Recent Cato Studies

May/​June 1996 • Policy Report

While much of Latin America is approaching an economic renaissance thanks to the adoption of free‐​market reforms,Venezuela is still following the discredited statist policies of the past, says Roger Fontaine, former senior staff officer for LatinAmerica in the National Security Council. Despite Venezuela’s enormous natural resources, he reports in “Venezuela: FromShowcase to Basket Case” (Policy Analysis 251), its economic, political, and social systems are disintegrating, which couldlead to nationwide catastrophe within a decade or less.

As have many other Latin American countries faced with economic crises in recent years, Venezuela can resolve its problemsby introducing market reforms, says Fontaine. A crucial component of those reforms is the privatization of the oil monopoly,which has been the lifeblood of the nation’s mercantilist state. Other necessary changes include the constitutional recognition ofwidespread property rights and the elimination of corruption through judicial reform. Making those changes requires awholesale change in the country’s political culture, which may not come about until the crisis becomes more severe.Fortunately, notes Fontaine, other Latin American countries provide Venezuela with a ready free‐​market model.

Trade Policy Deemed Corporate Welfare

For decades the U.S. government has singled out Japan as a country guilty of particularly grievous protectionist policies andhas forced on it special trade arrangements. But U.S.-Japanese trade disputes are often simply the result of American firms’enlisting government help to make up for their earlier neglect of the Japanese market, says Scott Latham, a Philadelphia‐​basedinternational trade consultant in “Market Opening or Corporate Welfare? ‘Results‐​Oriented’ Trade Policy toward Japan”(Policy Analysis no. 252). “Clearly,” writes Latham, “the automotive, semiconductor, and, now, film industries have been tryingto gain a competitive advantage that would not be attainable in the absence of U.S. government pressure or threats.” that the Japanese government unfairly limits American auto and auto parts imports, for instance, are based on phonystatistics that purport to define America’s “correct” share of Japan’s market. But U.S. automakers offer only four right‐​handsteering wheel models in Japan, compared to more than 100 from European manufacturers who have managed to crack thatsupposedly closed market.

“Results‐​oriented” trade policies are a form of corporate welfare for American industries that made bad business decisions inthe past. American and other foreign companies have already clearly demonstrated their ability to succeed in Japan withoutUncle Sam’s helping hand. Japan, like every other advanced industrial democracy, has its economic, social, and politicalproblems; its trade barriers; and its regulations. There are many policies it could pursue to open its economy further andstimulate recovery from a long recession. But, concludes Latham, those have nothing to do with granting sector‐​specific favorsto companies with healthy balance sheets and highly competent managers.

Social Security Reform Recommended

Anyone who has taken the time to sort through recent Social Security trustees’ reports knows that the program is notsustainable in its current form, says Mark Weinberger, former chief of staff and counsel for the Bipartisan Commission onEntitlement and Tax Reform. Of the total $1.53 trillion in federal expenditures in 1995, he reports in “Social Security: Facingthe Facts” (Social Security Paper no. 3), Social Security was the largest, accounting for nearly 22 percent, or $334 billion. Thefigure is greater than the amount spent on all other entitlement programs, except Medicare, combined. By 2005, Weinbergersays, spending is expected to reach $556 billion (constant dollars). Alarmingly, the baby‐​boom generation will not beginretiring until approximately 2010, causing the cost of the program to balloon enormously.

The growing fiscal imbalance is a mathematical certainty caused by the “graying” of America and the increased number ofelderly people who will collect benefits for a longer portion of their lives coupled with a reduction of the number of workersavailable to pay for their benefits. Increasing costs of living and higher standards of living (as reflected in higher wages) also arecauses of the program’s growth.

The only way for politicians to keep their commitment to the program’s beneficiaries, Weinberger concludes, is to act now toreform the Social Security system. After years of fiscal recklessness and political avoidance, policymakers face four choices:reduce benefit payments by altering the benefit formula or restricting eligibility, increase taxes to fund the program, add to thefederal debt, or restructure the program to allow individuals to save money in private accounts that yield higher returns than thecurrent system. We cannot wait to act, he warns. In approximately 2013 inflows to the program are projected to beinsufficient to pay beneficiaries. To provide for adequate planning, the choice must be made now.

The Nunn‐​Lugar Act Exposed as Counterproductive

When the Soviet Union disintegrated in late 1991, Soviet nuclear weapons were in the hands of four suddenly independentrepublics — Russia, Ukraine, Kazakhstan, and Belarus — whose leadership appeared confused and wobbly. In response to thatthreatening turn of events, Sens. Sam Nunn (D‐​Ga.) and Richard Lugar (R‐​Ind.) persuaded Congress to pass the CooperativeThreat Reduction (CTR) program to provide assistance for dismantling or safely storing the weapons in the Soviet nucleararsenal. That program, says Rich Kelley in “The Nunn‐​Lugar Act: A Wasteful and Dangerous Illusion” (Cato Foreign PolicyBriefing no. 39), is now a full‐​fledged Pentagon bureaucracy. The urgent need for aid has waned, and its central purpose — todestroy nuclear weapons — remains unfulfilled.

