Or so it was until recently. But as nature abhors a vacuum, economists prefer controversy to consensus—especially when the consensus puts their professional judgment at odds with their political instincts. Accordingly, the decades-long agreement on the employment effects of the minimum wage now has been challenged by several scholarly papers examining survey data on employment in fast-food restaurants and other low-wage sectors. Four widely publicized studies argue that raising the minimum wage has not led to greater unemployment among low-skilled workers.
Unsurprisingly, this new research has quickly become politicized. Labor leaders, who like high minimum wages because they make union pay scales more competitive, have seized on the new research to disparage the traditional view. So have Labor Secretary Robert Reich and President Clinton. "Now, I've studied the arguments and the evidence for and against a minimum wage increase," Clinton claimed in his State of the Union Address. "I believe the weight of the evidence is that a modest increase does not cost jobs, and may even lure people back into the job market."
Well, not so fast, please. While the new studies are serious works, done by serious scholars, they are not particularly believable. Indeed, they have several problems in common, as well as various individual flaws. And the (seemingly) most persuasive study turns out to be based on abysmally bad data.
To understand the studies and their problems, it is important to understand the traditional argument that raising the minimum wage reduces employment among low-skilled workers. The reason is simple. The demand for labor—the number of manhours (not workers) employers want to buy at different wage rates—is determined by the expected productivity of the given workers. So if wages rise by decree, rather than because workers can produce more per hour, employers will hire fewer hours of labor.
Moreover, not all low-skilled workers are created equal. Some have more skills than others. Some have a few or all of such advantages as good looks, physical strength, a flexible schedule, greater intelligence, more or better schooling, stronger communication skills, better health, greater perceived honesty and character, a lower perceived likelihood of resorting to the litigation system, ad infinitum. In general, they have higher expected productivity than other workers with low skills.
Other people are not so lucky. For any number of reasons they may appear "riskier" to prospective employers. They may have physical or mental handicaps, weaker references, or small children interfering with work schedules. They may be from neighborhoods or ethnic groups that lead prospective employers to expect (rightly or wrongly) a greater-than-average chance of various problems. They may have transportation problems, annoying personalities, poor personal hygiene, and so forth.
Given that employers are in business to make money—to get the biggest labor productivity bang for their wage buck—all of the anti-discrimination regulation in the world cannot overcome the simple reality that an increase in the minimum wage leads employers to hire relatively more-productive workers rather than relatively less-productive ones, who otherwise might be cheaper. The minimum wage thus makes it harder for the low-skilled—and for the lowest-skilled among them—to compete for employment. Elementary economic analysis predicts unambiguously that increases in the minimum wage, other things being equal, will reduce the employment of low-skilled workers.
Or so we all thought. The revisionist studies claim that, at least in a few instances, this story has a different ending. But a careful examination of the studies suggests that the traditional view is far from discredited.
? The Card/Krueger New Jersey-Pennsylvania Study. The most frequently cited, and seemingly most convincing, new study takes advantage of a "natural experiment" created when New Jersey raised its minimum wage from $4.25 an hour to $5.05 in April 1992. David Card and Alan Krueger of Princeton reasoned that since economic conditions ought not vary greatly between southern New Jersey and eastern Pennsylvania, which are essentially a single economy, looking at employment trends in the two states ought to reveal the effects of the minimum wage.
Card and Krueger conducted telephone surveys of about 400 fast-food restaurants in February–March 1992, and then again in November–December 1992. They asked questions about full- and part-time workers, wages, benefits, and prices. From their statistical analysis of those survey data, Card and Krueger not only "find no evidence that the rise in New Jersey's minimum wage reduced employment at fast-food restaurants in the state," but "find that the increase in the minimum wage increased employment." Indeed, the Card/Krueger statistical analysis suggests that the 18.8-percent increase in the New Jersey minimum wage yielded a 20.8-percent increase in employment relative to the Pennsylvania sample.
One immediate problem is that the authors looked only at major fast-food chains: Elementary economic analysis does not say that if you increase the minimum wage, employment will go down in every business—or in any particular business. The higher minimum wage might have differing impacts across firms. Indeed, it is possible that the major fast-food chains might emerge better off if the increased minimum wage raises costs at such smaller competitors as mom-and-pop fast-food stands.
Moreover, the Card/Krueger study turns out to have a major flaw: The survey data upon which it depends are lousy.
Suspicious of the Card/Krueger data and findings, the Employment Policies Institute gathered the actual payroll records from the Burger King franchises in the Card/Krueger zip codes and compared them to franchises surveyed in those zip codes. The survey data were wildly inconsistent with the payroll records. (The payroll sample also includes some restaurants that Card and Krueger missed.)
Independently, David Neumark of Michigan State and William Wascher of the Federal Reserve noticed that the variation in employment changes across the surveyed restaurants in the Card/Krueger sample seemed implausibly large—some restaurants had supposedly added huge numbers of employees while others had supposedly cut large numbers. In relatively small businesses, this sort of fluctuation seemed odd.
So Neumark and Wascher reviewed the payroll employment data gathered by EPI. When they applied the payroll data to the same econometric model used by Card and Krueger, they got completely different results. The variation in employment changes declined markedly, and analysis of the new data yields an estimated 4.8-percent decline in New Jersey employment relative to the Pennsylvania sample as a result of the higher minimum wage. Where payroll data could be compared with survey data for specific restaurants, Neumark and Wascher also found numerous errors in the Card/Krueger data.
Looking just at Burger King restaurants, for instance, the Card/Krueger survey data show employment declines in two of three Pennsylvania zip codes, while the payroll data show employment increases in all three zip codes. Neumark and Wascher conclude that the questions used by Card and Krueger were too vague to generate precise information. For example, the survey asked how many "full-time" and "part-time" employees a restaurant had. But it didn't define either those terms (40 hours a week? 30?) or the relevant time period (within the last week? month? year?), leaving different restaurant managers to define the question differently. In short, using the actual payroll data instead of the survey "guesstimates" effectively refutes the Card/Krueger findings yielded by the New Jersey/Pennsylvania "natural experiment."
? The Card State-Group Study. In another study, Card uses the April 1990 increase in the federal minimum wage (from $3.35 to $3.80 per hour) to produce another "natural experiment." He reasons that the increase ought to have affected various states differently. The new minimum would make a big difference in states where relatively few low-skilled workers earned $3.80 an hour before the increase; it would not matter as much in states where many low-skilled workers were already earning at least $3.80.
Card notes that in 1989 the proportion of teenage workers earning between $3.35 and $3.79 an hour varied from less than 10 percent in the New England states and California to more than 50 percent in many southern states. Accordingly, he divides the states into "high-wage," "low-wage," and "medium-wage" groupings.
The central issue is what happened to employment across the state groupings. In the crude group comparisons, Card finds a larger fall in teenage employment in the high-wage states than in the low-wage states, an outcome inconsistent with the traditional view of the minimum wage. Indeed, he finds an increase in teenage employment in the low-wage states, with no effect in the medium-wage group.
But of course, the minimum wage isn't the only factor affecting employment. The state's general economic climate and growth rate are also important. Card recognizes that differences in economic conditions and other factors might account for his findings. After controlling for them econometrically, he concludes that such differences in labor market conditions might in fact explain all of the variation in teenage employment growth. But he says also that "there is no indication of an adverse employment effect [caused by the increased minimum wage] in the low-wage states…."
That latter finding is quite weak: It would be one thing to find that an increase in the minimum wage yielded an increase in low-skilled employment, other things being equal. But to say that no negative effect can be found in the data means next to nothing. It says little more than the data are so imprecise or there is so much measurement error that the predicted effect is difficult to discern. The effect of the minimum wage gets lost in the noise—a weak basis indeed for fundamental change in the traditional view of the minimum wage.
And employers don't necessarily wait for the minimum wage to rise to cut jobs. They may have sufficient advance notice to make gradual adjustments accordingly. The Card paper ignores this. Neither does it look at reductions in fringe benefits or, even more important, changes in manhours hired—the more relevant parameter—as opposed to numbers of teenagers working.
Most important, the Card analysis examines employment changes over a one-year period; but it is very easy to believe that the demand for low-skilled labor over so short an adjustment period is highly inflexible ("inelastic"). Looking over a longer adjustment period might very well show stronger employment effects. After all, wages on average rose by only 6 percent in the low-wage states; if businesses adjust gradually to wage increases—for instance, by reducing employment through attrition—the resulting employment effect might be real but too small to discern in the data over a short period.
? The Card California Study. California raised its minimum wage from $3.35 an hour to $4.25 an hour in July 1988; the federal minimum wage remained unchanged at $3.35. In this third paper, Card tries to test the effect of the minimum wage by comparing changes in low-skilled employment in California with changes in a group of "comparison states." Looking at the 1987–89 period, he concludes that the data suggest "a gain in [California] employment following the rise in the minimum wage." He also argues that "groups with a higher fraction of low-wage workers do not appear to have suffered any relative losses in employment" as contrasted with trends in the comparison states.
Card argues in this paper that his control areas—Arizona, Florida, Georgia, New Mexico, and the Dallas-Fort Worth area—were "a legitimate control group" for California over the 1987–1989 period in terms of economic growth and other important parameters. But that premise is highly debatable, as the data in Table 1 show. Real growth in California was substantially greater than the weighted average for the comparison group, with the exception of 1988; that anomaly is due largely to strong growth in Texas (included as a proxy for growth in the Dallas-Fort Worth area) that year. It is hardly surprising, then, that California produced more jobs for low-skilled workers.
