The Most Important Secret of a Prosperous Economy

by Jim Powell at http://www.cato.org/publications/commentary/most-important-secret-prosperous-economy

Why has the U.S. economy been such a poor performer in recent years? The short answer is that many Washington politicians either don't understand the most important secret of a prosperous economy, or they disregard it.

President Obama, for example, imagined that pumping money into the banking system was a secret of prosperity, but the Fed pumped in trillions of dollars, and there are still fewer Americans employed in the private sector than when he took office in January 2009. Obama's $825 billion "stimulus" bill never produced the "multiplier" effect that he claimed would energize the economy.
He offered subsidies for more "green" jobs, but the result has been more "green" layoffs as subsidized companies went bankrupt. Obama touted infrastructure spending as a key to prosperity, but it would be very difficult to show how the economy benefited by taxing everybody to pay above-market union wages for repaving perfectly good roads. The Obama administration has spewed hundreds of regulations, supposedly to strengthen the economy, but the resulting uncertainty has discouraged investors and entrepreneurs from making commitments for the future.
What, then, is the most important secret of a prosperous economy? Consider the experience of Jacob Reiss and his wife Mary who started International Tailoring Company around the turn of the last century. Like other tailors, they made suits one at a time. They would take a customer's measurements and deliver a finished suit several weeks later. There were no ready-made suits. Reiss wondered how they could boost sales.
Reiss analyzed their records of customer measurements and organized them in groups, from smallest to largest. This led to his idea of "sizes." Each size involved component pieces of cloth cut to specific dimensions. Reiss organized assembly lines to manufacture suits. He persuaded merchants to stock his line in popular sizes. A customer could try on different sizes to determine the best fit. The only additional work to be done was the quick alteration of sleeve and pants length. The simple idea of sizing has helped lower clothing costs for the millions. As this example suggests, to a significant degree prosperity is the result of myriad improvements implemented from the bottom up.
Stan Mason also has remarkable story. In 1949, he was changing his baby's diapers, which made him wonder how diapers might be designed so that they didn't leak. He didn't have any special training — he graduated from State College in Trenton, New Jersey. He concluded that diapers would be less likely to leak if, instead of being formed from rectangular pieces of fabric, their shape conformed with a baby's bottom. "I took a roll of paper and cut it into a long series of back-to-back hourglass shapes," he explained. "Cut these where the broad part of each hourglass join, and you have individual diapers. Put two sticky tabs at one end of each diaper, and you don't need safety pins. Insert an absorbent pad into the middle part." These, the first disposable, pin‑free, form-fitted diapers, soon dominated the market and launched Mason's career.
Although Mason has invented brand new products like microwave cookware and granola bars, he spent much of his life improving existing products. For instance, he recalled, "Hunt Foods asked me what might be done about the gallon bottles they used for their cooking oil. The bottles were manufactured at one factory, then shipped to the oil-processing factory. This was expensive, and there was some breakage during shipment. I thought polyethylene would be a better material, because polyethylene pellets could be shipped to the oil-processing factory and molded into gallon jugs with equipment that didn't require much space. I came up with a jug design that addressed the glug-glug complaint about gallon bottles (as poured, the flow of air into the bottle disrupted the flow of oil out, resulting in spills). I designed a hollow handle and a contoured shape that makes for smoother air and liquid flows, eliminating the tendency to spill." This design became standard in billions of gallon jugs used for milk, water, cider and other liquids.
One could cite example after example of improvements that made things easier, cheaper and better, achieved by people hardly anyone has heard of. In 1858, the Jamaica-born immigrant Hymen Lipman began producing pencils with an attached eraser. He received a U.S. patent for this, the first modern pencil, and it has made life easier ever since.
That same year, Margaret Knight, of Springfield, Massachusetts, figured out how to efficiently produce the first modern shopping bag. It was well-known that a flat-bottomed bag was far better than a V-shaped bag for carrying bottles and packages, but a flat bottom was costly. Knight invented a machine that did the work of 30 people, cutting, folding and gluing bag components together, for which she received a U.S. patent.
Until 1925 there wasn't an easy way to determine which shoe size would be appropriate for a customer's feet. Then Charles Brannock, a shoemaker's son, used a child's construction set to build a simple device: one end was for measuring the right foot, the other end for the left foot. The device is used around the world.
In 1959, engineer Ernie Fraze forgot to bring his can opener to a picnic, and he ended up opening beverage cans by using his car bumper. He went on to invent pop-top cans with a removable tab.
In 1966, James Goodfellow developed a secure method — using a "PIN number" — that enabled people to withdraw money from or deposit checks into their accounts when banks were closed.
Jack Clements liked to drink coffee as he walked or rode in his car, but it wasn't until 1985 that he figured out how to substantially reduce the risk of aggravating spills. He conceived of a domed lid with an opening that made spill-free sipping easy.
Nobody could have predicted that these and countless other people would come up with improvements that helped the economy prosper. If inventing had been restricted only to individuals with political connections or individuals whom so-called experts considered worthy, there would have been far fewer people trying to make improvements. The number and value of improvements would have gone down, particularly improvements from unforeseen sources. Improvements would have come later — or not at all. Quite a few important inventions, common in one part of the world, were unknown elsewhere for centuries.
Economies prosper when multitudes of ordinary people are motivated to make improvements. This is because information and insights needed to make an economy prosper are widely dispersed. There's far more than could ever be centralized, validated and updated in a place like the federal government. The most reliable way to motivate people? Harness their self-interest: let them try making a profit by starting a business based on their information and insights. Government can best promote prosperity by, among other things, maintaining equal rights, low taxes, free trade, sound money, predictable laws and protection against force and fraud. Government should let consumers render their verdicts in open markets — no subsidies, special favors or bailouts.
Obviously not everyone will try to start a business, many efforts will fail, and successful efforts will often cease working after a while, but if opportunities for profit are wide open, it's likely that there will be an outpouring of improvements essential for prosperity.
It was hard for Americans to imagine great outcomes from the hordes of impoverished, unskilled immigrants who began arriving in very large numbers during the 19th century. For example, Chinese contract laborers performed difficult, often dangerous work that other people weren't willing to do on railroads, on farms and in mines. Chinese immigrants learned to get along in a society that used a language utterly unlike their own. There was harsh discrimination against these people. But their strong work ethic, their frugality and their culture that emphasized the importance of education enabled them to become more prosperous than most other ethnic groups. Today Chinese Americans play a crucial role in mathematics, science, technology and medicine. Where would we be without them?
Eastern European Jewish refugees, fleeing from persecution during the last two decades of the 19th century, didn't seem much more promising than the Chinese. Unlike the sophisticated German Jews who had arrived earlier, Eastern European Jews reportedly arrived with less money than any other immigrant group. Only about half were literate. Many worked as day laborers. The influx of Eastern European Jews packed more people into New York City's Lower East Side than were in the densest slums of Bombay. The strange language (Yiddish), the strange dress and religious practices of Eastern European Jews embarrassed the Germans who had embraced Reform Judaism. But bedrock values of Jewish culture — cleanliness, learning and charity — prevailed. Jews built schools, libraries, bath houses, hospitals and other community institutions. Jews minimized their exposure to diseases arising from filth. There was little alcoholism. Upward mobility was dramatic as increasing numbers of Jews entered professions. From their impoverished beginnings, Jews emerged as the most prosperous group in America.
Although it isn't possible to predict which people will do the most to help achieve a prosperous society, there are sure to be plenty of improvements if millions and millions of people have incentives to do better. This is consistent with nature's way of assuring the survival of species.
For example, a single seed-head of a common dandelion weed is reported to have approximately 180 seeds. In a good year, a mature oak tree might produce as many as 150,000 acorns, each containing one seed. Nobody knows which seeds will survive — most will end up in places without adequate sunlight, water or nutrients. But the sheer number of seeds produced is the most reliable way to make sure that enough will survive.
Similarly, female salmon lay some 5,000 eggs in a gravel riverbed. The odds are overwhelming against the survival of any particular egg, because of all the eggs that weren't fertilized, hatchlings that were suffocated by river debris, young salmon that were too weak to survive or were killed by pollution or were eaten by other fish, birds or seals, grown salmon caught by fishermen and salmon killed by otters or bears while swimming back upstream to spawn. Despite all this, the number of eggs helps assure the survival of their species.
Another example: there can be as many as 300 million sperm in a single human ejaculation. Of the sperm deposited in a woman's vagina, only a small percentage make it to the uterus, and an even smaller percentage venture into the fallopian tube and reach the egg. The health and capabilities of sperm vary, but competition to penetrate the egg makes it likely that the race will be won by the fittest.
So, there's a tremendous amount of talent and energy in human society, more than enough to achieve prosperity. It can be achieved despite a lack of natural resources. It can be achieved in small nations that have no hope of influencing world events or negotiating favorable deals with major powers. Human talent and energy can overcome devastation caused by epidemics, famines, wars or natural disasters.
But if incentives are inadequate, or if tax or regulatory obstacles to enterprise are too great, fewer people are likely to incur the risks of making improvements, commonly achieved through a business enterprise. There will be suffocating stagnation, unemployment and poverty.
Consider, for example, what it's like trying to start and operate a legal business in Singapore (atop the World Bank's Doing Business 2012 report on 183 countries) compared with Chad (at the bottom of the list). In Singapore, starting a legal business involves only 3 procedures, whereas in Chad there are 11 procedures. The process takes 3 days in Singapore, 66 days in Chad. It takes 26 days to obtain a construction permit in Singapore, 154 days in Chad. The filing fees, taxes and other costs of starting a legal business are 0.7 percent of per capita average income in Singapore, a dramatic contrast with Chad where such costs amount to 208.5 percent of per capita average income.
In Singapore, an estimated 84 hours are required each year to maintain tax-related records and prepare tax returns, versus 732 hours in Chad. Total taxes consume 27.1 percent of corporate profits in Singapore, 65.4 percent of corporate profits in Chad. Importing a container of goods costs $439 in Singapore, $8,525 in Chad. Exporting a container of goods: $456 in Singapore, $5,902 in Chad. Resolving a bankruptcy takes 9.6 months in Singapore, 4 years in Chad. In Singapore, the recovery rate (cents on the dollar) from a bankruptcy is 91.3 percent, but the recovery rate is zero in Chad. Is anyone surprised that per capita GDP is much higher in Singapore ($50,714) — about 55 times higher — than Chad ($920).
The World Bank certainly doesn't measure everything that affects incentives to make improvements needed for prosperity, but the report covers many basic things. As the findings make clear, poor countries that stay poor tend to suffer from governments with fundamentally bad policies.
How does the U.S. compare? Overall, it's high on the World Bank's ranking, number 4 out of 183 (behind Hong Kong and New Zealand as well as Singapore). In some respects, the U.S. ranks well behind Singapore. For example, the total tax rate on corporate profits is 46.7 percent, and tax-related record-keeping and preparation consumes an estimated average of 187 hours per year. Importing a container of goods costs about $1,315, while exporting a container costs about $1,050. The U.S. per capita GDP is $48,147.
The latest annual survey by the Vancouver-based Fraser Institute, Economic Freedom of the World, shows that economic freedom is rapidly declining in the United States. It's in tenth place, because of runaway government spending and debt as well as continuing government assaults on private property rights. This is alarming, since the survey repeatedly has affirmed that there can be no prosperity without economic freedom. The survey uses 42 data points to rank 141 nations according to the amount of economic freedom.
Ronald Reagan understood these issues very well, as one would expect, since he was elected amidst economic stagnation that plagued three presidents, yet he launched an era of remarkable prosperity. On September 29, 1981, he declared: "Growth, prosperity and ultimately human fulfillment are created from the bottom up, not the government down. Only when the human spirit is allowed to invent and create, only when individuals are given a personal stake in deciding economic policies and benefitting from their success — only then can societies remain economically alive, dynamic, progressive, and free."

