Studies: “Microsoft, Social Security, Kosovo, and term limits”

January/​February 1999 • Policy Report

“Network Effects” Don’t Justify Antitrust

In its antitrust case against Microsoft, the Justice Department has invoked a variety of “novel economic theories to justify new antitrust doctrines and to revive old ones,” say economists Stan Liebowitz and Stephen E. Margolis in the study, “Dismal Science Fictions: Network Effects, Microsoft, and Antitrust Speculation” (Policy Analysis no. 324). Those theories, which invoke such factors as “network effects,” “path dependence,” and “lock‐​in,” are “fundamentally flawed,” say Liebowitz and Margolis. The new theories find little support among economists because “there is a poor connection between theories of path dependence and the real‐​world behavior of entrepreneurs and consumers.” The authors conclude that “reexamination of the empirical evidence demonstrates that the claimed examples of lock‐​in are not market failures,” and that, “with regard to Microsoft, as elsewhere, neither theory nor fact supports the call for antitrust enforcement measures.”

Flying the Overregulated Skies

“To achieve the full benefits of an open aviation market, Congress should grant foreign‐​owned carriers the right to provide domestic air service in the United States,” writes Kenneth J. Button in a new Center for Trade Policy study, “Opening U.S. Skies to Global Airline Competition” (Trade Policy Analysis no. 5). Button, professor of public policy at George Mason University and former head of aviation policy at the Organization for Economic Cooperation and Development in Paris, contends that “foreign competition and investment would provide the ultimate, free‐​market check on ‘predatory pricing’ and domestic price collusion and would negate any arguments for imposing federal regulations and antitrust sanctions.” Button highlights the inconsistency between the theory and the practice of America’s “Open Skies” policy. He argues that all restrictions on foreign ownership and competition should be dropped. “For American air travelers,” the author concludes, “opening U.S. skies would yield a greater choice of carriers and lower fares, both at home and around the world.”

Giving Encryption Keys to Government Could Prove Risky

In the new Cato paper, “Encryption Policy for the 21st Century: A Future without Government‐​Prescribed Key Recovery” (Policy Analysis no. 325), director of information studies Solveig Singleton says that government access to encryption keys is a “grave danger to privacy.” Encryption technology is essential “to protect consumers and businesses against spies, fraud, and theft over the computer networks used in electronic commerce.” But government policy that seeks to restrict U.S. exports of strong encryption technology is “doomed,” and “government‐​prescribed key recovery and export controls are a grave danger to the privacy of law‐​abiding citizens and businesses, not only in the United States but around the world.” More than 7,500 human rights groups “combat torture, mysterious disappearances, and government massacres by disseminating information such as reports of witnesses of government brutality.” Government access to encryption keys would place all such activity in serious jeopardy.

U.S. Fourth in Economic Freedom Index

Does economic freedom lead to prosperity? Economists have long debated just that question. According to The Economic Freedom of the World: 1998/1999 Interim Report, copublished by 54 independent institutes including the Cato Institute, the evidence says yes. That most comprehensive index of economic freedom found a strong relationship between economic freedom and prosperity. Hong Kong continued to be the most economically free country in the world in 1997, followed in order by Singapore, New Zealand, and the United States. The index ranks 119 countries using 25 separate indicators of economic freedom that fall into seven major categories ranging from the size of government to monetary policy and security of private ownership. Coauthors James Gwartney and Robert Lawson note that “the summary indexes of economic freedom presented here are more comprehensive, and they are based on more complete data and the use of statistical procedures more value‐​free than any prior measure.”

The Morality of Privatizing Social Security

“The most important arguments for Social Security privatization are moral, not economic,” says Daniel Shapiro, associate professor of philosophy at West Virginia University. In “The Moral Case for Social Security Privatization” (Social Security Paper no. 14), Shapiro argues that “a privatized Social Security system meets moral criteria far better than does our current, bankrupt, pay‐​as‐​you‐​go system.” That is true, he says, not only from the classical liberal or libertarian perspective, “but from virtually every perspective in political philosophy,” including those of egalitarians, welfare theorists, and communitarians. He concludes that “the moral shroud that used to surround Social Security is an illusion: there is no moral argument for Social Security.” A private system is justified, Shapiro argues, “regardless of which political values one thinks most important.”

Throw the Bums Out

“One of the most significant reasons for the GOP’s failure to tame the budget is that senior Republicans have not lived up to the party’s campaign’s promises,” says Aaron Steelman, a former staff writer at Cato. In “Term Limits and the Republican Congress: The Case Strengthens” (Cato Briefing Paper no. 41), the voting behavior of members of Congress on 31 of the most significant budget, tax, and regulatory issues since 1995 was examined. In 27 of the 31 votes analyzed, junior Republicans (who had served 6 years or less in the House and 12 years or less in the Senate) voted for fiscal restraint in greater proportions than senior Republicans (who had served more than 6 years in the House and 12 years in the Senate). Steelman concludes that, “if the public wants Congress to reduce the size and scope of government, term limits may be imperative.”