More fundamentally, Lowell Taylor of Carnegie-Mellon has examined employment growth (or losses) across California counties and across California retail sectors when the minimum wage went up. In counties and retail sectors in which the increased minimum had the greatest wage impact, Taylor finds the greatest adverse employment effects as well, a refutation of the Card findings.
? The Katz/Krueger Study of Texas. Princeton's Krueger and Harvard's Lawrence Katz surveyed well over 100 fast-food restaurants in metropolitan areas of Texas (from the Burger King, Wendy's, and Kentucky Fried Chicken chains) in December 1990 and in July and August 1991. These surveys followed the increases in the federal minimum wage in April 1990 and April 1991. With complete data for 100 restaurants, the authors' statistical analysis finds greater employment growth in the restaurants most affected by the increase in the minimum wage. In other words, the increases in the minimum wage yielded increases in fast-food employment, or, at a minimum, no effects upon that employment.
First, the Katz/Krueger sample is limited to restaurants operating both before and after the increases in the minimum wage. If the increases forced some out of business, or reduced the rate at which new restaurants were opened, the analysis, as Katz and Krueger recognize, would fail to pick up that change. It would therefore underestimate the adverse employment effect of the higher minimum wage.
More important, the Katz/Krueger analysis emphasizes wage differences across fast-food restaurants in Texas. Logically, the increase in the minimum wage ought to have affected low-wage establishments the most, but Katz and Krueger find greater employment growth in those restaurants. This is less meaningful than it may appear.
At the time, low-wage regions of the United States were growing faster overall than high-wage areas. The same might have been true within Texas, but the Katz/Krueger analysis does not control for different growth rates. And if low-wage areas were growing faster, employment might still have jumped despite the increase in the minimum wage. In short, the Katz/Krueger paper provides little basis to reject the traditional view of the employment effect of the minimum wage.
Thus does the Law of Demand still stand. New research by Donald Deere and Finis Welch of Texas A&M and Kevin M. Murphy of the University of Chicago finds substantially greater employment losses after the 1990 and 1991 increases in the federal minimum wage for population groups with larger proportions of low-wage workers, high school dropouts, and minority dropouts.
Moreover, people who advocate increasing the minimum wage seem not to have examined its income distribution implications carefully; instead, they make the usual glib argument that an increase in the minimum wage will help "the poor" or even, in President Clinton's words, "the underclass." But the minimum wage tends to shift employment within the class of low-skilled workers, from those with relatively less productivity to those with relatively more—squeezing "the underclass" out of jobs in favor of less-risky, more-productive employees.
And, of course, many people working at the minimum wage are not "poor." They may be middle- or upper-class teenagers working part-time, second earners in a family, seniors working to keep busy, etc. Michael Horrigan of the Bureau of Labor Statistics and Ronald Mincy of the Urban Institute report data for 1987, dividing into income quintiles all "minimum wage families"—families in which at least one person works at the minimum wage. Table 2 presents their findings. Far from what advocates of the minimum wage would have us believe, most minimum wage families are not poor; indeed, about 60 percent are in the middle of the income distribution or higher.
The effect of the minimum wage is an important subject for scholarly exploration and debate. But it is one thing for scholars to write papers challenging conventional wisdom, which then can be subjected to debate and renewed analysis. It is quite another for politicians to latch onto new findings uncritically in their pursuit of interest group advantage. A willingness to argue that water flows uphill is precisely the present stance of the Clinton administration with respect to the minimum wage, and it is unlikely to yield salutary outcomes.
Benjamin Zycher is vice president for research at the Milken Institute for Job and Capital Formation in Santa Monica.
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]]>Consider, for instance, the 1992 study of racial discrimination in mortgage lending published by the Federal Reserve Bank of Boston. This plainly politicized paper has thrust the lending discrimination issue to the forefront of regulatory policy in banking, notwithstanding an econometric model that is highly suspect conceptually and poor as a predictor, variables defined poorly, and findings that disappear upon deletion of six observations out of about 3,000.
Moreover, the Boston Fed's study data include a substantial number of obvious and probable errors. For example, there are no fewer than 22 cases implying loans with large negative interest rates. One applicant with annual income of $34,000 supposedly received a $400,000 loan, to be repaid in 12 payments of $154. Another $140,000 loan was supposedly approved with a total of eight payments under $1,500.
One approved application was for a loan of $271,000 for someone with an annual income of $11,000; but the dataset indicates that this person's ratios of housing debt payments to income and total debt payments to income are zero. Another observation is similar: a loan of $245,000 was approved for an individual earning $47,000 per year, but the "front end" ratio of housing debt payments to income supposedly is zero. In all, there are no fewer than 13 large loans approved for individuals with modest incomes but with such ratios equal to zero. Other observations record "back end" ratios of total debt obligations to income lower than the ratio of only mortgage debt to income, an obvious inconsistency.
One applicant with annual income of $4,000 was approved for a $181,000 loan, while another applicant with annual income of $5,000 received a loan of $148,000. Those two latter cases, and others like them, may merely indicate that the lenders may have had other information about the borrowers' future income prospects. But even if that were the case, the Boston Fed's statistical analysis would not take such additional information into account, and so would yield misleading findings. It is just as possible, however, that the typist omitted a zero.
Indeed, some of the data seem to be obvious numerical errors. One loan was reportedly approved for $979,000 for a house costing $118,000; the actual loan amount was $97,900, as reconstructed from various data sources. A $3,115,000 loan was supposedly approved for the purchase of a $445,000 house; the actual loan was for $311,500. Another approved loan was for a home purchase listed in the dataset at a price of $124,000; the actual price was $240,000, so that the true loan/ value ratio of 65 percent was recorded instead at 125 percent.
One applicant supposedly was approved for a $55,000 loan to purchase a $174,000 home, even though his annual income was $30,000 and his net worth was ?$7.9 million. Four other applicants with net worths between ?$1.4 million and ?$4.3 million reportedly were approved for loans even though their annual incomes averaged only $95,000. All of the above cases involved loans approved for white applicants, a fact that may have biased the Boston Fed's findings.
Even more curious are the cases in which applications are recorded as having been denied, but in which the "denied" loans are recorded as loans subsequently sold on the secondary market. The Boston Fed's dataset is a subset of the Home Mortgage Disclosure Act data for 1990; in the HMDA data, there are 15 cases in which applications are recorded as denied but then sold on the secondary market. Of these 15 obvious inconsistencies, none is from a Hispanic applicant and one is from a black applicant. But in the Boston Fed's dataset—again, supposedly a subset of the HMDA data—there are 43 applications recorded as denied and then sold on the secondary market, of which 40 are black or Hispanic. That inconsistency remains to be explained.
It is at least plausible that other errors of similar magnitude exist in the Boston Fed's data along with numerous errors less obvious. Monthly and annual income figures often are inconsistent by substantial proportions. Another serious problem is presented by special programs for affordable housing. Applicants for such programs are disproportionately members of minority groups, and applicants are often found to be overqualified for the special programs. The Boston Fed study defines such overqualified applicants as "rejected" for mortgage loans even though the "rejection" has nothing to do with a conventional mortgage application.
More generally, David Horne of the Federal Reserve Board of Governors reports that data errors of varying magnitudes were found by examiners in 58 percent of the applications actually denied but predicted by the Boston Fed's econometric model to be approved. Ted Day and Stan Liebowitz of the University of Texas at Dallas report that of the 2,932 applications from the Boston Fed data that they examined, "hundreds" failed to pass various consistency tests.
Well, who cares about a few mistakes when "discrimination" is the target and bigger budgets are the goal? Accordingly, 10 federal agencies published a "Policy Statement On Discrimination In Lending," earlier this year. That 10 federal bureaus have clambered aboard this bandwagon says more about political and budgetary potential than about actual illegal discrimination by lending institutions. The "Policy Statement" declares, "The 1992 Federal Reserve Bank of Boston study on lending discrimination, Congressional hearings, and agency investigations have indicated that race is a factor in some lending decisions."
It is not clear whether by "indicated" the authors mean "demonstrated" or merely "asserted." The "Policy Statement" is based upon the Fair Housing Act and the Equal Credit Opportunity Act, the two statutes that specifically proscribe discrimination in lending. Liability under the two statutes is civil, not criminal, thus reducing the evidentiary standard required to prove discrimination. This evidence can be of "overt" discrimination, of "disparate treatment" on the basis of such prohibited characteristics as skin color, or of a "disparate impact" on applicants correlated with prohibited characteristics. Such disparate impacts would be illegal if "not justified by business necessity" or if a "less discriminatory alternative" exists.
The statement asserts that "Disparate treatment may more likely occur in the treatment of applicants who are neither clearly well-qualified nor clearly unqualified," because such cases leave more room for lender discretion in assistance and approval. Of course, "gray area" cases leave more room for discretion on the part of the enforcement agencies as well.
The likelihood of such enforcement discretion is enhanced by the assertion in the statement that "a pattern or practice of disparate treatment on a prohibited basis may also be established through a valid statistical analysis of detailed loan file information, provided that the analysis controls for possible legitimate explanations for differences in treatment."
That the interpretation of such econometric evidence is both science and art is clear to anyone familiar with the economic analysis of data. But will the agencies' lawyers understand this? Will the congressmen and senators considering the agencies' budget requests understand it?