Obamacare’s Sweetheart Deal for Massachusetts

Posted by Michael F. Cannon at http://www.cato-at-liberty.org/obamacares-sweetheart-deal-for-massachusetts/


A bunch of rural hospitals are upset about a provision of Obamacare that benefits Massachusetts above all other states. Forgive the bureaucratese, but you really have to read the Medicare Price Control Payment Advisory Commission’s description to appreciate the situation:

Among the proposed wage index reclassifications or exceptions granted to hospitals for FY2012, the rural floor exception triggered in the state of Massachusetts will have a large impact on hospital payments. Beginning in FY 2012, the conversion of Nantucket Cottage Hospital from a critical access hospital to an IPPS hospital will trigger the rural floor wage index exception for the 60 urban hospitals in the state of Massachusetts, increasing wage indexes for these hospitals from an average of 1.16 in FY2011 to 1.35 in FY2012. Nantucket Cottage Hospital is a rural island hospital, which has 15 inpatient beds and serves approximately 150 Medicare inpatients per year. This hospital will become the only rural IPPS hospital in the state of Massachusetts. As a result of this change in one small hospital’s status, and the subsequent change in the wage index, payment rates for urban hospitals in Massachusetts will increase by 8 percent, or by more than $200 million in FY 2012. These extra payments will be made budget neutral at the national level, and therefore all hospitals—including rural hospitals—will absorb the financial loss.

Got that? One small, rural, island hospital in Massachusetts changes its Medicare status, and—presto!—the other 60 Massachusetts hospitals suddenly qualify for an extra $200 million in Medicare subsidies. Land of the free! A letter from several state hospital associations complains the amount is actually $367 million per year. The best part: Medicare scrounges up that $200-$367 million by reducing subsidies to other states. Thus the nasty letter from the lobbyists for non-Massachusetts hospitals.
Cato adjunct scholar David Hyman writes about this dynamic in his excellent satire, Medicare Meets Mephistopheles:

Geographically based envy has also precipitated a “formula fight” among the states, complete with litigation, coalitions of aggrieved states and senior citizens, coverage in newspapers and editorials, and statements from concerned legislators… [C]ertain state medical societies have been particularly insistent that their states are being shortchanged by the Medicare program. These interest groups have had great success in persuading their elected representatives to change Medicare’s reimbursement formulas, so the Medicare money train unloads their “fair share.”

I’ve written before about how Romneycare solidified layers of corruption whereby Massachusetts officials (with the complicity of the Bush administration) bilked taxpayers in the other 49 states. It turns out that Obamacare also has a sweetheart deal for Massachusetts. Who knew Romneycare and Obamacare had so much in common?

It's Up to The Private Sector to Invest in New Technology

by Jerry Taylor at http://www.cato.org/publications/commentary/its-private-sector-invest-new-technology

In free-market economies, decisions about whether to invest in a technology or an industry are made by market actors with private capital. The promise of profit induces investment in promising ventures and the sting of loss penalizes those investments that turn out to be misguided. Of course, we live in a mixed economy in which government frequently assumes tasks that were once left to private individuals and corporations. Whether the government should invest in green energy suggests two questions. Are major green energy investments worthwhile in the first place? And should the Obama administration be spending $80 billion in grants and loans to make these investments on our collective behalf?

Although proponents of green energy note that the sheer enormousness of the federal subsidy effort is helping to expand green energy generating capacity, stock prices for green energy firms are in free fall, even in China, because investors understand that this industry would disappear if the lavish federal and state subsidies were to end.
The "green jobs" argument most commonly marshaled is thus looking thinner by the day. Data recently released by the U.S. Department of Energy reveal that the $38.6 billion of federally guaranteed loans to green energy projects have thus far produced only 3,545 new, permanent jobs ($5 million per job), far short of the 65,000 jobs promised by the administration.
The DOE's Energy Information Administration reports that new renewable energy power plants will continue to be far less economically competitive than new gas-fired generation plants over the foreseeable future, even after federal subsidies are taken into account.
Things look even worse in the transportation sector. The Obama administration has spent $5 billion to promote the manufacture of electric vehicles so as to put 1 million EVs on American roads by 2015. But layoffs and bankruptcies have plagued those receiving EV handouts because the technology is still problematic and the final product so expensive that consumers won't buy it, even with $7,500 rebates. Consequently, only two tenths of 1 percent of the cars sold this year were EVs, and the vast majority of those were in development long before President Obama took office. EV sales would have to be almost nine times greater per year to meet the administration's objective.
The only good argument for federal handouts to green energy projects is the contention that there are environmental costs associated with fossil fuel consumption that are not internalized in fossil fuel prices, distorting the market and leading to more "brown" energy consumption than is economically efficient.
But the most credible estimates about climate externalities put the cost at no more than $12 per ton of CO2. Internalizing that cost into fossil fuel prices would increase gasoline prices by no more than 12 cents per gallon, not enough to make EVs economically efficient or commercially competitive. If all the nation's electricity were coal-fired, a $12-a-ton CO2 tax would increase the price of electricity by about 1.3 cents per kWh, just over 10 percent above the average retail price of 12 cents per kWh. Given that a little over half of the nation's electricity is coal-fired, the actual increase would be even less.
If green energy is commercially promising, then profit-hungry capitalists will make those investments. If it isn't, no amount of government subsidy will turn those economic sows' ears into wealth-creating silk purses.

