking about?

Low‐​wage workers in a high‐​wage company would be worse off thanlow‐​wage workers with identical productivity in a low‐​wage company.For instance, a single worker earning $21,660 — 200% ofthe federal poverty level for an individual — would receivea net subsidy of $3,574 through the exchange if he or she wereemployed at a low‐​wage company choosing to “pay” but would geta subsidy (a tax exemption) of only $1,887 if employed at ahigh‐​wage company choosing to “play.” The $1,687 differencerepresents about 32% of the premium and 8% of the worker’s income.

The same kind of inequities exist for higher‐​wage workers:

Forinstance, a worker earning $43,320 — 400% of the federalpoverty level for an individual — would have to pay $866(2% of payroll) in lower wages if he or she were employed ata low‐​wage company that opted to pay a tax penalty but wouldeffectively receive a subsidy of $2,407 if he or she were employedat a high‐​wage company that opted to provide insurance. Thedifference is about 63% of the premium and 8% of income…So high‐​wage workers would beworse off in low‐​wage companies than in high‐​wage companies.

Here’s their graph showing how the House bill would penalize low‐​wage workers in high‐​wage firms, and high‐​wage workers in low‐​wage firms:

Note also that the falling subsidies for low‐​wage workers would discourage them from climbing the economic ladder.

December 30, 2009 11:55AM

Terrorism and Security Systems

Terrorism presents a complex set of security problems. That’s easy to see in the welter of discussion about the recent attempted bombing on a plane flying from Amsterdam into Detroit. The media and blogs are poring over the many different security systems implicated by this story. Unfortunately, many are reviewing them all at once, which is very confusing.

Each security system aimed to protect against terror attacks and other threats involves difficult and complex balancing among many different interests and values. Each system deserves separate consideration, along with analysis of how they interact with one another.

A helpful way to unpack security is by thinking in terms of “layers.” Calling it security “layering” is a way of describing the many different practices and technologies that limit threats to the things we prize. (It’s another lens on security, compatible with the risk management framework I laid out shortly after the Fort Hood shooting.)

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December 30, 2009 10:27AM

Talking about Terrorism

Terrorists are named after an emotion for a reason. They use violence to produce widespread fear for a political purpose. The number of those they kill or injure will always be a small fraction of those they frighten. This creates problems for leaders, and even analysts, when they talk publicly about terrorism. On one hand, leaders need to convince the public that they are on the case in protecting them, or else they won't be leaders for long. On the other hand, good leaders try to minimize unwarranted fear.

One reason is that we shouldn't give terrorists what they want. Another is that fear is a real social harm, particularly when it is exaggerated. Stress from fear harms health. It causes bad decisions. For example, if people avoid flying and drive instead the number of added fatalities on the road will quickly surpass the dead from a typical terrorist attack. Most important, excessive fear causes policy responses that often damage the economy without much added safety. Measured in lives on dollars, reactions to terrorism often cost more than the attack themselves.

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December 30, 2009 10:22AM

It’s the End of 2009. Where Are Our Troops?

This is not the change we hoped for. President Obama rose to power on the basis of his early opposition to the Iraq war and his promise to end it. But after a year in the White House he has made both of George Bush’s wars his wars.

Speaking of Iraq in February 2008, candidate Barack Obama said, “I opposed this war in 2002. I will bring this war to an end in 2009. It is time to bring our troops home.” The following month, under fire from Hillary Clinton, he reiterated, “I was opposed to this war in 2002.…I have been against it in 2002, 2003, 2004, 5, 6, 7, 8 and I will bring this war to an end in 2009. So don’t be confused.”

Indeed, in his famous “the moment when the rise of the oceans began to slow” speech on the night he clinched the Democratic nomination, he also proclaimed, “I am absolutely certain that generations from now we will be able to look back and tell our children that … this was the moment when we ended a war.”

Now he has doubled down on the war in Afghanistan and has promised to keep the war in Iraq going for another 19 months, after which we will have 50,000 American troops in Iraq for as far as the eye can see. If McCain had proposed this sort of minor tweaking of the Bush policy, I think we’d see antiwar rallies in 300 cities. Calling the antiwar movement!

President Obama’s promises are becoming less credible. He says that after all this vitally necessary and unprecedented federal spending, he will turn his attention to constraining spending at some uncertain date in the future. And he says that he will first put more troops into Afghanistan, and then withdraw them at some uncertain date in the future (“in July of 2011,” but “taking into account conditions on the ground”). Voters are going to be skeptical of both these promises to accelerate now and then put on the brakes later.

The real risk for Obama is becoming not JFK but LBJ — a president with an ambitious, expensive, and ultimately destructive domestic agenda, who ends up bogged down and destroyed by an endless war. Congress should press for a quicker conclusion to both wars — and should also remember the years of stagflation and slow growth that followed President Johnson’s expansion of the welfare state.