Cato Studies: “As Workers Become Investors, Politics Shifts”

January/​February 2000 • Policy Report

The nation’s 76 million stockholders have “internalized their new role as capitalists,” causing public opinion to favor investor‐​friendly policies over government programs, says Richard Nadler in “The Rise of Worker Capitalism” (Policy Analysis no. 359). Forty‐​three percent of U.S. households own stocks or stock mutual funds, a 126 percent increase in shareholding over the last 15 years. The rate of increase was particularly steep among laborers and farmers (106 percent), householders 34 years old or younger (64 percent), and families with incomes under $25,000 (80.4 percent). As wage earners become owners of capital, Nadler finds, they increasingly favor policies that reduce taxes on savings and distrust government “investments” such as Social Security. “Congress should enact policies that expand worker ownership and financial self‐​sufficiency,” Nadler concludes, pointing out the importance of spreading wealth to even larger segments of the population by expanding individual retirement accounts and 401(k) plans and instituting individually owned Social Security accounts.

Tennessee—Still the Volunteer State?

In “The Case against a Tennessee Income Tax” (Cato Briefing Paper no. 53), Stephen Moore and Richard Vedder argue that insti‐​tuting an income tax in Tennessee would reduce growth and job creation and would be the most economically destructive way to close the state’s budget shortfall. The study was released the day before the state legislature was to begin debating Gov. Don Sundquist’s proposed 3.75 percent state income tax. Tennessee is currently one of only nine states without an income tax. Moore, director of fiscal policy studies at Cato, and Richard Vedder, an economics professor at Ohio University, contend that “Tennessee’s structural deficit problems are a result of a huge growth in state expendi‐​tures, not insufficient revenues.” Of the options available for closing the state budget deficit, estimated to be between $300 million and $500 million, an income tax “would likely be the single most economically harmful. Tennessee derives large economic benefits from not having an income tax, and it should not forfeit those benefits,” the authors conclude.

An Agenda for the WTO

Supporters of free trade should abandon the reciprocity model of negotiations and instead pursue a course of coordinated unilateralism, in which the benefits of open markets at home and abroad are clearly recognized, write the authors of “Seattle and Beyond: A WTO Agenda for the New Millennium” (Trade Policy Analysis no. 8). Brink Lindsey, director of Cato’s Center for Trade Policy Studies; Daniel Griswold, associate director of the center; Mark Groombridge, research fellow; and Aaron Lukas, trade policy analyst, argue that the new WTO round should be seen as a “ ‘bottom‐​up’ process in which countries liberalize, not merely to gain ‘concessions’ from other countries, but primarily to reap the economic rewards of their own liberalization.” Free traders, the authors maintain, “should focus on getting the available gains as quickly as possible and fend off efforts to clog and corrupt the agenda with illiberal initiatives.”

Iraqi Threat Overblown

The U.S. policy of attempting to remove Saddam Hussein from power will be difficult, could be counterproductive, and might throw Iraq into a civil war, argues defense analyst David Isenberg in “Imperial Overreach: Washington’s Dubious Strategy to Overthrow Saddam Hussein” (Policy Analysis no. 360). The author contends that the Iraq Liberation Act of 1998, which states that the United States will aid efforts to overthrow Saddam and promote democracy, is flawed because it does not offer a realistic way of dealing with the Iraqi leader. Isenberg believes that the threat of Saddam is “overblown,” pointing out that Saddam’s army has already been decimated by war and sanctions. “Saddam may be odious, but his regime does not pose a major threat to America’s security.” Isenberg argues that a more realistic policy would be to lift general economic sanctions in exchange for international weapons inspections and to continue a selective embargo on military weaponry.

Not‐​So‐​Smart Growth

The campaign to eliminate urban “sprawl” and replace it with “smart growth” has been financed with federal tax dollars, note the authors of a new Cato study, “Smart Growth at the Federal Trough: EPA’s Financing of the Anti‐​Sprawl Movement” (Policy Analysis no. 361). The federal government, via grants from the Environmental Protection Agency to nonprofit organizations, has been covertly supplying funds and technical support to anti‐​automobile, anti‐​suburb groups. Peter Samuel, editor of Toll Roads Newsletter and a consultant on EPA policies for the George C. Marshall Institute, and Randal O’Toole, executive director of the Thoreau Institute and an adjunct scholar at the Cato Institute, argue that “EPA’s campaign fundamentally subverts not only the Tenth Amendment but the very concept of democracy itself.”

Social Security Is Still a Bad Deal

The current Social Security system would not pay higher rates of return and benefits than a privatized system of personal retire‐​ment accounts, writes Peter J. Ferrara in “Social Security Is Still a Hopelessly Bad Deal for Today’s Workers” (Social Security Paper no. 18). The analysis refutes a recent study by John Mueller for the National Committee to Preserve Social Security and Medicare. Ferrara, chief economist and general counsel with Americans for Tax Reform and senior fellow at Cato, points out that Mueller’s findings are contradicted by a broad range of analysts, institutions, and leaders, including President Clinton, Harvard economics professor Martin Feldstein, the Heritage Foundation, the World Bank, and the 1994–95 Social Security Advisory Council.