Anti‐​Merger Mania

“Antitrust laws have become a weapon of convenience for special pleaders of all stripes who are apparently willing to go to almost any length to protect their own selfish interests by stopping mergers,” says William F. Shughart II, the Frederick A. P. Barnard Distinguished Professor of Economics and holder of the Robert M. Hearin Chair in Business Administration at the University of Mississippi. In “The Government’s War on Mergers: The Fatal Conceit of Antitrust Policy” (Policy Analysis no. 323), Shughart argues that the result is that “antitrust authorities all too often succeed, not in keeping prices from rising, but in keeping them from falling.” Shughart argues that “antitrust has a dark side” and that “it has been deformed in its application into a kind of domestic equivalent of trade protectionism.” He concludes, “The time for modest reform of antitrust policy processes has passed. Root‐​and‐​branch repeal of what Federal Reserve chairman Alan Greenspan a generation ago referred to as a ‘jumble of economic irrationality and ignorance’—and what modern scholarship has shown over and over again to be a playground of special pleaders—is called for.”

Currency Board for Russia

In “The Case for a Russian Currency Board System” (Foreign Policy Briefing no. 49), economist and Cato Institute adjunct scholar Steve H. Hanke says that “the devaluation of the Russian ruble this year was predictable, especially considering Russia’s poor monetary history.” The solution is “a competitive, parallel currency system” and the creation of a currency board system that would tie the ruble’s value to the dollar. But “to work in Russia, a currency board system must be ultraorthodox,” so that it can “command the respect and confidence of the justifiably skeptical Russian people.” Hanke points out that the Russian people have been victims of “state‐​manipulated money” ever since the time of Peter the Great. “To put the ruble on a sound competitive footing, the Russian government should enact a currency board system law immediately and announce that it will be implemented as soon as possible.”

Social Security Transition Cost Myths Debunked

“Regardless of the transition financing mechanism, moving to a market‐​based Social Security system will ultimately be less costly than trying to prop up the current program,” writes William Shipman, a principal with State Street Global Advisors and co‐​chairman of the Cato Institute’s Project on Social Security Privatization. In “Facts and Fantasies about Transition Costs” (Social Security Paper no. 13), Shipman says that critics who point to the transition costs involved in moving to a market‐​based Social Security system “ignore the enormous unfunded liabilities of the current system. Any valid discussion of the transition costs must compare those costs with the costs of maintaining the current system, including the costs of meeting those unfunded liabilities.” Shipman concludes, “Transforming Social Security to a market‐​based system of individual accounts does require a transition period, a cost, and a change in the timing of cash flows. However, any cost is reasonably less than staying with the present law.”

First, Free the Lawyers

Laws prohibiting the unauthorized practice of law (UPL) serve “no legitimate public purpose” and “should be repealed or struck down by the courts as unconstitutional,” George C. Leef writes in a new Cato study, “The Case for a Free Market in Legal Services” (Policy Analysis no. 322). An adjunct professor of law and economics at Northwood University, Leef says that licensure requirements do little to ensure adequate skills. “By imposing a costly barrier to entry, they distort the market for legal services.” The free market, reinforced by remedies for fraud, breach of contract, and negligence, establishes powerful incentives for competence, fair dealing, and efficiency. Voluntary certification programs would help consumers identify attorneys who have demonstrated proficiency at prescribed tasks and would “not restrict contracting options or deprive people of occupational freedom,” Leef observes.


NATO military intervention in Kosovo “would complete the process of transforming NATO from a defensive alliance into an on‐​call police force,” says a new Cato study. Sending NATO forces into Kosovo “will set an entirely new precedent: NATO can conduct ‘out‐​of‐​area’ operations even if the government of the country in question objects to it,” warns Gary Dempsey, foreign policy analyst at Cato. In “Washington’s Kosovo Policy: Consequences and Contradictions” (Policy Analysis no. 321), Dempsey traces the history of the region and describes the various stages of the ethnic conflict that has plagued Kosovo this century. “The conflict in Kosovo is not simply a matter of Kosovar Albanians suffering under a brutal and repressive regime— which they are—but a complex clash of mutually exclusive political claims that is aggravated by conflicting historical grievances— real and imagined.”

Deregulate the Electricity Industry

“Policymakers have decided to restructure rather than eliminate the monopoly‐​franchise state‐​regulated system that gave us our currently inefficient electric power system,” but that approach cannot work, says Peter M. VanDoren, associate director of environmental studies at Cato. In “The Deregulation of the Electricity Industry: A Primer” (Policy Analysis no. 320), VanDoren argues that policymakers need to “repeal the monopoly‐​franchise restrictions that prevent competition and eliminate public utility regulation.” Consumers might reject that proposal “because they believe that market forces will not constrain the behavior of the current monopoly transmission and distribution systems,” but “scholarly evidence suggests that regulation does very little to constrain utility pricing. In the few areas of the country where actual competition exists, electric prices are lower than they are elsewhere.”

Don’t Abolish the Exclusionary Rule

“Abolishing the exclusionary rule has been a high priority for conservatives for more than 30 years,” but the effort is “fundamentally misguided on constitutional grounds,” says Timothy Lynch, associate director of Cato’s Center for Constitutional Studies. In “In Defense of the Exclusionary Rule” (Policy Analysis no. 319), Lynch points out that “the exclusionary rule is the only effective tool the judiciary has for preserving the integrity of its warrant‐​issuing process.” There have been numerous attempts to circumvent the rule, including, most notably, the New Hampshire practice (struck down by the Supreme Court in 1971) of police officers’ issuing search warrants to themselves and a failed section of the 1995 crime bill offered by Senate Judiciary Committee chairman Orrin Hatch (R‐​Utah), which “sought to completely eliminate the exclusionary rule in federal criminal prosecutions.” Lynch concludes, “Make no mistake, abolishing the exclusionary rule would give executive branch agents a license to bypass the warrant application process and to disregard the terms of search warrants.”

This article originally appeared in the January/​February 1999 edition of Cato Policy Report.