Even without explicit discriminatory intent, some lending practices could have disparate impacts correlated with race. The statement makes it clear that such practices with disparate impact may be illegal if they are not justified by "business necessity" or if there exists a "less discriminatory alternative." But it is not clear just what constitutes a "business necessity." The "Policy Statement" states only that "factors that may be relevant to the justification [of business necessity] could include cost and profitability." If it means business survival, it is hard to imagine what in the context of lending discrimination might be "necessary," that is, any decision without which bankruptcy becomes certain.
Banks' lower profits caused by regulation would eventually drive up interest rates, causing lower demand for loans. Under such conditions, all lenders might simply lend less, and none would have to leave the market. Is avoidance of that effect "necessary"?
In any event, it would be hard to know or demonstrate that a practice is necessary until it's challenged by regulators. And even with demonstration of an undefined business necessity, a lending practice still might be judged illegal if a "less discriminatory alternative" exists. It is unclear from the "Policy Statement" how to compare a given lending practice with an alternative based on the degree of discrimination they yield. Perhaps a "less discriminatory" alternative is one that results in more lending to members of protected groups; but since a given bank can lend only so much, more lending to one group necessarily leaves less credit (that is, more "discrimination") for another. Besides, if a practice is truly necessary, then by definition there is no alternative, whether less discriminatory or not.
The section on "disparate impact" in the statement also leaves dangerously wide scope for regulatory discretion: "Frequently [the existence of a disparate impact] is [established] through a quantitative or statistical analysis….Not every member of the group must be adversely affected for the practice to have a disparate impact. Evidence of discriminatory intent is not necessary to establish that a policy or practice adopted or implemented by a lender that has a disparate impact is in violation of the [FHA] or ECOA." This means that no criminal intent is necessary for violation of this law, according to the bureaucrats, and that discovery of violation is to be made through the use of subjective numerical games played by ideologues of the sort who have already shown themselves in the Boston Fed study to be pretty fast and loose with their analysis.
Under such standards, can lenders know if they are in compliance? If not, then it is likely that they will be driven inexorably to adopt lending quotas. The statement notes that "a reason to believe" that the ECOA has been violated requires that "a reasonable person would conclude from an examination of all credible information available that discrimination has occurred." Is it reasonable to expect "reasonable" persons to agree on the implications of econometric findings? It seems reasonable to doubt it.
The "Policy Statement" notes that HMDA data don't provide enough information for statistical analysis of discrimination because the data omit such important variables as credit histories and debt ratios. Nevertheless, the statement argues that, "HMDA data are useful…for identifying lenders whose practices may warrant investigation for compliance with fair lending laws." Given the ambiguity inherent in data on lending decisions, and given the political volatility of the discrimination issue, such use of HMDA data in the search for culprits can prove perverse.
For example, suppose two lenders—the Equal Opportunity Bank and the Bigotry Bank—are open for business. Minority applicants know that only the most wealthy and famous among them will be approved for a loan at the Bigotry Bank. Accordingly, almost all minority applicants waste no time and effort there and instead attempt to do business with the Equal Opportunity Bank. The only minority applicants applying at the Bigotry Bank are those sufficiently wealthy or famous to be guaranteed approval. The Bigotry Bank will have a spotless record—all of its minority loan applications will be approved—while the Equal Opportunity Bank will have a substantial number of denials. The use of HMDA data to find discrimination malefactors is likely to ensnare lenders analogous to the Equal Opportunity Bank precisely because of their reputations for fairness.
On the basis of poor data and analysis, regulators now are delaying bank mergers until lenders accused of bias establish special funds for minority lending or for "compensatory" payments to past loan applicants who were denied credit and agree to enhance marketing and other efforts among potential minority customers. Lawsuits charging past racial discrimination are being settled along similar lines.
In D.C., for example, the Chevy Chase Federal Savings Bank recently settled, admitting no wrongdoing, with the federal government for allegedly ignoring predominantly black neighborhoods in its branch placement. No specific acts of discrimination were even alleged.
As part of its penance for not making business decisions that please the feds, Chevy Chase Federal Savings must commit $140 million in home loans—at lower than market rates—to areas dictated by regulators. Those sorts of charges, adverse publicity, defense costs, and expensive settlements work as a tax on lenders. The long-run implications for access to capital of discrimination accusations based on shoddy data and poor analysis are unlikely to prove salutary for anyone, even "protected" minorities.
Do-goodism is as old as sin. In the do-gooders' rhetoric, the problems of our inner cities are not the fruit of oppressive taxation and regulation, destructive welfare policies, the mindless drug crusade, or an education system monopolized by a government insatiable in its quest for coercive and confiscatory power. Nor is the cause our professional political class, the central characteristics of which are ignorance, ineptitude, and an all-powerful instinct for self-preservation. No, the cause is "discrimination" practiced by evil capitalists.
Analytic sloppiness, dishonesty, verdict first/trial later, and all the other hallmarks of media politics are much in evidence in the attacks on lending "discrimination." Nonetheless, the bureaucrats and the politicians should not be called liars. Instead, they are truth-challenged.
Benjamin Zycher is vice president for research at the Milken Institute for Job and Capital Formation in Santa Monica, California. This essay is based upon an article by Benjamin Zycher and Timothy A. Wolfe in the 1994 Number 2 issue of Regulation.
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]]>Second, perhaps paradoxically, Clinton inherits a U.S. economy that fundamentally is very strong, as a result of years of restructuring, efficiency improvement, and disinflation. The early signs of this strength already are apparent, as labor productivity growth has been very impressive for at least four quarters.
And third, whatever Clinton's intelligence, whatever his shrewdness, and whatever his desire to avoid the fate of our beloved Jimmy Carter, it is nonetheless a fact that political and policy principle have not been the pillars of his career, and were not the basis of his ascent to the presidency. Instead, he has understood instinctively how to scratch the many, varied, and conflicting itches of the electorate.
That Bush was so bad inevitably will lower the standard that Clinton politically will be required to attain; immunity from attack four years hence requires only that economic growth be a bit stronger, that the deficit and unemployment rate be a bit lower, and that inflation remain reasonably restrained. Enormous new mischief—taxes, regulation, spending, ad infinitum—is and will remain compatible with such modest goals. The underlying strength and competitiveness of the U.S. economy will yield much room for Clinton to indulge, if not his instincts, then the myriad Democratic Party interest groups soon to be engaged in a life-or-death tug-of-war over snout privileges at the federal trough. And the absence of central principle suggests that on many or most issues he will not know which arguments to believe among many sounding equally plausible, and he will not know which of his advisers to trust. In the end it is inevitable that short-term political considerations rather than long-term economic growth will emerge as the guiding principle for his decision making.
Let us consider some straws in the wind. Did Clinton manage to progress even five minutes into his victory speech on election night before attacking pharmaceutical producers and insurance companies? Here is a man who may mouth words to the effect that growth and wealth are created not by government but by the private sector, but his fundamental misunderstanding of market processes is beyond doubt. Clinton actually seems to believe that "profiteering" by drug companies and insurance firms is the pillar of the "crisis" in medical care; can price controls on drugs and medical insurance be far behind? And look for drug companies to be required to give medicine away as a condition for FDA approvals and other regulatory largess.
And if the private sector is the fundamental problem, only an expansion of governmental power can provide a solution in principle. In a world of scarce resources, for example, there can be no such thing as "universal access" to any and all medical care; some people and some services must be competed out under any system. Since Clinton fundamentally does not understand this, he will blame the private sector for the queuing and cost increases resulting inexorably from "universal access," even though government is and always has been the source of the problem. For Clinton, more and more government will be the solution, now and forevermore. Thus are monsters created.
Let us turn to the environmentalism racket. It is bad enough that Clinton has signed on to the scientific and political fraud inherent in the purportedly "unprecedented new threats of global climate change [and] ozone depletion." It is worse that he displays no understanding at all of the role that the absence of property rights plays in all of this. But Clinton actually seems to believe that any and all environmental protection not only is costless but yields greater wealth in nonenvironmental dimensions.
Now, that is absolute nonsense: Many increments of environmental improvement may well be worth what they cost, but only those attempting to deceive others or themselves can believe that they are costless. This effort by the political left to transform environmentalism into a free lunch is part of the larger effort by socialists everywhere to gain legitimacy under democratic institutions for increased governmental coercion and confiscatory power.
That is the fundamental meaning of Clinton's warning that his administration will "demand responsibility from individuals, families, communities, [and] corporations…to do more to preserve the quality of our environment." And lest we allow competition among governments to spoil the party, Clinton notes that "Our country's leaders must be willing to exert international leadership on issues threatening the health of the planet."
On such fundamental issues as the North American Free Trade Agreement, Clinton cannot afford to lose in Congress, so he will have to pay high prices to innumerable special interests. It is possible that he will pay mere lip service to some interest group demands, but on others he will have no choice but to dance to the Democratic Party music.
Many bills vetoed or watered down by Bush will be passed again or strengthened, and Clinton will have to sign them; foremost among these are family leave and other innumerable mandated goodies imposed upon business. Bush's Clean Air Act and its implementing regulations—which will yield little or no improvement in air quality at an annual cost no less than $20 billion—will not be good enough by definition; a harsher bill will be passed and signed and more stringent regulations imposed. The same holds for such other blessings as the "Civil Rights" (quota) Act. Look for the return of race-norming on employment tests and for far more stringent language defining discrimination in terms of hiring proportions, thus making employers guilty until proven innocent. Look for bigger and more frequent increases in the minimum wage. And can quotas for homosexuals be far behind?