“You could use it at a specific event. You could use it at a shooting-prone location…”

Posted by Jim Harper at http://www.cato-at-liberty.org/%E2%80%9Cyou-could-use-it-at-a-specific-event-you-could-use-it-at-a-shooting-prone-location-%E2%80%9D/


That’s NYPD Commissioner Ray Kelly touting a new technology called “terahertz imaging detection” to a local news outlet.
Terahertz radiation is electromagnetic waves at the high end of the infrared band, just below the microwave band. The waves can penetrate a wide variety of non-conducting materials, such as clothing, paper, cardboard, wood, masonry, plastic, and ceramics, but they can’t penetrate metal or water. Thus, directing terahertz radiation at a person and capturing the waves that bounce off them can reveal what is under their clothes without the discomfort and danger of going “hands-on” in a search for weapons. Many materials have unique spectral “fingerprints” in the terahertz range, so terahertz imaging can be tuned to reveal only certain materials. (In case you’re wondering, I got this information off the top of my head…)
Will the machines be tuned to display only particular materials? Or will they display images of breasts, buttocks, and crotches? The TSA’s “strip-search machines” got the moniker they have because they did the latter—until the agency tardily re-configured them.
Then there’s the flip-side of not going “hands-on.” Terahertz imaging detection doesn’t natively reveal to the person being searched that law enforcement has picked him or her out for scrutiny. A pat-down certainly lets the individual know he or she is being searched, positioning one to observe and challenge one’s treatment as a suspect. Terahertz imaging lacks this natural—if insufficient—check on abuse.
So terahertz imaging is not just a “hi-tech pat-down.” Its potential takes what would be a pat-down and makes it into a secret, but intimate, visual examination—a surreptitious strip-search. Pat-downs and secret strip-searches are very different things, and it is not necessarily reasonable, where a pat-down might be called for, to use terahertz imaging.
And that brings us to the fundamental problem with Commissioner Kelly’s proffer to use this technology at a “specific event” or at a “shooting-prone location.” These contexts do not create the individualized suspicion that Fourth Amendment law demands when government agents are going to examine intimate details of a person’s body and concealed possessions.
It is certainly possible to devise a terahertz imaging device and a set of use protocols that are constitutional and appropriate for routine, domestic law enforcement, but Commissioner Kelly hasn’t thought of one, and I can’t either.
Consider the dollar costs and potential health effects of terahertz imaging detection, it might just be that the pat-downs pass muster far better than the high-tech gadgetry.

The Great Renewable Energy Scam: Is There A Change in the Wind?

by Patrick J. Michaels at http://www.cato.org/publications/commentary/great-renewable-energy-scam-is-there-change-wind

People don’t like being forced to purchase things they may not want, which is why over half of us are hoping that the Supreme Court throws out the individual insurance mandate in President Barack Obama’s health care plan.

There’s also a worldwide rebellion brewing against being forced to purchase expensive electricity produced by so-called “renewable” sources, now being exacerbated by the availability of very cheap natural gas from shale formations.
But, here in the U.S. there are some 30 different statewide “renewable portfolio standards” (RPSs) that also mandate pricey power, usually under the guise of fighting dreaded global warming.
RPSs command tha. a certain percentage of electricity has to come from wind, solar, geothermal, or biomass. Given that this power generally costs a lot more than what comes from a modern coal or gas plant, your local utility passes the cost on in the form of higher bills, which the various state utility commissions are only too happy to approve in the name of saving the planet.
RPSs generally do not include hydroelectric power, which produces no carbon dioxide. It’s also much more predictable than solar or wind, and costs about the same as the average for gas and coal combined. It’s not in the portfolio standards because dams are soooo 20th century, and it isn’t a darling of the green lobby, like solar, wind and biomass. But hydro can deliver more juice than solar is ever likely to.
Nor do RPSs allow for natural gas. There are massive quantities in shale formations around the country, and new horizontal drilling techniques are releasing so much of it that it is now the cheapest source of electrical power. If our environmentalist friends were at all serious about climate change, they would enthuse over it becaus. it produces significantly less carbon dioxide than an equivalent quantity of coal when used for power generation. Instead, they are horrified that cheap gas will destroy solar and wind.
Their worries are quite well-founded. In November, NextEra Energy, the country’s largest wind-energy producer, said it would develop no new wind projects this year, as utilities sell cheaper gas power.
When are governments going to learn that they ought to butt out of the energy business? RPSs that specify certain technologies are essentially picking winners and losers based more upon political pull than market logic.
One needs to look no further than ethanol as a motor fuel, mandated by the feds. Sold as “renewable” and reducing pernicious carbon dioxide emissions, it actually produces more in its life cycle than simply burning an equivalent amount of gasoline. It also—unconscionably—consumes 40% of U.S. corn production, and we are the by far the world’s largest producer of this important basic food.
The popular revulsion against ethanol has succeeded in cutting its massive federal subsidy, of $0.54 per gallon, which ran out on Dec. 31. But that doesn’t stop the federal mandate. Last year it was for roughly 14 billion gallons from corn and it will be nearly 15 billion in 2012. By 2022, up to 20 billion gallons will be required — all from corn — unless there is a breakthrough in so-called “cellulosic” ethanol, which, no matter how much money the government throws at it, hasn’t happened. Indeed, the largest cellulosic plant, Range Fuels, in Camilla, Ga., just went bankrupt. The loss to American taxpayers appears to be about $120 million, or about 25% of a Solyndra.
Don’t expect Congress to zero the ethanol mandate anytime soon. Farm country tends to be conservative on pretty much everything except propping up corn prices, which is what ethanol mandates do.
Having seen the ethanol debacle, will the states put solar and wind in their rightful (small) niches by repealing the RPSs? Increasing utility bills with renewable mandates is politically dangerous, and there is less and less political will to subsidize and otherwise prop up energy sources and technologies that cost too much.
Look for a movement in the many state legislatures that approved the outrageous RPSs without asking people how they liked being forced to buy something they don’t want. Or will cheaper natural gas and hydro be allowed in the standards in the place of wind and solar? There is likely to be some legislation introduced this year and a lot more in the future, as the U.S. catches on to the great renewable energy scam.

The Panel Makers’ Petition

Posted by David Boaz at http://www.cato-at-liberty.org/the-panel-makers-petition/


One of the most famous documents in the history of free-trade literature is Bastiat‘s famous “Candlemakers’ Petition.” In that parody, the French economist and parliamentarian imagined the makers of candles and street lamps petitioning the French Chamber of Deputies for protection from a most dastardly foreign competitor:

You are on the right track. You reject abstract theories and have little regard for abundance and low prices. You concern yourselves mainly with the fate of the producer. You wish to free him from foreign competition, that is, to reserve the domestic market for domestic industry.
We come to offer you a wonderful opportunity. . . .
We are suffering from the ruinous competition of a rival who apparently works under conditions so far superior to our own for the production of light that he is flooding the domestic market with it at an incredibly low price; for the moment he appears, our sales cease, all the consumers turn to him, and a branch of French industry whose ramifications are innumerable is all at once reduced to complete stagnation. This rival . . .  is none other than the sun.

For after all, Bastiat’s petitioners noted, how can the makers of candles and lanterns compete with a light source that is totally free?
Thank goodness we wouldn’t fall for such nonsense today. Or would we?
We may be about to find out. Makers of solar panels have petitioned the U.S. Department of Commerce and the International Trade Commission to slap tariffs on imported Chinese panels. Christopher Joyce of NPR reports that Gordon Brinser, CEO of Solar World, complains that U.S. manufacturers can’t compete with cheaper Chinese imports. The Chinese panels aren’t free; but just as Bastiat’s candlemakers complained, the competition is hard to counter.
Perhaps the comparison is unfair. After all, the Coalition for American Solar Manufacturing isn’t asking for protection from the sun, only from Chinese panel producers who are allegedly “dumping” panels into the American market “at artificially low prices.”
What’s the difference, though? Any source that supplies solar panels to American consumers and businesses is a competitor of the American industry. And any source that can deliver any product cheaper than American companies is a tough competitor. Domestic producers will no doubt gain by imposing a tariff on their Chinese competitors. But companies that install solar power will lose, by having to pay higher prices for panels.
Businesses would always prefer a world without competitors. If they can’t outcompete their rivals in the marketplace, they may be tempted to ask the government for protection. And our “antidumping” laws actually invite such complaints. But economists agree that consumers, and the businesses that use imported products, lose more on net than producers gain. Protectionism is a bad deal for the American economy. Let’s hope the uncompetitive solar panel manufacturers get told to go build a better mousetrap.
More on “antidumping” laws here.

