Cato Studies

January/​February 1996 • Policy Report

Bosnia Plan Is Blueprint for Disaster

The terms of the emerging peace accord to end the war in Bosniaare ablueprint for disaster, writes Ted Galen Carpenter, Cato’sdirector offoreign policy studies. In “Holbrooke Horror: The U.S. PeacePlan forBosnia” (Foreign Policy Briefing no. 37), Carpenter saysthat Washingtonfoolishly insists on maintaining the fiction of a united Bosnianstate whileaccepting a de facto partition. Renewed fighting is highlyprobable when theSerb self‐​governing “entity” attempts to secede andmerge with Serbia andthe Muslim‐​dominated government tries to assert Bosnia’ssovereignty.Indeed, says Carpenter, a clash between Muslim and Croat forcesis alsopossible, since any Muslim‐​Croat cooperation has been a matter ofexpediency. To enforce such an inherently unworkable settlementwould be torecklessly put American treasure and lives at risk.

Carpenter concludes that since Bosnia is little more than abattlegroundfor contending ethno‐​religious factions, and the United Stateshas no vitalinterests there, Washington should let the competing factionswork out theirown destiny, however long it takes. Only a settlement forged bythe partiesto the conflict — an agreement that reflects battlefield realitiesand thebalance of political and military forces — has any chance ofachieving adurable peace.

Capital Gains Tax Cut Would Help Low‐​Income People

A cut in the capital gains tax will benefit poor andworking‐​classAmericans most, according to Stephen Moore, Cato’s director offiscal policystudies, and economist John Silvia. Contrary to popular belief,they writein “The ABCs of the Capital Gains Tax” (Policy Analysisno. 242), a capitalgains tax cut actually increases taxes paid by the wealthy.“Over the past30 years, every time the capital gains tax has been raised, taxpayments bywealthy Americans have fallen. Every time the tax rate has beencut, taxpayments by the wealthy have substantially risen,” writeMoore and Silvia.

They say that a capital gains tax cut would unlock hundreds ofbillionsof dollars of unrealized capital gains, thus promoting investmentin newtechnologies and entrepreneurial ventures. The report calculatesthat thereis now $7 trillion in unrealized capital gains in the UnitedStates. If arate cut unlocked even 10 percent of those gains, the governmentwould raisenearly $150 billion in added revenues.

Moore and Silvia conclude that “the most economicallyefficient capitalgains tax rate is zero.” Most of the fast growing Asiantigers, includingHong Kong, Korea, Singapore, and Taiwan, have a zero capitalgains tax rate.The United States has the highest effective capital gains taxrate in theindustrialized world, which significantly impairs the country’sability tocompete for scarce investment capital in a global economy.

U.S. Bailout Hurts Mexican Economy

The Clinton administration’s use of Treasury funds to support theMexicanpeso is aggravating that country’s long‐​term economic problemsand is anuncon‐​stitutional expenditure of money. So write W. Lee Hoskins,presidentof the Huntington National Bank and former president of theFederal ReserveBank of Cleveland, and James W. Coons, the Huntington Bank’schiefeconomist, in “Mexico: Policy Failure, Moral Hazard, andMarket Solutions”(Policy Analysis no. 243). Hoskins and Coons warn that aid fromthe UnitedStates and the International Monetary Fund is producing debtrather thannecessary reform.

The authors say the loans have helped special interests and donenothingto raise living standards for most Mexican citizens because themoney hasbeen used to cut investors’ losses and to avoid makinginstitutional andpolicy changes. Four times in the past 20 years the United Stateshasresponded to Mexico’s election‐​year currency crises by lendingMexicoincreasing amounts of money as a short‐​term economic solution.The authorsfind that the U.S. bailouts have insulated Mexican governmentsfrom theconsequences of their actions, thus ensuring continued poormonetary policyand future crises. The Mexican peso crisis, they add, did notpose a seriousthreat to the international financial system. Moreover, theClintonadministration’s disbursing of U.S. funds without congressionalappropriation violates the constitutional principle of separationof powers.

American Alliance with Japan Unjust and Unstable

The U.S. military alliance with Japan not only provides alucrativedefense subsidy to the Japanese at the expense of Americantaxpayers; italso enables Tokyo to evade important security responsibilitiesin EastAsia, according to “Paternalism and Dependence: TheU.S.-Japanese SecurityRelationship” (Policy Analysis no. 244) by Ted GalenCarpenter. The studycontends that the alliance is designed for a bygone era in whichJapan waseconomically weak and the two countries faced a powerful globalmilitarythreat — the Soviet Union. Today Japan is an economic great powerand shouldplay the lead role in promoting security and stability in EastAsia insteadof relying on the United States to do so.

Carpenter points out that the defense subsidy to Japan hasamounted tomore than $900 billion (1995 dollars) since the early 1950s, thatbeing EastAsia’s policeman costs America approximately $40 billion a year,and thatthe United States spends nearly six times as much on the militaryas doesJapan. Carpenter warns that an alliance in which one party mustassume mostof the risks and costs while the other party reaps the benefitsis unstableas well as unjust. U.S. policymakers who foolishly try topreserve aninequitable status quo risk an abrupt, acrimonious rupture in theU.S.-Japanese relationship. He calls for the withdrawal of all U.S.forces fromJapanese territory within five years and the termination of thealliance twoyears later.

Washington Needs Diplomacy Overhaul

Because of the end of the Cold War, the advent of newcommunicationstechnologies, the worldwide trend toward decentralizedgovernment, and theincreasing importance of economic — rather thanpolitical — relations,Washington needs to overhaul its approach to diplomacy. That’sthe view offormer U.S. Foreign Service officer Charles Schmitz in“Changing the Way WeDo Business in International Relations” (Policy Analysis no.245). Schmitzargues that the conduct of U.S. foreign policy needs to bestreamlined andthat more of the business of international relations should beconducted byregional or local authorities, businesses, and private citizens.

One of the main candidates for reform is U.S. embassy operations,Schmitzcontends. Instead of supporting large and expensive embassyoperations inevery country recognized by the United States, Washington shouldrethink theimportance of each country and reengineer the U.S. diplomaticpresenceaccordingly. Schmitz writes that many embassy functions eitherareirrelevant or could be performed equally well and at a much lowercost by“contracting out” to private organizations.

Schmitz also argues that a number of foreign policy institutionscould beeliminated, including the United States Information Agency, theAgency forInternational Development, and the Commerce Department’s overseasoperations.

Medical Licensing Means “Medical Monopoly”

Requiring the licensing of health care professionals creates a“medicalmonopoly” and leads to higher costs and fewer choices forconsumers. In “TheMedical Monopoly: Protecting Consumers or LimitingCompetition?” (PolicyAnalysis no. 246), health policy consultant Sue A. Blevins showsthat statelicensure laws and federal regulations limit the kinds ofservicesnonphysician health care professionals can provide. Blevins citesampleevidence that nonphysician providers — such as midwives, nurses,andchiropractors — can perform many of the services performed byphysicians, butat lower cost. What’s more, nonphysicians achieve comparablehealth careoutcomes and maintain high patient satisfaction.

“Instead of enforcing strict licensure laws that focus onentry into themarket but do not guarantee quality control,” Blevins says,“states shouldhold professionals equally accountable for the quality of theiroutcomes.“That will boost competition, lower costs, and increase access tohealthcare.