Look for Clinton and Joe Biden immediately to expand the federal judiciary as a means of diluting 12 years of Reagan/Bush appointments, and prepare yourself for Larry Tribe and far worse on the Supreme Court; we will have judges who will write law and ignore the Constitution. Look for even more money for AIDS "research" and for manipulation of the data to create a heterosexual AIDS "crisis" out of whole cloth.
Look for strengthening of the Davis-Bacon Act, proscriptions on hiring replacements for strikers, and other union goodies. Look for a huge expansion of public works pork under the guise of "infrastructure investment" and "jobs." The use of the tax system to redirect resources will be enlarged greatly; thus, we will return to a system of high marginal tax rates combined with innumerable loopholes. Look for the kind of meddling in energy markets that even Carter would have rejected. But don't bet the mortgage money on tort reform.
And then, of course, there is the ineffable Hillary. When Clinton on election night announced from the steps of the Old State House in Little Rock that his wife would prove to be the nation's "best First Lady," it was not hospital wings or tree plantings or flower arrangements or oatmeal cookies that he had in mind. NO, indeed: Hillary's ardor is aroused by the prospect of big, powerful, activist government, the kind that can't be too rich or too fat.
She is unlikely to receive a formal appointment, for the nepotism charge is something that Clinton will want to avoid; ironically, that will make her all the more dangerous, since her constant presence and unofficial status entail both a permanent voice and an absence of countervailing opposition. In a word, she will be unaccountable as she passes on judicial appointments, presses for a federal childcare bureaucracy, pushes the truly loony idea of women in combat, and encourages a large expansion of litigation activity by children and activist lawyers.
It is not going to be pretty. Clinton will bring 3,000 leftists into the bureaucracy, even if he doesn't want them, because an attempt to keep them out would alienate every constituency that elected him by keeping quiet during the campaign. And Clinton cannot and will not appoint the kind of cabinet officers who would keep them on short leashes.
Moreover, Clinton's "ethics" noises—officials of the Clinton administration, upon leaving office, will have even fewer options than is currently the case to capitalize on their contacts and government experience—will make matters worse, since few sensible people can afford to go to medical school or whatever after serving in the federal government. Most of those who will have a think tank or something similar to which to return will not be defenders of liberty and property; their goal, and the standard by which they will be measured, will be to out Bush the Bushies on everything from regulation to spending to taxation.
Clinton already has announced an "economic summit," a block party at which deals will be cut among career politicians, fat cats, established interest groups, and defenders of the status quo. Newcomers and others pressing for more competition in government and markets will be excluded. This is "change"?
My opponents in this exchange are Dwight Lee and Richard McKenzie, and I am proud and fortunate indeed to be able to list them among my dear friends. The term "gentleman and scholar" properly applies to remarkably few; Dwight and Richard are prominent among them. They have performed God's work over many years, most recently as they have explained the role of market forces as constraints on government expansion and as they have debunked completely and courageously the many fantasies about the 1980s and about the Reagan legacy believed and propagandized by the political left.
However, they apparently have been traumatized by the fact that for the first time the newly elected president of the United States is younger than they. That the ascent of Bill Clinton to the presidency has induced them to descend into a fantasy world of their own represents an ironic mystery best left to the sofas and ink blots of the psychologists. Their view that market forces over a four-year period will constrain severely the ability of the Clinton administration to engage in mischief is one that can be believed only by their nanas, their dogs, and other such innocents.
Accordingly, Dwight and Richard and I have agreed to bet our respective honoraria for this exchange on the following proposition: By October 1, 1996, the relative size of government—federal, state, and local government spending as a proportion of GDP—will have gone up from that on October 1, 1992. I say that it will; they say that it won't.
We're putting our money where our mouths are; President Clinton also will put our money where his mouth is.
Benjamin Zycher is a visiting professor of economics at UCLA and an adjunct scholar at the Cato Institute in Washington, D.C.
Markets Will Prevail
Understandably, Bill Clinton's election to the presidency leaves much for the country to worry about. If he holds true to his economic platform and if he gets his way with what appears to be a compliant Congress, many of the market freedoms Americans hold dear will be in jeopardy. Fortunately, those are two very big ifs. The first and most important auxiliary check on the powers of the new president to hold to his platform and to inaugurate his "new beginning" will be the very market forces he seeks to manipulate and suppress.
Those who see the policy changes of the 1980s mainly as a product of Ronald Reagan's election have much to fear. For them, the guard on the public treasury has indeed been changed.
On the other hand, those who see the changes of the '80s mainly as a response to global competitive forces among governments, rather than to Reagan or Thatcher per se, can take heart. Those same forces of global competition among governments for the world's capital base that were so evident in the '70s and '80s remain at work in the real world that Clinton must now face. Clinton will soon recognize that the main change since Reagan is that competition among governments is even more constraining, since capital has become ever more slippery and the number of government competitors has grown with the liberation of Eastern Europe and the break up of the Soviet Union.
Granted, Bill Clinton has embraced every labor market mandate that Congress has considered, and he threatens to raise taxes on the rich, which, if passed, would penalize competitiveness and success still further. And he pledges to redistribute wealth—especially health care wealth—from the rich and middle class to the poor who cannot afford health insurance, plus all others who could purchase it but have chosen not to do so. In effect, he has fostered the delusion that workers can get something for nothing if only government tells employers they must foot the bill.
Moreover, Clinton proposes increased public spending and an array of "industrial policies" (although the expression is never used) that would mire Washington even more deeply in allocating (and misallocating) the country's resources. He doesn't seem to realize the extent to which Washington politics can twist even well intentioned "infrastructure" expenditures into boondoggles for the home states of the politically powerful. Given that Robert Byrd will continue to lead the Democrats in the Senate, more infrastructure "investment" will likely mean, as some have suggested, paving over a larger portion of West Virginia.
That, in brief, is the economic agenda that less than a majority of the American public swallowed. The pessimists have reason to fret anew.
There are, however, reasonable grounds for being, if not optimistic, then not terribly pessimistic. The Clinton presidency probably cannot do as much damage as the pessimists are now forecasting. The results of the Clinton presidency might even be no worse than a continuation of the Bush presidency. In the end, the Clinton presidency might reinvigorate pro-market politicians and analysts. They can now regroup around more articulate, intelligent, and effective leaders such as Jack Kemp and Phil Gramm.
A continued Bush presidency would likely have fortified the mythology that the White House was still occupied by a dedicated heir-apparent to Reagan's political philosophy of expanded market incentives and constrained government, leaving market proponents open to the charge that the country's economic failures result from a failed philosophy. In Clinton, the country will get a president who appears (at the outset, at least) to be open and honest concerning his plans to expand the scope of government, which means that Americans will know to guard their wallets now that they have read his lips. Under Bush, they carelessly left their wallets unguarded, much to their chagrin. They might have been duped again by his 1992 no-taxes pledge.
Admittedly, these are not strong reasons for optimism, but there are several other justifications that political pundits appear to have missed. First, Clinton may not be as liberal as many think. After all, he is from a place called Hope in a generally conservative Southern state. Clinton, with his democratic aura of ties to the downtrodden, might—just might—be able to open cutbacks in "entitlements" for thoughtful public discussion and reform in the same way that Richard Nixon, cloaked with his anticommunist past, was able to open up China's admission to the United Nations for public discussion.
Clinton has indeed talked a good and long line about the importance of personal responsibility and about making people look to government for a "second chance" rather than making government aid a "way of life," and few in the press and policy circles have raised concerns about his hardheartedness, a level of consideration rarely accorded Ronald Reagan and George Bush. Clinton has also endorsed the Bush version of the North American Free Trade Agreement and will likely have an easier time of getting it through Congress than Bush would have.
Second, Clinton will be checked by normal politics. Less than half of the of the public voted for him, and many who did vote for him held their noses as they did so. They voted against George Bush, whose mean-spirited campaign, organized around largely irrelevant issues (Hillary, the draft, Moscow, and the chicken pluckers of Arkansas) was about as inept as the economic program that he was never able to articulate and hence defend effectively. With closer scrutiny, Clinton's mandate is far shakier than one might think from looking merely at the count of electoral votes. His plurality was smaller than Michael Dukakis's tally in 1988. Many of the non-Clinton majority voters can be expected to impede his more left-leaning political moves.
Third, Clinton and his advisers soon will learn that paying for his programs off the backs of the rich alone will be far more problematic than his pre-election numbers suggest. In the heat of an election campaign, candidates can direct their advisers to come up with numbers that sound good. Once elected, how ever, officials, including the president, cannot just conjure up revenue that will meet the estimates.
As this new president will learn, probably rather quickly, the rich will not play dead when confronted with the prospect of higher tax rates. They will—through their political allies and tax accountants—find ingenious ways of dulling the impact of the greater tax bite directed at them. President Clinton soon will realize the fact that the higher tax burden he contemplates must be shared by people way down the income ladder, an insight that is likely to dampen his interest in "soaking" anyone, certainly not those he has promised a free ride.
If he persists with his tax plans to soak the rich, by the end of Clinton's first term the federal tax burden will once again have moved down the income distribution, a reversal of the experience of the 1980s. In the '80s, the share of all federal taxes paid by the fifth of all households with the highest incomes went up at the same time their marginal and average tax rates went down.
Clinton was never as absolute in his anti-tax stand as was George Bush, but he did say, repeatedly, though not in so many words: "Read my lips, no new taxes on the middle class." He has said that he will scale back his expenditure plans before he will raise the taxes on his favored income classes. He will be shackled, in part, by his own words—and he may have to endure their haunting him in much the same way that George Bush had to endure Clinton's endlessly repeating the words that George Bush had so glibly let roll from his lips in the heady days of the 1988 convention.