One Size Does Not Fit All

by Neal McCluskey at http://www.cato.org/publications/commentary/one-size-does-not-fit-all

The best way to look at education is not as a private or public good, but from the perspective of reality: All people are different, and diverse people cannot be equally served by a single school system. Some parents want their children to learn that Columbus was good, some bad. Some kids are ready for algebra in eighth grade, some as sophomores. Some students respond well to zero-tolerance discipline, others don't.

Once you acknowledge reality, there's no question that a monolithic system will be hopelessly inefficient. Worse yet, it will foster incessant conflict as people try to get the schools to teach the things they — not somebody else — want.
The law in New Hampshire is one way of dealing with reality. It is an effort to allow parents or children who want or need something different to get it. It's a nearly immovable escape hatch — parents would have to pay to develop their preferred curricula, while schools could potentially face overwhelming demands to furnish personalized learning — but it at least acknowledges that one size does not fit all.
A far better option is to move to a system that functions naturally and smoothly with diversity — school choice. Let parents control education funding, and give educators freedom. Then numerous schools will spring up and parents will be able to pair with educators who share their views, or whose schools focus on the specific needs of nonuniform children.
But what about the public good? Aren't there some things that we agree every child must learn?
If we all agree, then freedom is no threat; parents will choose schools that teach those things. And if we don't?
Look no further than endless warring over evolution to see what happens when we ignore reality in service of the perceived public good. As Michael Berkman and Eric Plutzer recently documented, even when state standards call for the teaching of evolution, big percentages of high school biology teachers skip it. Why? To avoid conflict with objecting parents and students.
In other words, by trying to force evolution instruction on everyone, even those who want it often miss out. But that's what happens when you ignore basic reality.

FBI Reminds Us Government Already Has MegaPower to Take Down Websites

Posted by Julian Sanchez at http://www.cato-at-liberty.org/fbi-reminds-us-government-already-has-megapower-to-take-down-websites/


Online activists were still busy celebrating a successful day of protest against proposed (and now shelved) Internet censorship legislation when the Justice Department pulled the popular cyberlocker site Megaupload offline Thursday, and indicted its owners on charges of criminal copyright infringement. It was a serendipitously timed demonstration of two important facts.
First, the U.S. legal system is perfectly capable of reaching criminal suspects overseas. Megaupload is incorporated in Hong Kong, and its CEO was arrested (along with three employees) in New Zealand. That’s significant because supporters of laws like the Stop Online Piracy Act (SOPA) and PROTECT-IP Act (PIPA) typically claim they’re helpless to do anything about overseas sites by more conventional means, necessitating aggressive new enforcement powers with streamlined hearings that give short shrift to due process. Now, if the people behind Megaupload are, in fact, guilty of criminal activity—and the indictment certainly looks damning—the government will have the opportunity to prove it beyond a reasonable doubt before a jury, which will also get to hear any exculpatory facts or arguments the defendants are able to offer. It can be a slow process, but it’s also how we’re supposed to do things in the United States: we don’t just issue orders branding people or sites as “rogues,” we convict them.
Second, if you’re worried about the government taking down U.S.-registered sites, which include any site in the .com and .org domains, wherever their servers might be located, then SOPA and PIPA aren’t really what you should be concerned about: the government already has that power under the PRO-IP Act of 2008. There are good reasons SOPA and PIPA attracted more attention: Instead of “seizing” domains directly at the registry, they would have imposed blocking and filtering obligations on thousands of ISPs and search engines, creating a whole host of technological and security problems. There was also the private right of action, which seemed more susceptible to abuse by overzealous copyright owners who were able to find a friendly judge. But the central power of the government to shut down web domains is already there in PRO-IP, and has been used to seize hundreds of sites already—wrongfully in at least some cases. Incidentally, those absurdly inflated phony statistics I wrote about earlier this month—the ones the Government Accountability Office has debunked, which even the content industries have finally stopped using—were heavily cited as evidence for why PRO-IP was needed, featuring prominently in press releases by the bill’s authors.
The owners of Megaupload don’t seem like particularly sympathetic characters, but the abrupt seizure of the domain before trial ought to give us a bit of pause. The site was plainly used to enable an enormous amount of copyright infringement—and judging by the indictment, the site’s operators appear to not only have known about this, but encouraged it in order to bolster their ad revenues. But that doesn’t mean that’s all the site was used for. Plenty of people made legitimate use of the site for cloud storage, or to (legally) share large files with friends, family, or colleagues. Indeed, no small number of major-label recording artists declared in song  that they used the site for just such purposes. Journalist Adam Penenberg tweeted this morning that he was in the habit of using the site to share recordings of his interviews with a transcription service. If you Google around, of course, you’ll mostly see evidence of the more illicit uses—but that’s because people don’t post a link publicly on the Internet when they’re trying to share a file in a more limited way. Taking the entire domain down has affected all those legitimate uses along with the illicit ones.
Civil forfeiture laws have, frankly, always been subject to abuse. But when a suspected drug dealer’s car is seized, the effects are at least limited to the suspect and his family. The de facto seizure of an entire online platform, by contrast, affects all the users of that site, including many thousands who were using it to engage in legitimate, protected speech. And precisely because the non-pirate uses are less likely to involve public links, it’s extremely hard to know in advance exactly how much collateral damage is inflicted on legitimate activity by the seizure. In this specific case, I’d wager the proportion of illicit to legitimate content was quite high, but I can guarantee there’s also a whole lot of copyright-infringing videos posted to YouTube at any given instant as well; most people, presumably, recognize that shutting down YouTube in order to disable access to those videos would not be worth the enormous cost to protected speech.
There are also some troubling arguments offered by the government in the indictment. They suggest, for instance, that Megaupload shouldn’t be eligible for “safe harbor” under the Digital Millennium Copyright Act because though the firm would disable specific URLs linking to “infringing content” upon notice by copyright owners, it did not remove the underlying file entirely. (Megaupload was designed, like many other cloud storage services, to only keep one underlying copy of a file that many different users had uploaded, though it would create a different virtual address for each user’s “own” instance of the file.)  This may sound like shameless flouting of the DMCA takedown process, but it’s a bit more complicated than that, because in reality “infringing content” is something of a misnomer. Content is content. It’s what you do with it that infringes copyright.
Just about everyone’s hard drive these days is full of copyrighted music in MP3 format.  But it isn’t necessarily “infringing content.” In my case, it’s music I’ve downloaded from legal venues like the iTunes store or ripped from CDs I purchased back when one still bought music in shiny-plastic-disc form. Many people will put their legal MP3 files in a private Dropbox folder, or some other cloud storage service, so they can access the music from the office as well as their home desktops, or from their networked mobile devices. Creating a public link to those files, and distributing them to anyone on the Internet who wants them, would clearly be copyright infringement.  But that doesn’t mean the files themselves are suddenly “infringing content,” and it doesn’t mean that every user should lose his own access to the same files because other users tried to publicly distribute them.
This is another reason the takedown-before-trial model is disturbing. Again, there’s strong evidence in the indictment that Megaupload’s conduct here was anything but innocent. But now imagine some other cloud storage site that comes under the crosshairs of the government or content industries. As I suggest above, they might have very good reason for only disabling specific, publicly distributed links to a copyrighted file in response to a takedown notice, rather than cutting off access to every user who has remotely stored the file, regardless of how they’re using it. At a trial, they’d get to explain that.  If the site is shut down before its operators have an opportunity to even make the argument … well, that doesn’t bode well for investment in innovative cloud services.