The Imperial Presidency

Modern presidents have moved beyond their constitutional duty of seeing “that the Laws be faithfully executed” and have instead been usurping vast lawmaking powers reserved to Congress or the states, argue attorneys William J. Olson and Alan Woll in “Executive Orders and National Emergencies: How Presidents Have Come to ‘Run the Country’ by Usurping Legislative Power” (Policy Analysis no. 358). The authors note that, during the recent presidential scandals, many people called for the investigations to end “so that the president could get back to ‘the business of running the country.’ ” How did we get to a point, the authors ask, “where so many Americans think of government as embodied in the president and then liken him to a man running a business?” The answer rests, in part, “with the growth of presidential rule through executive order and national emergency,” according to the authors. Congress has delegated more and more power to the executive branch, aiding and abetting the expansion of presidential power, the authors note. The courts have acted in just two cases––in 1952 and 1996––to restrain the executive branch. The good news, the authors point out, is that the nation’s governors have just forced President Clinton to rewrite a federalism executive order; and now there are two proposals in Congress that seek to limit presidential lawmaking.

Clinton’s Pyrrhic Victory in Kosovo

The Clinton administration’s policy in Kosovo has habitually failed to meet its objectives and will continue to entangle the United States in multi‐​billion‐​dollar, open‐​ended peacekeeping operations, writes Christopher Layne, a visiting scholar at the Center for International Studies at the University of Southern California. In “Faulty Justifications and Ominous Prospects: NATO’s ‘Victory’ in Kosovo” (Policy Analysis no. 357), Layne writes that the administration “stumbled into war and blundered its way to ‘victory.’ ” Layne says that President Clinton’s claim of victory “rings hollow”: NATO’s intervention not only killed many innocent civilians in Yugoslavia; it also caused serious economic and social disruptions throughout the Balkans and greatly strengthened the position of the extremist Kosovo Liberation Army. Layne warns that the war continues to have negative policy repercussions. “The war with Yugoslavia has had important geopolitical effects that reverberate far beyond the Balkans. Clinton’s Kosovo policy has had portentous consequences for America’s relations with its great‐​power rivals, Russia and China, and its great‐​power allies, the West European nations.”

Cut Global Warming Program

Congress should eliminate funding for a $1.4 billion global warming program, argues Jerry Taylor, Cato’s director of natural resource studies, in “Energy Efficiency: No Silver Bullet for Global Warming” (Policy Analysis no. 356). The Climate Change Technology Initiative, being pushed by the Clinton administration as a way to combat global warming, is a “sham,” and a “repackaging of failed programs” that do nothing to significantly reduce global temperatures, he writes. The program—an amalgam of tax credits, research and development, product labeling and awareness programs, demonstration projects, and subsidies and regulations to increase energy efficiency and the economic attractiveness of renewable energy—is “built on economic ignorance and political symbolism,” Taylor writes.

Protocols on Biological Weapons Ineffective

The protocols proposed for the Biological Toxins and Weapons Convention would do little to stop the spread of bioweapons and could compromise valued U.S. secrets and critical data used for defense against biological weapons, writes Eric R. Taylor of the University of Louisiana at Lafayette in “Strengthening the Biological Weapons Conventions: Illusory Benefits and Nasty Side Effects” (Policy Analysis no. 355). Taylor writes that proposed protocols render inspections “useless” in demonstrating either compliance with or violation of the convention. According to Taylor, U.S. pharmaceutical development, which relies heavily on the very technology that is also critical to bioweapons research and development, would be especially hurt by the new protocols. “The future of the people’s right to be secure in their possessions and personal effects is placed in peril by the Biological Toxins and Weapons Convention protocols,” he writes. “Although an attack with biological weapons on the United States would be dangerous, an assault on U.S. constitutional rights in an effort to strengthen an international convention has little hope of stopping the spread of those weapons.”

Repeal the Community Reinvestment Act

The Community Reinvestment Act should be repealed, writes economist George J. Benston in “The Community Reinvestment Act: Looking for Discrimination That Isn’t There” (Policy Analysis no. 354). Originally intended to deal with “redlining”—the alleged refusal of banks to lend to residents of poorer urban areas inhabited by racial minorities—the two‐​decade‐​old CRA is an expensive way to deal with a problem that may not exist, the study finds. Benston reports that qualified applicants, regardless of their address, do not suffer unwarranted discrimination in lending. “Researchers using the best available data find very little discernible home‐​mortgage lending discrimination based on area, race, sex, or ethnic origin,” writes Benston, the John H. Harland Professor of Finance, Accounting, and Economics at Emory University.

Cradle‐​to‐​Grave Taxation

The federal gift and estate tax, better known as the “death tax,” is clearly a failure from an economic standpoint, but “the biggest problem with the death tax is a moral one,” writes law professor Edward J. McCaffery in “Grave Robbers: The Moral Case against the Death Tax” (Policy Analysis no. 353). He notes that the tax’s economic shortcomings are well‐​known. It “raises barely over 1 percent of total federal tax revenues,” and “for every dollar raised from the tax, roughly another dollar is lost because of avoidance, compliance, administrative, and enforcement costs.” But it is the moral impact that is most objectionable, according to McCaffery. The tax “rewards a ‘die‐​broke’ ethic, whereby the wealthy spend down their wealth on lavish consumption, and discourages economically and socially beneficial intergenerational saving.” McCaffery, a professor in the University of Southern California Law School, finds that the death tax rewards those who don’t work, don’t save, and spend all of their wealth.

This article originally appeared in the January/​February 2000 edition of Cato Policy Report.