Of course, inflation is a potential problem, but even inflation is no longer the government revenue engine that it once was. The power of "bracket creep" has been muted by indexing and the collapse of the tax schedule. Furthermore, bond markets can be expected to rapidly convert higher inflationary expectations into higher interest rates the federal government pays. One of the unheralded legacies of the buildup of federal debt during the 1980s is that federal interest payments loom large in the budget (accounting for about a fifth of it). Any increase in interest payments spawned by higher inflation rates can quickly soak up any additional real tax revenue garnered from higher rates of inflation. Besides, Alan Greenspan will head the Federal Reserve for almost all of Clinton's first term. Fourth, if Clinton persists with his plans for mandated benefits, economists will learn that the perverse effects of labor-market mandates will not be as severe as many have envisioned. Employers will work diligently to soften the impact of such mandates. Workers will learn that it is they, not their employers, who must foot the bills, and that lesson is likely to muffle their enthusiasm for mandates.
Employers who face competitors not covered by the mandates, both domestic and foreign, will be forced to pass on the cost of mandates to their employees in the form of lower wages and other fringe benefits and greater work demands. Some employees will undoubtedly be replaced by robots unburdened by the cost of mandates, or by foreign workers who obtain the jobs driven off shore by costly mandates. These employees will see the mandates as bad deals, festooned with political goodies not worth their personal economic costs. The higher cost of employing workers who will likely take advantage of the mandates will reduce the market demand for such workers and the wages they can secure.
Finally, the Clinton presidency will be severely checked by global market forces that have been acknowledged, albeit reluctantly and belatedly, by even his most liberal advisers. For example, in the early '80s Robert Reich, one of Clinton's top economic advisers, wrote a book that was full of venturesome proposals to tax, regulate, protect, and subsidize American corporations. To Reich, making American firms more competitive by way of federal aid (and a variety of other industrial policies) was then crucial if our industries were to meet the challenges of "the next American frontier."
More recently, Reich has acknowledged (without really saying so) that many of his earlier proposals will not work. He has written, quite effectively, in The Work of Nations about the emergence of the global economy in which capital can move around the world with ease. As a consequence, he now believes the focus of federal policies should not be "industries," because it is too easy for companies to transfer the benefits of government largess abroad. He has corrected his belief and now recognizes that the true wealth of a country is its people, who should be the object of any future government largess.
However, he succumbs to the faulty reasoning that largess for the many who are not so wealthy should be financed by taxes on the few who are wealthy. What he and others in the Clinton camp do not seem to realize yet is that the human capital at the disposal of the wealthy is more fugitive on a global scale and less subject to government expropriation than the physical capital of corporations. Physical capital can only be shipped across the globe at the slow pace of boat travel. Human capital in the form of brainpower can travel to any point on the globe at close to the speed of light through the world's interconnected network of computers and satellites.
International money markets and integrated world stock and bond markets will teach on a daily basis our country's leaders lessons that they now seem to resist. National elections conducted every four years will remain important. But votes of confidence and approval will be taken daily in the world markets, which because of the country's ties to them can be ignored only at great peril. Clinton has already sought to assure markets that he intends to make markets work better. If he doesn't hold to that promise, the next four years will prove interesting, a test of the relative power of domestic politics and global markets in shaping national policies.
An undeniable fact of the modern global economy is that capital has been transformed. Over recent decades, capital has become smaller and lighter, less physical, more transportable. Capital, in the form of brainpower and information (which is no more tangible than electronic impulses on computer disks), can be sent around the globe at the speed of light and for the cost of a telephone call. Capital has become as slippery as quicksilver, as difficult for governments to tax as it is for them to define and harness it, and this quicksilver capital is primed to move to more cost-effective venues at the slightest government provocation. To shape and constrain government policies, quicksilver capital need not move; it need only threaten to move.
Governments around the world have had to start competing for the world's capital base. And in spite of their ideological inclination to do otherwise, governments have done so over the last two decades by easing the burden of their taxes and regulation—by capping the growth in government expenditures relative to their economies, by lowering their marginal tax rates, by freeing their industries, and by privatizing their services.
Walter Wriston, former CEO at Citicorp, could not have chosen a more apt title for a book concerned with the policy consequences of modern technology than The Twilight of Sovereignty. Governments, including that of the United States, have lost a measure of their sovereignty. Norman Macrae, former editor of The Economist, explained prophetically several years ago, "In the future, we will vote more frequently with our feet. If politicians try to boss us, brainworkers will go away and telecommunicate from Tahiti. Countries that choose to have too high a level of government expenditure or too fussy regulations, will be residually inhabited mainly by dummies." That future is upon us, and Bill Clinton.
Bill Clinton's election is, in part, a reflection of the global forces at work. The Democrats were forced, kicking and screaming, to choose someone far more moderate than were the candidates of just a few years back. At this juncture, we can still hope that Clinton will respond more effectively to the market forces afoot in the world than George Bush would have.
Without a doubt, Clinton will have an impact on this country. Some of that impact will be positive. He is obviously not the total dummy and liberal ideologue whom some would like to imagine he is, and all can take some solace in that. The country needs a quick learner in the White House. The country probably needs to spend more on basic research, and most likely there are some worthy infrastructure projects that have been left unattended. More importantly, Clinton probably will pass a reduction in the capital gains tax on long-term investments something George Bush was unable to do.
Just as certainly, some of Clinton's impact is likely to be negative. The country doesn't need a parental-leave mandate but it will probably get one anyway. We can expect, however that more constraint and guidance will be applied to the policy process in the United States and elsewhere than ever before, not by the visible hands of politics but by the invisible hands of market forces that span the globe. Probably the worst Clinton can do is create expectations among his followers (and opponents) that cannot be realized. In his first post-election news conference, Clinton fully acknowledged, albeit indirectly, the power of world markets: He announced his intention to lower taxes on highly mobile capital in the form of equipment by way of a new investment tax credit, and he talked earnestly of the need to reduce in a measured way the federal budget deficit to calm the jitters evident in world markets.
Those on both sides of the political spectrum who believe that politics control policies should wager that government, on balance, will loom larger in the economy in 1996 than it did under George Bush in 1992. Those who believe that markets constrain politics should probably wager that government, on balance, will be no greater a presence in the economy in 1996 than it was under George Bush.
We prefer the latter wager. If we are proven wrong, there is every reason to believe that Bill Clinton will be the next one-term president.
Richard McKenzie and Dwight Lee are authors of Quicksilver Capital: How the Rapid Movement of Wealth Has Changed the World (Free Press). They are adjunct fellows at the Center for the Study of American Business at Washington University in St. Louis. McKenzie is the Walter B. Gerken Professor of Enterprise and Society in the Graduate School of Management at the University of California at Irvine. Lee is the Eugenia A. and Bernard B. Ramsey Professor of Free Enterprise in the economics department at the University of Georgia.
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]]>1) Maintaining stability by making aggressive war difficult for states to pursue profitably;
2) Preserving the freedom of commerce through open sea lanes, open skies, and open borders where possible; and
3) Preserving and extending liberal democracy and opposing the extension of political repression.
An underlying assumption of these goals is that liberal states, of varying complexions, are generally peaceful and don't pursue aggressive military policies. The people of such states recognize that commerce, not coercion, is a preferable method of intercourse. Were the international system composed only of liberal states, armed conflict wouldn't be a significant issue. However, not all states are liberal democracies, and most don't share classical-liberal assumptions, values, or principles. It is the illiberal states which pose future threats to the United States and to the free world and which must be deterred or fought and, in time liberalized.
The United States should not intervene militarily in all conflicts. Nor should it rule out intervention in any conflict. Rather, we should judge intervention by U.S. interests. If American interests are threatened directly, through a possible armed attack on the American homeland, threat to citizens or property abroad, or similar circumstances, intervention (proportional to the threat) is mandatory. If the threat is indirect, the United States may (not must) intervene if:
1) U.S. action will promote the cause of freedom; and
2) U.S. action is militarily and politically feasible.
The feasibility test is an important check. For example, the United States won't invade China to impose democracy primarily because it has no chance of succeeding. On the other hand, the United States shouldn't intervene in a country even when militarily feasible with the intention of overthrowing its government simply because it is an illiberal state. While such action may be militarily feasible, in most cases it would not meet with international approval. Furthermore, there is more to democratization than simply overthrowing a dictatorship, and rash action by the United States could do more harm than good in the long run. The United States isn't committed to freeing every oppressed people, certainly not unilaterally.
The United States is now the world's dominant military power. This isn't because American force levels have increased; in fact, they have decreased since 1989. But the collapse of the Soviet Union has shifted the correlation of forces toward the United States. Because of this, the United States can reduce the size of its military establishment while still maintaining its dominant position.
Disarmament is only practical to a point. The Soviet Union is no longer a threat, but other dangers are emerging, such as the growth of regional powers in the developing world, increased problems of nationalism and ethnic strife, the proliferation of missile technology and weapons of mass destruction, and the continuing inclination of dictators to attack their neighbors. Radical disarmament may create an environment in which such threats develop more quickly. Our strategy should therefore look not only to imminent dangers but to preventive action against potentially dangerous future developments.
The Cold War force structure was centered on fighting the Soviet Union, primarily in Europe. Future forces will have to be designed to meet less predictable, more wide-ranging situations. One important role will be conventional deterrence and demonstration. The United States should make it clear that its armed forces will be used if necessary to pursue strategic goals. This will reduce attacks against America and its allies and citizens abroad.