Obama Is Avoiding the Tough College Course

Posted by Neal McCluskey at http://www.cato-at-liberty.org/obama-is-avoiding-the-tough-college-course/


College prices truly are ridiculous. But someone needs to tell President Obama that the root problem isn’t the colleges, which he is expected to announce today will be the targets of proposed sanctions should they raise prices too fast. No, the problem, Mr. President, is a federal government that wants to play Santa Claus by giving everybody, no matter how poorly qualified or unmotivated, money for college.
As I itemized in How Much Ivory Does This Tower Need? What We Spend on, and Get from, Higher Education, total aid in the form of federal grants and loans (I didn’t even get into tax credits and deductions) ballooned from inflation-adjusted $29.6 billion in 1985 to $139.7 billion in 2010. That is mammoth, and it probably helped not just colleges to enrich themselves, but enrollment to expand from 8.9 million full-time equivalent students in 1985 to 15.5 million in 2010.
But that latter part is good, right? Doesn’t that giant enrollment increase mean we’ve been “educating ourselves to a better economy,” to steal a favorite Obama administration catch phrase?
It might, if all those people were attaining important skills and graduating. But they haven’t been. You can get more details in my paper — and yes, some of the following stats are probably somewhat low because they’re for first-time, full-time students — but the higher ed outcomes appear dismal no matter what:

• The most recent six-year graduation rate for students in four-year programs was 57.3 percent
• The most recent three-year graduation rate for students in two-year programs was a minute 27.5 percent
• Roughly a third of people who manage to get bachelor’s degrees are in jobs that don’t require them, up from about 11 percent in 1967
• According to recent research by Richard Arum and Josipa Roksa,  45 percent of students learn nothing in their first two years of college, and 36 percent nothing in four years
• Between 1992 and 2003, the percentage of bachelor’s holders proficient in prose literacy dropped from 40 to 31 percent, and in document literacy from 37 to 25 percent, on the National Assessment of Adult Literacy

What does all this — and more that’s in the paper — tell us? That millions of the people taxpayers are sending to college are getting little if anything out of it, while the colleges rake in heavy dough. But that means the root problem isn’t the colleges — they are just taking the people government sends them — it is the federally dominated funding system that insists on giving dollars to almost any warm body that declares it wants to experience ivy-covered walls and frat parties.
In light of this depressing reality, if the president really wants to rein in costs he will call for significanlty reducing student aid, both the amount available to individual students, and the numbers of students eligible.
That, though, will probably not happen. Not only did the president talk up keeping aid cheap and casting an even wider net in his State of the Union, but taking the right course — cutting aid — means taking the politically tough course. And neither this president, nor almost anyone else in Washington, has ever signalled real willingness to do that. It’s just much easier to keep giving money away.

U.S. v. Jones: A Big Privacy Win

Posted by Jim Harper at http://www.cato-at-liberty.org/u-s-v-jones-a-big-privacy-win/


The Supreme Court has delivered a big win for privacy in U.S. v. Jones. That’s the case in which government agents placed a GPS device on a car and used it to track a person round-the-clock for four weeks. The question before the Court was whether the government may do this in the absence of a valid warrant. All nine justices say No.
That’s big, important news. The Supreme Court will not allow developments in technology to outstrip constitutional protections the way it did in Olmstead.
Olmstead v. United States was a 1928 decision in which the Court held that there was no Fourth Amendment search or seizure involved in wiretapping because law enforcement made “no entry of the houses or offices of the defendants.” It took 39 years for the Court to revisit that restrictive, property-based ruling and find that Fourth Amendment interests exist outside of buildings. “[T]he Fourth Amendment protects people, not places” went the famous line from Katz v. United States (1967), which has been the lodestar ever since.
For its good outcome, though, Katz has not served the Fourth Amendment and privacy very well. The Cato Institute’s brief argued to the Court that the doctrine arising from Katz “is weak as a rule for deciding cases.” As developed since 1967, “the ‘reasonable expectation of privacy’ test reverses the inquiry required by the Fourth Amendment and biases Fourth Amendment doctrine against privacy.”
Without rejecting Katz and reasonable expectations, the Jones majority returned to property rights as a basis for Fourth Amendment protection. “The Government physically occupied private property for the purpose of obtaining information” when it attached a GPS device to a private vehicle and used it to gather information. This was a search that the government could not conduct without a valid warrant.
The property rationale for deciding the case had the support of five justices, led by Justice Scalia. The other four justices would have used “reasonable expectations” to decide the same way, so they concurred in the judgement but not the decision. They found many flaws in the use of property and “18th-century tort law” to decide the case.
Justice Sotomayor was explicit in supporting both rationales for protecting privacy. With Justice Scalia, she argued, “When the Government physically invades personal property to gather information, a search occurs.” This language—more clear, and using the legal term of art “personal property,” which Justica Scalia did not—would seem to encompass objects like cell phones, the crucial tool we use today to collect, maintain, and transport our digital effects. Justice Sotomayor emphasized in her separate concurrence that the majority did not reject Katz and “reasonable expectations” in using property as the grounds for this decision.
Justice Sotomayor also deserves special notice for mentioning the pernicious third-party doctrine. “[I]t may be necessary to reconsider the premise that an individual has no reasonable expectation of privacy in information voluntarily disclosed to third parties.” The third-party doctrine cuts against our Fourth Amendment interests in information we share with ISPs, email service providers, financial services providers, and so on. Reconsidering it is very necessary.
Justice Alito’s concurrence is no ringing endorsement of the “reasonable expectation of privacy” test. But he and the justices joining him see many problems with applying Justice Scalia’s property rationale as they interpreted it.
Along with the Scalia-authored Kyllo decision of 2001, Jones is a break from precedent. It may seem like a return to the past, but it is also a return to a foundation on which privacy can be more secure.
More commentary here in the coming days and weeks will explore the case’s meaning more fully. Hopefully, more Supreme Court cases in coming years and decades will clarify and improve Fourth Amendment doctrine.

The Laffer Curve Works, Even in France

Posted by Daniel J. Mitchell at http://www.cato-at-liberty.org/the-laffer-curve-works-even-in-france/


One year ago, I wrote about how the French government was getting unexpected additional revenues following the implementation of lower tax rates.
This is the Laffer Curve in action, and it’s happening again in France, only this time because the government reduced the wealth tax.
Here’s part of the story at Tax-news.com.

France’s solidarity tax on wealth (l’impôt de solidarité sur la fortune – ISF), which was radically reformed by the government in June last year, has served to yield much greater fiscal revenues for the state than initially predicted.
…[T]he government agreed that the solidarity tax on wealth would in future comprise of only two tax brackets: a 0.25% tax rate imposed on individuals with net taxable wealth in excess of EUR1.3m (USD1.7m), and a 0.5% tax rate levied on individuals with net taxable assets above EUR3m. Previously, the entry threshold at which wealth tax was applied was EUR800,000, with the rates varying between 0.55% and 1.8%. To alleviate any threshold effects, a discount mechanism was also instated applicable to wealth of between EUR1.3m and EUR1.4m, as well as to wealth of between EUR3m and EUR3.2m. Although the new provisions provide for lower tax rates and for the abolition of the first tax bracket, effectively exempting around 300,000 taxpayers from the tax, according to latest government figures, the tax yielded around EUR4.3bn in 2011, almost EUR60m more than originally forecast in the collective budget.

This is not to say that France is an example to follow. There shouldn’t be any wealth tax, and income tax rates are still far too high.
And it’s also worth remembering that tax policy is just one of many factors that determine economic performance.
That being said, nations that shift from terrible tax policy to bad tax policy will enjoy better economic performance, just as nations that go from good policy to great policy also will reap benefits.
In other words, incremental changes make a difference. That’s even the case when the politicians impose a “Snooki tax” on indoor tanning services.
The most dramatic Laffer Curve effects, though, occur when there are big changes in policy. The video after the jump looks at some of the evidence.

This video is part of a three-part series, by the way. Click here if you want to see the entire set.

