Recent Cato Studies

January/​February 1995 • Policy Report

Bosnia Plan Is Blueprint for Disaster

The terms of the emerging peace accord to end the war in Bosnia are a blueprint for disaster, writes Ted Galen Carpenter, Cato’s director of foreign policy studies. In “Holbrooke Horror: The U.S. Peace Plan for Bosnia” (Foreign Policy Briefing no. 37), Carpenter says that Washington foolishly insists on maintaining the fiction of a united Bosnian state while accepting a de facto partition. Renewed fighting is highly probable when the Serb self‐​governing “entity” attempts to secede and merge with Serbia and the Muslim‐​dominated government tries to assert Bosnia’s sovereignty. Indeed, says Carpenter, a clash between Muslim and Croat forces is also possible, since any Muslim‐​Croat cooperation has been a matter of expediency. To enforce such an inherently unworkable settlement would be to recklessly put American treasure and lives at risk.

Carpenter concludes that since Bosnia is little more than a battleground for contending ethno‐​religious factions, and the United States has no vital interests there, Washington should let the competing factions work out their own destiny, however long it takes. Only a settlement forged by the parties to the conflict — an agreement that reflects battlefield realities and the balance of political and military forces — has any chance of achieving a durable peace.

Capital Gains Tax Cut Would Help Low‐​Income People

A cut in the capital gains tax will benefit poor and working‐​class Americans most, according to Stephen Moore, Cato’s director of fiscal policy studies, and economist John Silvia. Contrary to popular belief, they write in “The ABCs of the Capital Gains Tax” (Policy Analysis no. 242), a capital gains tax cut actually increases taxes paid by the wealthy. “Over the past 30 years, every time the capital gains tax has been raised, tax payments by wealthy Americans have fallen. Every time the tax rate has been cut, tax payments by the wealthy have substantially risen,” write Moore and Silvia.

They say that a capital gains tax cut would unlock hundreds of billions of dollars of unrealized capital gains, thus promoting investment in new technologies and entrepreneurial ventures. The report calculates that there is now $7 trillion in unrealized capital gains in the United States. If a rate cut unlocked even 10 percent of those gains, the government would raise nearly $150 billion in added revenues.

Moore and Silvia conclude that “the most economically efficient capital gains tax rate is zero.” Most of the fast growing Asian tigers, including Hong Kong, Korea, Singapore, and Taiwan, have a zero capital gains tax rate. The United States has the highest effective capital gains tax rate in the industrialized world, which significantly impairs the country’s ability to compete for scarce investment capital in a global economy.

U.S. Bailout Hurts Mexican Economy

The Clinton administration’s use of Treasury funds to support the Mexican peso is aggravating that country’s long‐​term economic problems and is an uncon‐​stitutional expenditure of money. So write W. Lee Hoskins, president of the Huntington National Bank and former president of the Federal Reserve Bank of Cleveland, and James W. Coons, the Huntington Bank’s chief economist, in “Mexico: Policy Failure, Moral Hazard, and Market Solutions” (Policy Analysis no. 243). Hoskins and Coons warn that aid from the United States and the International Monetary Fund is producing debt rather than necessary reform.

The authors say the loans have helped special interests and done nothing to raise living standards for most Mexican citizens because the money has been used to cut investors’ losses and to avoid making institutional and policy changes. Four times in the past 20 years the United States has responded to Mexico’s election‐​year currency crises by lending Mexico increasing amounts of money as a short‐​term economic solution. The authors find that the U.S. bailouts have insulated Mexican governments from the consequences of their actions, thus ensuring continued poor monetary policy and future crises. The Mexican peso crisis, they add, did not pose a serious threat to the international financial system. Moreover, the Clinton administration’s disbursing of U.S. funds without congressional appropriation violates the constitutional principle of separation of powers.

American Alliance with Japan Unjust and Unstable

The U.S. military alliance with Japan not only provides a lucrative defense subsidy to the Japanese at the expense of American taxpayers; it also enables Tokyo to evade important security responsibilities in East Asia, according to “Paternalism and Dependence: The U.S.-Japanese Security Relationship” (Policy Analysis no. 244) by Ted Galen Carpenter. The study contends that the alliance is designed for a bygone era in which Japan was economically weak and the two countries faced a powerful global military threat — the Soviet Union. Today Japan is an economic great power and should play the lead role in promoting security and stability in East Asia instead of relying on the United States to do so.

Carpenter points out that the defense subsidy to Japan has amounted to more than $900 billion (1995 dollars) since the early 1950s, that being East Asia’s policeman costs America approximately $40 billion a year, and that the United States spends nearly six times as much on the military as does Japan. Carpenter warns that an alliance in which one party must assume most of the risks and costs while the other party reaps the benefits is unstable as well as unjust. U.S. policymakers who foolishly try to preserve an inequitable status quo risk an abrupt, acrimonious rupture in the U.S.-Japanese relationship. He calls for the withdrawal of all U.S. forces from Japanese territory within five years and the termination of the alliance two years later.

Washington Needs Diplomacy Overhaul

Because of the end of the Cold War, the advent of new communications technologies, the worldwide trend toward decentralized government, and the increasing importance of economic — rather than political — relations, Washington needs to overhaul its approach to diplomacy. That’s the view of former U.S. Foreign Service officer Charles Schmitz in “Changing the Way We Do Business in International Relations” (Policy Analysis no. 245). Schmitz argues that the conduct of U.S. foreign policy needs to be streamlined and that more of the business of international relations should be conducted by regional or local authorities, businesses, and private citizens.

One of the main candidates for reform is U.S. embassy operations, Schmitz contends. Instead of supporting large and expensive embassy operations in every country recognized by the United States, Washington should rethink the importance of each country and reengineer the U.S. diplomatic presence accordingly. Schmitz writes that many embassy functions either are irrelevant or could be performed equally well and at a much lower cost by “contracting out” to private organizations.

Schmitz also argues that a number of foreign policy institutions could be eliminated, including the United States Information Agency, the Agency for International Development, and the Commerce Department’s overseas operations.

Medical Licensing Means “Medical Monopoly”

Requiring the licensing of health care professionals creates a “medical monopoly” and leads to higher costs and fewer choices for consumers. In “The Medical Monopoly: Protecting Consumers or Limiting Competition?” (Policy Analysis no. 246), health policy consultant Sue A. Blevins shows that state licensure laws and federal regulations limit the kinds of services nonphysician health care professionals can provide. Blevins cites ample evidence that nonphysician providers — such as midwives, nurses, and chiropractors — can perform many of the services performed by physicians, but at lower cost. What’s more, nonphysicians achieve comparable health care outcomes and maintain high patient satisfaction.

“Instead of enforcing strict licensure laws that focus on entry into the market but do not guarantee quality control,” Blevins says, “states should hold professionals equally accountable for the quality of their outcomes.” That will boost competition, lower costs, and increase access to health care.