The primary arm for this mission would be, as it has traditionally been, the Navy. A large, active, and visible naval presence worldwide will serve as an important check on the aspirations of leaders who are contemplating threats against the United States, its interests, or allies. Carrier battle groups would continue to be the centerpiece of the Navy, with a force of nine carrier battle groups and naval air wings.
If deterrence fails and conflict ensues, the United States should have the necessary force available to prevail against an adversary state. Naturally, the specific use of force will depend on the particulars of the crisis, but because many types of conflict are possible, U.S. forces should be flexible. With fewer forward bases and the possibility of future threats arising unexpectedly in remote regions, fast-attack forces will be an important component of the armed force.
Naval assets would probably be first on the scene and may be the only forces necessary if the conflict is contained. Three Marine divisions should be retained to serve as the inland element, using high-technology weapons and naval air support to make up for their relative lack of firepower. The Air Force would play a parallel though diminished role, since ground bases won't always be available.
The Army will play a less important part in overall defense, with the reduction of most of its NATO complement. Some have suggested that the Army should also be "lightened," that heavy armored forces are anachronistic and should be abandoned. This would be a grave error. If the United States must use force abroad, it must have the capability to use offensive force, to give theater commanders options to pursue whatever manner of military action they see fit. Operation Desert Storm offers a good example of the results that can be achieved by heavy forces.
Lack of armor would limit our troops to defensive roles, blunting the attacks of adversary heavy forces but unable to pursue decisive victory. The Army could be scaled back to 10 divisions at various states of readiness: three armored, four mechanized infantry, one cavalry, one airborne, and one air mobile. The smaller elite forces of all branches would be retained for special operations.
To maintain our current technological advantage, the United States should continue research and development on the next generation of "smart" weapons. As the Gulf War demonstrated, high-technology weapons and defensive systems mean fewer allied casualties. Smart weapons also cause fewer civilian casualties, which isn't a military necessity but is a value the United States should pursue. Civilians in illiberal states ought not to sacrifice their lives to pay for the sins of their juntas. Furthermore, the sheer margin of technological superiority could have a deterrent effect on potential aggressors, especially if the United States has the ability to target the entire enemy command structure (often including the leaders themselves).
The United States should continue to work for the elimination of nuclear, chemical, and biological weapons worldwide. Increasingly powerful conventional explosives and more-accurate delivery systems are rendering nuclear weapons obsolete for most strategic purposes. A small nuclear force could be maintained for purposes of deterrence against recalcitrant countries, but complete multilateral denuclearization would be preferable. Nuclear forces—submarines, bombers, and missiles—would be partly eliminated and partly converted to conventional roles.
As missile technology proliferates, the threat of purposeful or accidental launch against the United States increases correspondingly. Therefore, the United States should pursue political and diplomatic measures to slow the spread of these weapons, but it should also continue efforts to build some form of ballistic-missile-defense system. Because of the unlikelihood of a massed ICBM attack, a simple and inexpensive system should offer adequate protection.
The current system of military alliances requires substantial review, especially regarding costly force deployments overseas against threats that no longer exist. But the alliance structures themselves should be continued as consultative bodies and frameworks for cooperative action. Europe is an important forward base for U.S. forces, and naval bases in Europe will continue to service our fleets in the Atlantic and Mediterranean. NATO also represents a significant political link between Europe and the United States, which will become more important as Europe moves toward political unity.
Other alliances serve similar ends. By maintaining bases and predeploying materiel in regions worldwide, the United States will be better able to react to future crises.
The wars of the 20th century were large, violent, and total. The decline of ideological conflicts will usher in an era of less violent, limited warfare. U.S. defense strategy should take this into account but the United States should continue its diplomatic and political involvement on the world stage. A return to isolationism in any form will bring exactly what it brought the last time we tried it: conflict. It is in our interest to maintain American involvement in world affairs now to prevent being forced into large-scale wars later. It is an investment we cannot afford not to make.
James S. Robbins is assistant professor of diplomacy at the Fletcher School of Law and Diplomacy.
Beyond Intervention
By Ted Galen Carpenter
Dramatic changes in the international political and military environment create both the opportunity and the need for the United States to adopt a new security strategy. For the first time in more than 50 years, we don't confront a powerful state, such as Nazi Germany or the Soviet Union, that could pose a grave threat to America's security, nor is a new threat of that magnitude likely to emerge in the foreseeable future.
The absence of a would-be global hegemon is a crucial development that should fundamentally alter U.S. defense policy. Although the post–Cold War world may sometimes be a disorderly place, without a powerful rival to exploit the turmoil, most conflicts will be parochial. The United States can, therefore, afford to view them with detachment, intervening only as a balancer of last resort in the unlikely event that a conflict cannot be contained by powers in the affected region and is expanding to the point that it jeopardizes America's own security.
The American people should repudiate efforts to preserve a global-interventionist role for the United States and should instead insist on a policy of strategic independence. That policy would avoid military commitments unless there was a serious threat to America's own vital security interests, which would be defined quite narrowly. A vital interest ought to have a direct, immediate, and substantial connection to America's physical survival, political independence, or domestic liberties.
Moreover, those who argue that an interventionist enterprise is necessary should bear the burden of proof. Their policy prescription would automatically entail tangible and immediate costs and risks to the American people as opposed to the hypothetical costs and risks of inaction. They should have to present compelling reasons for us to adopt their position.
Strategic independence would in no way constitute isolationism. Not only should the United States maintain extensive diplomatic, cultural, and economic relations with the rest of the world, but it must have capable military forces and be prepared to take decisive action if a serious threat to American security does emerge. A restrained defense strategy doesn't mean that U.S. policy makers must wait until bombs are falling on American cities to respond.
The most dangerous threat to American security in the post–Cold war era will probably be the proliferation of nuclear weapons. Not only does proliferation appear to be accelerating, but the regimes that seem most determined to acquire nuclear arsenals are precisely the ones that the United States would least like to have them—the Irans, Libyas, and North Koreas of the world.
That situation has important defense-policy implications for the United States. First, it means that Washington must be doubly cautious about intervening in regional disputes that don't have a clear and compelling relevance to America's security. The only thing worse than gratuitous meddling in parochial conflicts when the parties are armed with conventional weapons is meddling when one or more of the parties has nuclear weapons.
Second, the United States must maintain a credible strategic arsenal—approximately 2,000 weapons deployed on submarines and long-range bombers to ensure the survivability of a retaliatory force—as a deterrent. Finally, the dangers posed by proliferation greatly increase the need for an effective shield against ballistic missiles. Indeed, the ABM program is the one area in which U.S. military spending should be modestly increased during the 1990s.
America's post–Cold War defense forces should be geared to neutralize threats to American security, not to intervene in regional conflicts or to protect Cold War–era allies that are now capable of defending themselves. This means concentrating resources on long-range retaliatory forces and strategic defenses.
In addition to preserving a "strategic dyad" of eight or nine Trident missile submarines and a bomber fleet (50 to 60 B-1Bs and B-2s), the United States should maintain a 250-ship Navy (including six carrier battle groups) and 16 tactical air wings (nine Air Force, two Marine, and five Navy). Ground units (both Army and Marine) are the least relevant arm of the military in a post–Cold War setting and should be pared to an active-duty force of 250,000.
Most important, over the next five years, the United States should withdraw and demobilize the forces stationed in Western Europe, Japan, and South Korea. With the disintegration of the Soviet Union, it is absurd to protect those nations from secondary threats that they should be able to handle with their own military resources. The Bush administration contemplates keeping 150,000 troops in Europe indefinitely—plus reinforcements stationed in the United States—at an annual cost to American taxpayers of more than $90 billion.
Washington's security commitments in East Asia (primarily to Japan and South Korea) cost another $40 billion annually. Yet Japan has the world's second-largest economy and can easily afford to spend more on defense, if necessary. South Korea has twice the population of and an economy 10 times as large as its only conceivable adversary, North Korea.
If the United States jettisons its obsolete alliances and adopts a force structure appropriate to the conditions of the post–Cold War world, it can protect the republic's security with an active-duty force of approximately 875,000 persons at a cost (after a five-year transition period) of $125 billion a year (measured in 1992 dollars). That sum is barely half of the Bush administration's projected 1997 budget.
Even at $125 billion, the military expenditures of the United States would still be three to four times larger than the probable 1997 defense budget of any other member of the Group of Seven (G-7) industrial powers. The cuts may seem radical in the context of the elephantine Cold War–era budgets that have come to be considered "normal," but with the end of the Cold War, we must change our ideas of what constitutes normal defense spending.
Beyond the issue of cost, there is an important moral consideration. The lives, freedoms, and financial resources of the American people are not—or at least, should not be—available for whatever foreign-policy objectives suit the whims of the national-security bureaucracy. The U.S. government has a fiduciary responsibility to protect the security and liberty of the American republic, not to pursue grandiose schemes of world leadership. It doesn't have either a moral or constitutional writ to implement the political elite's activist agenda internationally any more than it has one to do so domestically. Those who are serious about the principles of limited government cannot in good conscience support a global-interventionist foreign policy.
Ted Galen Carpenter is director of foreign-policy studies at the Cato Institute.
Haste Makes Waste
By Murray Weidenbaum
Events since 1989, at home and abroad, reinforce the need for a "new look" by the United States in setting national-defense strategy. The most sensible approach is a step-by-step arms reduction closely keyed to firm evidence of continuing ease in world tensions. Hasty defense cutbacks not geared to the changing threats to our national security are foolish. They could place the United States in a needlessly vulnerable position. The history of the past half century shows frequent and wasteful start-and-stop cycles of defense spending.