“Jones”ing for a Fourth Amendment Upgrade

Posted by Julian Sanchez at http://www.cato-at-liberty.org/jonesing-for-a-fourth-amendment-upgrade/


Today’s unanimous Supreme Court ruling in United States v. Jones makes it clear that government installation and use of GPS tracking devices is a Fourth Amendment “search”—but it may be the concurring opinions, rather than Justice Scalia’s majority opinion, that are most significant for Americans’ privacy in the 21st century.
As Jim Harper notes, Justice Scalia ruled on the relatively narrow grounds that installing the tracking device involved physical intrusion on the suspect’s property, triggering Fourth Amendment protections.  Yet as Justices Alito and Sotomayor observe in separate concurrences—and as I pointed out in a previous post on this case—there are plenty of means for tracking a target’s location in public that don’t require such intrusion. One of the most popular with law enforcement is cell-phone tracking, either by means of a court order demanding records from the phone company directly, or through the use of devices known as “Stingrays” or “Triggerfish.” There’s also the use of license-plate recognition cameras, and even aerial surveillance drones.  The broader question that’s crucial to determining the extent of our privacy rights in the long term, then, is the one Scalia’s opinion pointedly declines to reach: Does prolonged, technologically-assisted location surveillance impinge on a citizen’s “reasonable expectation of privacy,” even when it does not require physical intrusion?
Justice Alito, joined by three other justices, says that it can indeed—and in this case, did. The placement of a tiny device on the undercarriage of a car parked in a public place, Alito argues, does not sufficiently “interfere” with a suspect’s property interests to constitute a Fourth Amendment “seizure,” nor is it a “search” until police activate and begin monitoring the device. If the police had simply slipped a business card into the tire, after all, the physical intrusion would be too minor in itself to count as an actionable trespass. Instead, Alito insists, it is necessary to proceed to the harder question of whether such intensive location monitoring violates our reasonable social expectations of privacy, even as we move around in public. Though the concurrence is reluctant to say exactly when that expectation is breached, Alito notes that round-the-clock surveillance over a full month would be so costly to carry out by conventional physical observation that it exceeds what reasonable people expect—and so triggers the Fourth Amendment’s warrant requirement.
Perhaps most intriguing is Sotomayor’s brief concurrence. For Sotomayor, either the property rationale relied on by Scalia or the “expectations” analysis deployed by Alito would suffice to find a Fourth Amendment violation here. That’s crucial, because it means that there are at least five votes on the current Court for the view that we have some Fourth Amendment protection against intensive, high-tech location tracking, even in public, and even when the method doesn’t require physical intrusion. Yet even more important than that may be this passage:

More fundamentally, it may be necessary to reconsider the premise that an individual has no reasonable expectation of privacy in information voluntarily disclosed to third parties. [...] This approach is ill suited to the digital age, in which people reveal a greatdeal of information about themselves to third parties in the course of carrying out mundane tasks. People disclose the phone numbers that they dial or text to their cellular providers; the URLs that they visit and the e-mail addresses with which they correspond to their Internet service providers; and the books, groceries, and medications they purchase to online retailers. [...] But whatever the societal expectations, they can attain constitutionally protectedstatus only if our Fourth Amendment jurisprudence ceases to treat secrecy as a prerequisite for privacy. I would not assume that all information voluntarily disclosed to some member of the public for a limited purpose is, for that reason alone, disentitled to Fourth Amendment protection.

This is a pretty big deal. Fourth Amendment scholars have been warning for decades—and with increasing alarm—that modern communications technology could turn constitutional privacy protections into an empty formality if we’re regarded as waiving those protections whenever we “expose” information to a third party. It is inherent to the nature of the Internet and mobile telecommunications, after all, that almost everything we do online—and, increasingly, much that we do offline as well—leaves a trace in the vast databases of one corporation or another.
Sotomayor’s concurrence signals a recognition that we need to move beyond what privacy scholar Daniel Solove has called “The Secrecy Paradigm,” which assumes that whatever is not totally secret (or very nearly so) is effectively “public.” In other words, if your Internet provider has a record of every Web site you visit, there’s no invasion of privacy when the government decides to have a look at the list. At least one Justice, evidently, recognizes that this is an indefensible inference—and one hopes she’s not alone.

The New Pentagon Budget: Better, but Not Great

Posted by Benjamin H. Friedman at http://www.cato-at-liberty.org/the-new-pentagon-budget-better-but-not-great/


The changes announced in the Pentagon’s new budget guidance are, from my perspective, mostly good news, but woefully insufficient. They show how even limited austerity encourages prioritization among weapons systems that suddenly have to compete. A few more budgets like this and we’ll be getting somewhere.
The White House has not yet released the actual budget, but the Pentagon yesterday released a new document that explains the minor cuts in line for its slice. The document, unlike all the other defense strategy and guidance documents that have come out in recent years, sticks to plain English, avoids geopolitical gobbledygook, and tells you the budgetary impacts of its assertions. For that alone the Pentagon deserves some credit.
The document claims to be a guide to savings of $487 billion over 10 years. But you only get that figure by counting against past White House budget requests and their associated spending trajectory. We are saving just $6 billion from fiscal year 2012 to 2013, or 3.2% adjusted for inflation. If we leave out falling war costs, we have essentially frozen defense spending for two fiscal years (2011 and 2012), letting it grow at about inflation and then slightly slower, respectively. The Pentagon expects defense spending to grow at the rate of inflation or faster starting in fiscal year 2014, although their estimates of inflation are self-serving.
The new spending trajectory would cut about 8 percent from the base budget by the end of the decade. That’s from a budget that doubled in real terms from 1998 until 2012. And some of those savings are not really saved; they have simply migrated into the war budget. Keep in mind also that those savings are just a plan, one that is unlikely to last, particularly as presidents and Congresses change.
The biggest change in this budget is the beginning in a reduction of ground forces. The document says we will cut 80,000 troops from the Army and 20,000 from the Marines. The rationale is solid: we are probably not going to be committing large numbers of troops to another occupation of a populous country in revolt any time soon. Yet the cut leaves both forces with more personnel than they had prior to the expansion of ground forces that began in 2008. A real strategic shift away from occupational warfare would entail a bigger drawdown of Army and Marine personnel.
The document also reaffirms the administration’s decision to remove two army brigades from Europe, roughly halving our combat presence there. That’s good news given the absence of threat there and our NATO allies’ free-riding on U.S. taxpayers. But it only amounts to recommitting to a Bush administration plan. And we are unfortunately adding troops in the Philippines and Australia, at best a useless gesture that may encourage China’s military buildup.
The budget also takes a useful step in reducing the amount of tactical Air Force squadrons by six. Given the precision-revolution in targeting that makes each aircraft far more destructive and the increased Navy capability to strike targets from carriers, far bigger cuts in these forces are possible. Oddly, this reduction comes without a planned reduction in the purchase of F-35 Joint Strike Fighters.
Even worse, the Pentagon here reaffirms its commitment to the F-35B—the short-take-off and vertical landing version—taking it off “probation.” That version is meant to fly on amphibious landing ships to support missions where Marines attack shorelines. It’s hard to imagine such a mission where helicopters are insufficient for air-support and there is no carrier-based aircraft available to help the Marines, especially now that the Pentagon is again planning on operating 11 carriers.
The new version of the Global Hawk unmanned aerial vehicle is evidence of austerity forcing choices. The Pentagon now wants to cancel it because it is at least as expensive as the U-2 manned aircraft, which accomplishes similar tasks. This budget also usefully endorses the early retirement of some of our airlift capacity and tries to kill a new Army ground combat vehicle.
Another positive development is the request for two new rounds of base closures. This process requires legislation from Congress to form a Base Closure and Realignment Commission (BRAC).
Still, the hard choices here are few. Many observers were hopeful that budget savings would include cutting our excessive means of delivering nuclear weapons. But while the proposal delays production of the new ballistic missile submarine and speaks vaguely of a “different” sort of nuclear arsenal, it supports the continuation of the triad. There is still hope on this front, however. The Air Force plans to build its next bomber initially without nuclear weapons delivery capability, adding it later in development. That amounts to dangling bait for budget cutters. Like the F-35B, the nuclear bomber has an unnecessary mission that a more austere budget would cause us to reconsider
So while the changes in this budget may be the first step toward a more restrained military posture, including perhaps a strategy of offshore balancing, they are a minor one. A true offshore balancing strategy would involve a greater shift of resources from the Army to the Navy. This budget, by contrast, seems unlikely to end the traditional budget split where each service gets roughly one-third of the base.
Unsurprisingly, Defense Secretary Leon Panetta used his press conference yesterday to push Congress to amend the Budget Control Act to avoid sequestration, the across-the-board cuts in the Pentagon’s budget due next January, which would roughly double the cuts outlined here. I have argued that these pleas seem to play into Republicans’ hand in the coming budget negotiations. Readers should also know that the Pentagon could avoid the “meat-axe” nature of sequestration (to use Panetta’s language) by budgeting at the level sequestration would accomplish, roughly $492 billion, or about what non-war defense spending was in 2007. That would let the Pentagon choose how to make cuts. The strategic insights guiding these minor cuts could be exploited to make those larger ones.
Cross-posted from the Skeptics at the National Interest.