To date, the CTR program has done relatively little. The few projects it has funded — ranging from defense conversion toproviding housing for former Soviet military officers — do little, if anything, to advance Washington’s key objective of curbingnuclear proliferation. What is more, concludes Kelley, evidence suggests that CTR may in the long run threaten, rather thanenhance, American security. In fact, he reports that CTR funds have eased the Russian military’s budgetary woes, freeingresources for such initiatives as the war in Chechnya and defense modernization. Congress should eliminate CTR funding sothat it does not finance additional, perhaps more threatening, programs in the former Soviet Union.

Clinton’s Foreign Policy “Successes” Found Wanting

President Clinton and his senior advisers have claimed a lengthy list of foreign policy successes in such places as Bosnia, Haiti,Northern Ireland, North Korea, and the Middle East. Those claims should be viewed skeptically says Cato research fellowJonathan G. Clarke in “Instinct for the Capillary: The Clinton Administration’s Foreign Policy ‘Successes’ ” (Foreign PolicyBriefing no. 40). The recent terrorist bombings in Britain and Israel, conducted by the Irish Republican Army and Hamas,respectively, underscore the ephemeral nature of Washington’s alleged diplomatic achievements says Clarke. Events in Haiti,North Korea, and Bosnia, he says, also provide little cause for optimism in the long run.

Even if the administration’s claims are accepted at face value, most of the “successes” involve countries that have littlerelevance to America’s vital interests, notes Clarke. And Washington’s relations with such crucial nations as Russia, China,Japan, and the West European powers are in disarray. The United States, he concludes, appears to be drifting towardconfrontations with both Russia and China. A string of miscellaneous policy successes on peripheral matters cannot begin tocompensate for such a dangerous intellectual vacuum at what should be the epicenter of foreign policy.

Purchasing Power of School Vouchers Would Be Significant

American schools are failing because they are organized according to a bureaucratic, monopolistic model. However, manypeople believe that school vouchers could not possibly cover tuition at a private school; they may be thinking of such costlyschools as Dalton, Andover, and Exeter and concluding that all private schools cost in excess of $10,000 a year.

In “What Would a School Voucher Buy? The Real Cost of Private Schools” (Cato Briefing Paper no. 25), Cato’s executivevice president David Boaz and New York‐​based writer R. Morris Barrett report on a survey of private schools inIndianapolis, Jersey City, San Francisco, and Atlanta. The average tuition for all private schools — elementary andsecondary — is $3,116, or less than half the cost per pupil in the average public school, which is $6,857. Boaz and Barrettconclude that a school voucher for $3,000 per student per year would give more families the option of sending their children tobetter schools.

SAs Shown Not to Cause Adverse Selection

None of the proposed structural reforms of Medicare has come in for as much criticism as have medical savings accounts(MSAs), which are designed to return control over health care spending to the consumer, reduce costs, and avoid the rationingof care inevitable under either government‐​run health care systems or managed care. As MSAs have become increasinglypopular in Congress, reports Cato associate policy analyst Peter Ferrara in “The Establishment Strikes Back: Medical SavingsAccounts and Adverse Selection” (Cato Briefing Paper no. 26), opponents have tried to discredit the idea. The mostsignificant criticism is that MSAs would appeal only to the healthy, leaving traditional Medicare to serve the sick. Such adverseselection would, critics conclude, result in large cost increases to the Medicare system.

However, Ferrara reports that recent studies purporting to show adverse selection have been seriously flawed. In fact, bothactuarial studies and experience in the private sector show that MSAs will appeal to a wide cross section of the elderly,regardless of their health status. Despite recent attacks, he says, MSAs remain the best hope for reforming the Medicaresystem.

Corruption at the United Nations

The United Nations is under increasing attack by critics in the United States and other countries. According to Stephan Halperin “A Miasma of Corruption: The United Nations at 50″ (Policy Analysis no. 253), at the heart of the organization’s mountingproblems is an almost total lack of accountability, which gives rise to suspicions of wholesale corruption. Existing evidenceindicates that corruption and mismanagement go beyond the routine fraud, waste, and abuse of resources that mark allpublic‐​sector enterprises.

Halper, a syndicated columnist and former White House and State Department official, shows that UN budgets are shroudedin secrecy, and the actual performance of the myriad bureaucracies is translucent, if not opaque. There is no reliable way todetermine whether the various and often competing specialized agencies are doing their jobs, and many UN activities, even ifthey are of some value, can be carried out better and more efficiently by other groups. Other activities should not beundertaken at all. Available evidence coupled with the United Nations’ unwillingness to undergo a thorough audit raise seriousquestions about its mission and the means used to carry it out.

The United Nations is in dire need of reform, starting with a comprehensive, independent audit. Even if a complete audit wereperformed, however, there is no guarantee anything would be done about the problems identified. And radical change may notbe possible, no matter how obvious the need. Given all the earlier, failed attempts to put things right, even on a limited basis,optimism about meaningful reform may be an exercise in wishful thinking.