It makes good sense to cooperate with the ex-Soviet republics to cut back on the size of both military establishments. Yet the United States should be prepared to reverse course if a new leadership in Russia takes a more aggressive position or if serious strategic threats arise elsewhere. Effective reversibility thus requires a strong and diversified defense industrial base as well as alert and well-trained reserve components.
The most reasonable basis on which to plan our own national security is to expect continued and substantial reductions in U.S. military spending over the coming five years, if not longer. The cutbacks will be more than the very modest 1-percent to 2-percent annual declines of the late 1980s. We can plan on defense reductions of 5 percent a year or more. Another way of looking at it is that a high level of military spending will continue for the indefinite future, but it will be much lower than the peak rates of the 1980s.
This substantial, but curtailed, level of defense outlay necessitates a variety of adjustments, many of them painful to the people directly involved. Yet the general magnitude of the change will be less (as a share of GNP) than was the case following the end of the Korean War or the Vietnam War.
To fit within fiscal reality, Congress and the president have to take those difficult actions that the government has tended to avoid since the mid-1980s—substantially reducing the number of aircraft, missiles, and ships the Defense Department buys and the number of people in uniform. The mismatch between the military's wishes and congressional appropriations can only be resolved in one way—by cutting the planned spending to fit the budget cloth.
Coming to grips with the budgetary challenge will also reduce the great uncertainty that currently hangs over planning in the defense industry. That uncertainty adversely affects defense businesses and their employees. Some of the cuts that should be made are obvious. It is only bureaucratic inertia that has blocked them. For example, the Navy still plans to spend $1 billion to build and outfit a series of additional "home ports" originally designed to support a 600-ship fleet.
The current fleet is less than 500 ships, and further reductions are clearly in the cards. The support for continuing expensive and needless construction comes from the cities where the new ports are scheduled to be built. We must be on our guard against born-again military enthusiasts. Local interest groups find it easy to confuse pork with patriotism. Do you want to convert a congressional dove to a hawk? Easy; just try canceling a defense contract in his or her district.
The national interest requires a basic downsizing of the three military services. The end of the Soviet threat to Western Europe means a smaller Army. The reserves should be assigned the major portion of the task of defending our interests in Europe in the event of a future crisis.
The Air Force can also be cut because the United States will play a substantially smaller role in NATO. Nevertheless, we will still need a strong Air Force. Intercontinental ballistic missiles are still very much operational all throughout the region formerly controlled by the Soviet Union. And no one knows who will wind up controlling them.
Finally, the Navy should shift more of its vessels to reserve status and also reduce the number of aircraft carriers. Nevertheless, America needs a substantial tactical force of Navy and Army units to deal with potential crises in the developing world.
This smaller U.S. military force should be based mainly in the continental United States. It would require much less infrastructure support than the current armed forces, although airlift and sealift capability would be important considerations. Moreover, the quality and morale of military personnel must be maintained at high levels despite the reduction in their overall size and budgets. That takes pay and perks at levels competitive with the civilian economy. Visions of peace dividends shouldn't obscure the need to maintain an adequate corps of professionals in the armed forces and key reserve units.
In voting lower appropriations for defense, Congress should avoid setting in motion a new stop-and-go cycle in military spending. Serious threats to national security are changing in form, but they surely continue. Possibilities range from the Middle East to the nuclear buildup of North Korea. The effectiveness of the large amounts of money and resources devoted to defense will be enhanced by lowering the peaks in the military budget and raising the valleys.
None of this is reason to stop the movement to a lower level of defense spending. The prosperity of the United States doesn't require any particular amount of military activity. In fact, the productivity and competitiveness of the American economy will suffer if the government uses defense spending to prop up the prosperity of any region or industry.
Further, unemployed defense workers shouldn't receive special benefits. They should be treated as generously as—but not more or less than—say, people who lose their jobs because of sluggish housing sales resulting from a change in the government's monetary policy.
The scientists, engineers, and technicians that constitute a large fraction of the defense industry don't need federal "make work" programs. They are among the most mobile members of the labor force—geographically, industrially, and occupationally. While defense is a national problem, economic adjustment is largely local. In any event, the private sector is better equipped to deal with adjustment to defense cutbacks.
Many defense-oriented communities take the position that the nation owes them something special because of their "contributions" to national defense. But we must dismiss such obviously self-serving views. Just recall the vigorous lobbying efforts those same communities made to get the Pentagon to locate the defense contract in their locality in the first place.
However, cuts in defense spending should be accompanied by a massive dose of deregulation in the military procurement process. Congress should strip out the host of special provisions that require military contractors to act like government bureaus doling out benefits to designated classes of beneficiaries. That would reduce the overhead costs of defense contractors. It would also increase their ability to transfer new technology between civilian and military products.
Murray Weidenbaum is director of the Center for the Study of American Business at Washington University in St. Louis and the author of Small Wars, Big Defense (Oxford University Press).
Invest in Higher Machine IQ
By Bart Kosko
Most money for weapons goes to develop them. Much less money goes to research them and draw their blueprints. In fiscal 1990, Congress spent $81 billion on weapons procurement, $88 billion on "operation and maintenance," and $75 billion on military personnel. It spent $37 billion on all R&D and testing and most of that on development and testing. In contrast, Congress spent $12 billion on NASA and $2 billion on the National Science Foundation.
This suggests a rule of thumb for massive R&D cuts: Up the R a little, slash the D a lot. In 1991, Defense Secretary Dick Cheney called for stopping the development cycle at the prototype level. That is the right idea and the right first step. As long as the United States retains the capability to produce state-of-the-art weapons, it's not necessary to actually manufacture them unless new threats to our security emerge. Cutting production will mean the end of large aerospace firms, at least those that get 50 percent or more of their revenue from defense contracts.
A new market could soon form. There are and will be hundreds of thousands of laid-off aerospace workers and researchers who can consult, form small firms, and start think tanks to supply the new demand for defense research. A report by the Los Angeles County Aerospace Task Force claimed that by 1995 L.A. County alone may lose up to 420,000 aerospace jobs. The new defense-research market can help the United States keep its lead in the design of smarter weapons.
There is now a reason to favor research over development: Machine IQs are on the rise. Emerging technology could make U.S. weapons obsolete unless we keep up. We are seeing smarter cars, smarter satellites, even smarter washing machines. Part of this IQ boost comes from advances and shrinkage in sensors and computer chips and materials. Defense firms and funding agencies will no doubt support these areas. But most of the IQ boost comes from an area that most people have not heard of. This area is a new branch of machine intelligence that looks at the world from a view called model freedom.To grasp model freedom it helps first to see what it is not.
Science paints a picture of the world with math models. Each model uses equations to turn inputs into outputs. Newton's law of gravity is a simple math model. It takes as inputs the mass of two objects and their distance and gives as output their gravitational attraction. The models of econometrics use many equations to tie outputs to inputs. New data on interest rates and GNP and employment and the money supply tune the equations.
The trouble is that someone has to guess at the equations. Newton guessed well, and Einstein guessed better. In most cases, we have no idea what the equations look like. The world is too nonlinear. We don't know the math to control a helicopter in flight when it loses a rotor blade or to tell a mine in the sea from a rock or even to back up a truck and trailer to a loading dock. The new techniques of neural networks and fuzzy logic can perform these tasks. Like humans they work with no math model.
Model freedom lets the data tell their own story. It lets systems learn from experience. A neural net starts out as a black box with a tangled web of synapses inside. You show it a stream of inputs and outputs and the web changes. In time, when you give it an input it gives the right output. You show it a sonar picture of a rock and it says a rock and not a sea mine. It learns some complex math model in its tangled web of synapses but no one knows what it is or cares.
A fuzzy system works the same way but it learns, or you give it, a set of common-sense rules: If the water is dirty, then add more detergent. If the trailer turns to the right a little, then turn the steering wheel to the left a little. If the scud speeds up a lot, then move the cross hairs to the right a lot.
In theory, these model-free systems can model anything. So in theory neural nets and fuzzy systems can learn any relation between inputs and outputs, between cause and effect. In practice, we are still working on it. Smart fuzzy appliances and decision aids in Japan, which owns this market, came to over $2 billion in 1991. In the United States, Motorola, General Electric, and Rockwell have started large programs in smart fuzzy products. NASA has held workshops on neural nets and fuzzy logic and worked them into new designs for space shuttles and Mars rovers.
Defense firms and agencies have been slow to work with the model-free strains of machine intelligence. Cruise missiles and fighter aircraft still use 1960s control and scene-matching software. In some cases, you can prove theorems about how these simple math models work. The new model-free black boxes work well but do not leave much of an audit trail of how they work. They have no math model and that means no math guarantees. You have to trust simulations.
That and their newness has not set well with many defense agencies. But it has not stopped Sony from building fuzzy TVs or stopped Honda from putting fuzzy transmissions and brakes and fuel ignitions in its new cars. And future weapons systems—many with high-speed swarms of smart missiles and robocraft—will defy any man's math model. The future is model free whether generals feel comfortable with it or not.
Investing in higher machine IQs has a better chance that it will lead to commercial spinoffs than does investing in the later stages of weapons R&D. First, the commercial market has adapted to much of the new smart technologies. It stands ready to use the next advances. There is little market for stealth and other technologies grown in the defense hothouse.