Status Quo Stalwarts, Meet Reality

Posted by Andrew J. Coulson at http://www.cato-at-liberty.org/status-quo-stalwarts-meet-realityschool-choice-week-blast-from-the-past-pt-2/


Back in 1993, when Whitney Houston hit #1 with “I will always love you”, there was something that California-based state schooling advocates didn’t love at all: a school voucher ballot initiative. Much was written on the subject, and in 1994 a booklet was published summarizing the arguments for and against (Voices on Choice, K. L. Billingsley, ed.). In today’s School Choice Week installment, we’ll hear from those who were agin’ it.

Maxine Waters, United States Congress (D, Los Angeles):
“Contrary to claims, school choice will be devastating for urban, minority, and poor students who desperately need quality education.”
Delaine Eastin, California State Representative (D, Fremont):
“Having schools without [government] standards won’t improve learning.” Private school choice “won’t teach more kids how to read and write.”

Well, actually… U.S. private school choice programs usually do improve student achievement significantly in one or more subjects, and they have never been shown to have a negative impact on student achievement. The domestic scientific evidence to that effect was collected and summarized last March by Greg Forster, for the Foundation for Educational Choice. I do have one quibble with the report (it doesn’t count the insignificant findings in studies that have at least one significant finding, as is standard practice in literature reviews) but even after addressing it the aforementioned statements would still hold true.
Heck, even the few choice programs that don’t currently seem to be raising test scores are substantially raising students’ graduation rates–and doing it at substantially less cost to taxpayers than the state schools.
What’s more, when we cast a wider net and look at scientific studies comparing government and independent schools within countries all over the world, the results are even more dramatic.  In fact, it is the least regulated, most market-like schools that most consistently outperform state-run monopoly school systems such was we have in the U.S.

Delaine Eastin:
“[T]his initiative allows schools to fail. But it does nothing to protect taxpayers when they do. When public school systems go belly up as a result of the voucher initiative, the courts are likely to rule that taxpayers will be stuck with the tab—and it won’t be cheap.”

Modern private school choice programs have been operating around the country for as long as twenty years, and I know of no case in which they have been found to increase the total burden on taxpayers. In fact, the only systematic studies of the issue find that these programs save taxpayers money—sometimes quite a bit of it. Florida’s legislature has studied the fiscal impact of that state’s k-12 scholarship donation tax credit program, and found it to save $1.49 for every $1 it reduces revenues. That’s a nearly 50% return.
What’s more, the program has been found in two separate studies to both improve achievement of students who remain in public schools and to improve achievement of students who receive scholarships to attend private schools. It’s not hard to fathom why: on average, private schools spend thousands less per pupil than does the public school monopoly.

Warren Furutani, past president, Los Angeles City Board of Education:
“It is no coincidence that dollars are being pulled from our underfunded, overburdened school system at the same time our governor and the president of this nation are pushing vouchers and choice.”

Um… Yeah… About that claim that “dollars were being pulled” from “underfunded” public schools in California. I just happen to have the actual spending trend handy:

So, not only were these Status Quo Stalwarts unable to correctly predict the future, they had some difficulty accurately describing the present. Oh, and while thrifty school choice programs around the country have been improving student achievement and attainment, it’s hard to say the same for the California’s state education monopoly.

New Academic Study Confirms Previous IMF Analysis, Shows that Lower Tax Rates Are the Best Way to Reduce Tax Evasion

Posted by Daniel J. Mitchell at http://www.cato-at-liberty.org/new-academic-study-confirms-previous-imf-analysis-shows-that-lower-tax-rates-are-the-best-way-to-reduce-tax-evasion/


Leftists want higher tax rates and they want greater tax compliance. But they have a hard time understanding that those goals are inconsistent.
Simply stated, people respond to incentives. When tax rates are punitive, folks earn and report less taxable income, and vice-versa.

• When tax rates increase, sometimes they engage in tax avoidance, lowering their tax liabilities legally.
• When tax rates change, sometimes they choose to alter their levels of work, saving, and investment.
• And when tax rates go up, sometimes they resort to illegal steps to protect themselves from the tax authority.

In a previous post, I quoted an article from the International Monetary Fund, which unambiguously concluded that high tax burdens are the main reason people don’t fully comply with tax regimes.

Macroeconomic and microeconomic modeling studies based on data for several countries suggest that the major driving forces behind the size and growth of the shadow economy are an increasing burden of tax and social security payments… The bigger the difference between the total cost of labor in the official economy and the after-tax earnings from work, the greater the incentive for employers and employees to avoid this difference and participate in the shadow economy. …Several studies have found strong evidence that the tax regime influences the shadow economy.

Indeed, it’s worth noting that international studies find that the jurisdictions with the highest rates of tax compliance are the ones with reasonable tax systems, such as Hong Kong, Switzerland, and Singapore.
Now there’s a new study confirming these findings. Authored by two economists, one from the University of Wisconsin and the other from Jacksonville University, the new research cites the impact of tax burdens as well as other key variables.
Here are some key findings from the study.

According to the results provided in Table 2, the coefficient on the average effective federal income tax variable (AET) is positive in all three estimates and statistically significant for the overall study periods (1960-2008) at beyond the five percent level and statistically significant at the one percent level for the two sub-periods (1970-2007 and 1980-2008). Thus, as expected, the higher the average effective federal income tax rate, the greater the expected benefits of tax evasion may be and hence the greater the extent of that income tax evasion. This finding is consistent with most previous studies of income tax evasion using official data… In all three estimates, [the audit variable] exhibits the expected negative sign; however, in all three estimates it fails to be statistically significant at the five percent level. Indeed, these three coefficients are statistically significant at barely the 10 percent level. Thus it appears the audit rate (AUDIT) variable, of an in itself, may not be viewed as a strong deterrent to federal personal income taxation [evasion].

Translating from economic jargon, the study concludes that higher tax burdens lead to more evasion. Statists usually claim that this can be addressed by giving the IRS more power, but the researchers found that audit rates have a very weak effect.
The obvious conclusion, as I’ve noted before, is that lower tax rates and tax reform are the best way to improve tax compliance – not more power for the IRS.
Incidentally, this new study also finds that evasion increases when the unemployment rate increases. Given his proposals for higher tax rates and his poor track record on jobs, it almost makes one think Obama is trying to set a record for tax evasion.
The study also finds that dissatisfaction with government is correlated with tax evasion. And since Obama’s White House has been wasting money on corrupt green energy programs and a failed stimulus, that also suggests that the Administration wants more tax evasion.
Indeed, this last finding is consistent with some research from the Bank of Italy that I cited in 2010.

…the coefficient of public spending inefficiency remains negative and highly significant. …We find that tax morale is higher when the taxpayer perceives and observes that the government is efficient; that is, it provides a fair output with respect to the revenues.

And I imagine that “tax morale” in the United States is further undermined by an internal revenue code that has metastasized into a 72,000-page monstrosity of corruption and sleaze.
On the other hand, tax evasion apparently is correlated with real per-capita gross domestic product. And since the economy has suffered from anemic performance over the past three years, that blows a hole in the conspiratorial theory that Obama wants more evasion.
All joking aside, I’m sure the President wants more tax compliance and more prosperity. And since I’m a nice guy, I’m going to help him out. Mr. President, this video outlines a plan that would achieve both of those goals.
Given his class-warfare rhetoric, I’m not holding my breath in anticipation that he will follow my sage advice.

SOTU and Trade: the Good, the Bad and the Ugly

Posted by Sallie James at http://www.cato-at-liberty.org/sotu-and-trade-the-good-the-bad-and-the-ugly/


President Obama’s State of the Union address was, in my opinion, pretty awful (although James Pethokoukis at the American Enterprise Institute thinks it could have been worse). I know SOTUs are political theater at its worst, and I watch them always with something not unlike disgust, but I found almost nothing to like in the substance last night. The electioneering, partisan, self-aggrandizing tone didn’t help.
Let me turn specifically to trade policy, which was more thoroughly covered last night than in recent SOTUs. In an election year, and from a president who is ambivalent (at best) on trade, a trade-heavy speech is not always a good thing: trade policy can get caught up in broader political arguments about inequality, unemployment and economic growth. And rarely does that combination work well for those of us who want and promote free trade between people regardless of the political borders behind which those people happen to live.
But first, the Good news from last night’s speech. President Obama did make a passing and veiled reference to the need for Congress to extend Permanent Normal Trade Relations to Russia, necessary for the United States to treat Russia as any other member of the World Trade Organization when it joins the body later this year (i.e., allowing Americans to access Russian goods and services more readily). And at least he painted the recent passage of the trade agreements with Colombia, South Korea and Panama as a positive development, albeit on mercantilist grounds (more on this later).
The Bad? The president said precisely nothing about the Trans Pacific Partnership negotiations currently underway with nine other Asia-Pacific countries (with Canada, Mexico and Japan interested in joining in the future). The TPP is supposedly the crowning achievement of his administration’s trade efforts and a deal that he was itching to complete in 2012. What does it say about his priorities that it warrants not a mention in his main speech of the year? Maybe his political supporters in organized labor aren’t buying this “21st century trade agreement” stuff any more than I am and he sees merit in keeping it quiet. But that then raises worrying questions about the ability of the negotiations to be completed on schedule if they don’t have full-throated political support at the highest level. The president made no mention of the World Trade Organization or its struggling Doha round of trade liberalization negotiations, either, although maybe there he is simply showing acceptance of the round’s (near) death, an assessment he would share with most trade watchers.
And the Ugly? Once again the president displays no appreciation for the true benefits of free trade – the benefits from specialization and exchange. They include the economic benefits that come from increased competition, and from access to cheaper and more variable goods and services for Americans. From his silly (and, I suspect, futile) goal to “double exports in five years” to his rhetoric about how America can “win” if the playing field is level (what does “winning” mean in that context anyway?), the speech was peppered with nationalistic, misguided and quite frankly inflammatory rhetoric that will not help trade relations – let alone lead to enhanced trading opportunities for Americans – one bit. Creating yet another government agency, this time to “investigat[e] unfair trade practices in countries like China”, will just add to tensions. Claiming the tires debacle as a model of trade enforcement success is yet another example of how the concept of unintended consequences is apparently lost on this president.
Matthew Yglesias has some excellent things to say on the mercantilist nonsense in Obama’s message, and the ill-conceived manufacturing fetish he conveyed. And Obama managed to combine both economic illiterate concepts when wailing about the unfairness of having to compete with “foreign manufacturers [who] have a leg up on ours only because they’re heavily subsidized.” (He then, inevitably, went on to include all sorts of subsidies or tax breaks that he would like to extend to certain American firms/industries – Chris Edwards has amply covered the tax stuff here). Overall, I give this speech a “D” on trade. Must try harder.

CBO Study on Federal Pay

Posted by Chris Edwards at http://www.cato-at-liberty.org/cbo-study-on-federal-pay/


CBO has released a study comparing the wages and benefits of private sector and federal non-military workers. The study uses statistical techniques to make comparisons with adjustments for education level, experience, and other factors.
Here are the overall results:

• The wages of federal workers are 2 percent higher than similar private-sector workers, on average.
• The benefits of federal workers are 48 percent higher than similar private-sector workers, on average.
• The total compensation (wages plus benefits) of federal workers is 16 percent higher than similar private-sector workers, on average.

CBO finds that the federal compensation advantage varies by education level. People with low and middle levels of education generally do better in the government, while people with doctorates generally do better in the private sector.
CBO’s results are generally in sync with my observations on federal pay. For example, I’ve pointed to the excessive pension and health benefits received by federal workers. The CBO says:

The federal government provides retirement benefits to its workers through both a defined-benefit plan and a defined-contribution plan, whereas many large private sector employers have replaced defined-benefit plans with defined-contribution plans. The federal government also provides subsidized health insurance to qualified retirees, an arrangement that has become uncommon in the private sector.

I’ve also noted that high job security is an important federal benefit that should be considered when deciding on federal pay levels. Federal workers get laid off and fired at much lower rates than private-sector workers. That benefit has value, and thus federal pay rates should be set somewhat lower than for otherwise comparable jobs in the private sector. The CBO notes:

…greater job security and less uncertainty about the size of pay raises tend to decrease the compensation that the federal government needs to offer, relative to compensation in the private sector, to attract and retain employees.

Given these results, I’ve proposed these action items for Congress:

• Continue the federal pay freeze for a number of years.
• Repeal the federal defined-benefit pension plan.
• Hire an outside accounting firm to audit the Federal Salary Council’s apparently erroneous “pay gap” method, which always seems to find that federal workers are grossly underpaid.
• Privatize as many federal activities as possible so that markets can figure out the appropriate levels of compensation.

The Mirage of Free-Market Roads

If you're driving through certain West African countries, you'll be stopped every few miles by armed men—often in police uniforms—who will demand payment in exchange for letting you pass.

I have a somewhat similar experience every time I drive from my home in Philadelphia to Washington, DC. As I'm driving up Interstate 95, I'll periodically be stopped by people in uniforms (thankfully not armed) who will demand money in exchange for letting me through.
Obviously, there are important differences between these cases. In Africa, the roadblocks are mostly illegal and the payments are generally described as "bribes." In the United States, the practice is known as "collecting tolls" and is government-sanctioned. While no single payment in Africa is prohibitively expensive, the accumulation of charges over a long trip sometimes exceeds the value of the cargo being transported, stifling the flow of goods across Africa. In contrast, tolls in the US are mostly low enough to avoid signficantly hampering trade.
These two stories illustrate two different ways to think about tolls. One way is as a "user fee" to cover the cost of constructing the road. The other is as a tax on mobility. There's no clear line between the two, but as tolls go up, they begin to look less like a user fee and more like a tax.
The dual character of tolls has important implications for the current debate over road privatization. A variety of metropolitan areas have undertaken ambitious projects to allow private firms to build and/or operate either entire roads or individual lanes, charging motorists tolls to use the land. This trend has been particularly cheered on by libertarians, who see it as a step toward a more general free market in roads.
While I'm generally sympathetic to the idea of privately-managed roads, I've become convinced that the broader vision of "free-market roads" is a conceptual confusion. In the abstract, the idea of competing, privately-owned roads has a lot of appeal. But the more I think about it, the less sense it makes. Roads are deeply intertwined with governments. They always have been and as far as I can see they always will be. This means that they'll never be truly private in the sense that other private companies like restaurants or shoe factors can be.
Assembling the land needed for a long-distance road is prohibitively expensive without government assistance. Unsurprisingly, private roads almost never come into existence without extensive government assistance. And that means that the profitability of a "private" road depends crucially on how many competing roads the government allows to exist.
It's unsurprising, then, that real-world privatization schemes are often explicitly protectionist. A 2004 GAO survey found that four of the five privately-funded toll road projects started or completed in the preceding 15 years included non-compete clauses that restricted the creation of competing freeways nearby. It's much easier to turn a profit when would-be competitors are barred from entering the market.
Supporters of free-market roads point to the experience of the United States and Great Britain in the 18th and 19th centuries as the golden age of private roads, but those roads were only private in a limited sense. This history is detailed in Street Smart, an edited collection published by the libertarian Independent Institute. Daniel Klein and John Majewski write that in the United States, "turnpikes were encouraged by government, sometimes by granting of exisitng trails or public roadbeds to turnpikes, sometimes guarantees against new parallel routes, and typically the granting of eminent domain powers." They write that they "cannot say" whether these privileges were important to the success of these turnpikes.
The basic pattern seems to have been the same for British toll roads. Most toll roads replaced previously-existing public roads; the book doesn't say if the new roads were built with eminent domain or other government privileges. Indeed, after thumbing through the entire 500-page book, I didn't find a single example of a country, now or in the past, where most roads were built using ordinary market transactions. The vast majority of "private" roads, around the world and throughout history, came into existence thanks to direct government assistance.
When a formerly-public road is privatized, the public loses the freedom to travel along a particular route that it previously enjoyed. This is true even when new roads are assembled using eminent domain. The Fifth Amendment specifies that property taken by eminent domain must be put to a "public use." So the public has a greater stake in even most privately-constructed roads than they would for an ordinary private structure. That means that even when they're collected by a nominally private company, tolls are partly a tax on freedom of movement.
To be clear, this isn't to say libertarians should oppose road privatization. To the contrary, private road management can be an excellent way to bring private capital and technical expertise to the provision of a public service. But it is to say that private road operators should be viewed as providing a service to the government, rather than operating an ordinary private business. The public has a right to freedom of movement along public roads, and this right can't be extinguished by transferring physical control of the road to a private firm. And libertarians should demand that private operators of public roads follow the same basic principles—non-discrimination, tolls not greatly exceeding the cost of building an operating the roads—that we'd apply if the government were operating those roads itself.