Second, the problems of smart weapons are much like those of smart products. They come down to how we sense data and how we use them to control actions at the cognitive level. If you can tell friend from foe by a laser radar pulse, you might use the same pattern-recognition net to tell cracked bottle caps from good ones or to tell a safe loan from a risky one or to tell a healthy cell from a cancerous cell. If you can control a swarm of cruise missiles as they talk and hit targets and get hit and reassign themselves, you might use the same fuzzy-logic rules to schedule tasks in a supercomputer or to guide a platoon of small cars as the cars cruise down a freeway and join or exit the platoon.
Few weapons programs favor simulation over production, software over hardware. One exception is the little-known Air Defense Initiative or "Air Wars." This program started in the late 1980s in the shadow of the Strategic Defense Initiative. SDI tried to put the roof on a house before the sides were up. Even the best Star Wars shield could not stop a cruise missile or swarm of them lobbed at the White House from a close submarine or bomber. ADI deals with these "air-breathing" threats of the future, the sort of pinpoint strikes a future Azerbaijan or Mexico might launch against its neighbor. The Air Force wants to fund an ADI simulation testbed to test new ADI weapons systems and organization schemes in "virtual" battles. So far, the giant SDI program has taken most of the ADI monies.
Today the Defense Advanced Research Projects Agency funds most of the research on smart weapons. DARPA has favored mainstream computer and "artificial intelligence" approaches over the new model-free systems. From the 1960s to the 1980s DARPA kept the new A.I. field afloat and kept that infant industry an infant. Hundreds of millions of dollars led to a few A.I. breakthroughs and no A.I. commercial products that you can find on the shelf or in the office or in the kitchen.
One idea is to start a new civilian DARPA to nurture new smart technologies and to compete with the Cold War DARPA. A lesser-cost idea is to strip DARPA of its top-secret projects and put it under civilian control. That might make it act more like Japan's Ministry of International Trade and Industry. A still lesser-cost idea is to abolish DARPA outright.
Bart Kosko is an assistant professor of electrical engineering at the University of Southern California and author of the Prentice-Hall textbooks Neural Networks and Fuzzy Systems and Neural Networks for Signal Processing.
Defense Trust Busting
By Benjamin Zycher
The collapse of the Soviet Union and of state socialism in Eastern Europe signals the end of the great 20th-century struggle for hegemony in Europe, a contest that had its origins in the German quest for power that grew in the late 19th century, culminating in the First and Second World Wars. That in the end this hegemony will be enjoyed by a Germany defeated in both blood baths is ironic but hardly affects the vital interests of the United States.
In the narrower context of U.S. defense planning and organization, the end of the Cold War provides a rare opportunity to restructure substantially the U.S. defense establishment, which more accurately should be termed the Socialist Defense Cartel. This reflects one of the great missed opportunities of the Reagan administration—the failure to use the large Pentagon budget increases to offset inevitable bureaucratic opposition to reform of the defense cartel.
Of more central interest are the appropriate goals of the U.S. defense establishment in a post–Cold War world. These are: preservation of a core defense program as an insurance policy; development and deployment of missile defense; expansion of a vigorous antiterrorism capability; deployment of a substantial preemption capability; and preservation of a highly credible and stabilizing second-strike nuclear capability.
Core Defense Insurance. Invoking uncertainty about the future, the Bush administration supports only minor reductions in the size and cost of the U.S. military force structure. Such uncertainty, of course, is an omnipresent feature of life; that hardly implies that a force structure appropriate for an uncertain world with a Cold War is appropriate also for an uncertain world without one. That life is uncertain can be used to justify anything. But because resources are limited always and everywhere, judgments must be made about the seriousness of alternative risks. Whatever one's view of U.S. interests in Europe, the end of the Cold War must imply that we should cut U.S. military forces subtantially.
On the other hand, unforeseen risks can arise. That future risks are undeniably smaller, but still real, means that preservation of a smaller but substantial defense establishment is appropriate. This force must be sufficiently large to deal with realistic threats, say, to Mexico and must be expandable on relatively short notice.
In budget terms, this requires substantial resource commitments to training and equipment but for smaller forces. Equipment whose acquisition involves long lead times should be stockpiled, with production lines kept open and expansion capacity maintained. Further, the United States should maintain a large training program for reserves to allow for a quick expansion of our forces should that prove necessary. In total, the defense budget should be cut to about $150 billion (in 1991 dollars) over a period of five years at most.
Missile Defense. "Nonproliferation" is an unrealistic goal. The embargoes upon which it depends require that all potential sellers agree not to sell, an arrangement that is unstable for the same reasons that any cartel will tend to find its members cheating. In a world with rapid evolution in technology and with rapid dispersion of technological expertise, it is foolish to assume that many regimes will fail to acquire substantial nuclear, biological, or chemical weapon technology and delivery capabilities.
Such a world may well be one in which future Saddam Husseins, of which there is an infinite supply, will be able to threaten greater damage to the United States than the United States can threaten in retaliation. Certainly, the exchange of political damage between elected U.S. leaders and foreign autocrats is unlikely to prove salutary from our perspective.
Therefore, the United States should develop and deploy missile defenses, whether ground or space-based, capable of defending against attacks by dozens or perhaps hundreds of warheads. Such a system should be made expandable because the military capabilities of even small regimes will tend to grow over time, increasing the danger to the United States.
Antiterrorism. Rarely if ever does terrorism pose a threat to the survival of a state. But responses to terrorism carry important implications for the security of individual citizens, for future terrorist activities, and for public morale under democracy. As a central principle, attacks upon innocent lives and property must be resisted vigorously, and nations harboring or sponsoring terrorist organizations must be subjected to certain and disproportionate retaliation.
Retaliation is necessary because free societies cannot be on the defensive always and everywhere, and more generally because hiding under the bed is not consistent with preservation of national self-respect. This means that resources must be invested in commando units, transportation, delivery systems, special weaponry designed to minimize collateral damage, and the like.
Preemption. Conditions will arise under which hostile regimes will develop weaponry threatening vital or important U.S. interests. Major ground operations or other actions in response may appear too cumbersome or otherwise inappropriate. Therefore, the United States should have a capability for "surgical" preemptive strikes designed to remove such threatening weapons. A small long-range bomber force, coupled with development of highly accurate cruise missiles, whether ground-, sea-, or air-launched, will provide an important form of insurance.
Nuclear Deterrence. Nuclear threats will not disappear, and preservation of effective deterrence against potential first strikes is an important defense goal remaining from the Cold War. So that potential aggressors will see an effective first strike as futile, presentation of an effective second-strike capability requires some combination of missile defense and deployment of large numbers of retaliatory weapons.
Maintenance of deterrence stability—reduction of incentives for first strikes by potential adversaries—requires that the U.S. strategic force not be seen as a first-strike force. This consideration puts limits on the number of strategic missiles carried by submarines and a premium on nuclear-armed cruise missiles and bombers, which are too slow to pose a first-strike threat. Multiple-warhead weapons and other such destabilizing strategic assets should be limited sharply or eliminated.
Finally, let us recognize that the U.S. defense establishment now may be the largest centrally planned economy in the world. Pentagon decision makers, when designing weaponry or when specifying performance characteristics, have weak incentives to respond to shifts in consumer preferences. The "consumers" are the soldiers in the foxholes, the airmen facing dogfights and anti-aircraft fire, and so on. A good proxy for these ultimate users may be the theater commanders charged with the task of winning battles. But without a profit motive or competition, Defense Department decision makers have few incentives to follow the preferences even of theater commanders.
As a result, the Pentagon often has promoted and shielded from criticism and competition weapon designs with dubious combat features and effectiveness. The performance of the M-16 rifle during the Vietnam War provides a classic example of such bureaucratic turf protection: the M-16 was redesigned by the Army from the AR-15, which had been developed by a private inventor. To protect its own design bureaus, the Army fought against it for years, and then redesigned it, resulting in a far less reliable and effective weapon.
During the 1991 Gulf War, the Air Force A-10 "Warthog," however ugly, performed brilliantly in support of Army and Marine ground operations, as it was designed for that specific purpose. For years, the Air Force tried to eliminate funding for the A-10 precisely because it supports the other services, and thus yields few bureaucratic benefits for the Air Force. The Air Force wanted to use F-16s and other more glamorous aircraft for ground support, even though their great speed makes them far less suitable for such missions. One crude way to get weapons and other equipment that conform more to user preferences is to give the users a larger voice or a direct veto in design decisions.
Because the military services have tasks that are defined sharply with little overlap, each service is in effect a monopolist in its defined missions. This is closely analogous to a cartel which divides submarkets among its members. The Army, for example, is prevented from flying fixed-wing aircraft, giving the Air Force a monopoly in the provision of much close air support for ground operations.
An important reform would have the services compete. For example, the Army and the Marines could be required to compete on a much broader scale in "production" of ground combat operations. The Army and the Air Force could compete in the provision of close air support. The Navy could be forced to compete on a much broader scale with the Coast Guard.
The 1990s have brought the dawn of a new age, but the U.S. defense establishment is structured to deal poorly with smaller but more numerous threats—or with tighter budgets. Defense is too important to be left to the Cold Warriors.
Benjamin Zycher is vice president for research at the Milken Institute for Job and Capital Formation and a visiting professor of economics at UCLA. He was formerly a defense analyst with the RAND Corp.
The post Arms Wrestling appeared first on Reason.com.
]]>Rising oil prices were used in the early and late 1970s as a justification for oil-import tariff proposals, presented as a purported means to tax away OPEC profits. Stable prices were used in the mid-1970s as a rationale for more tariff proposals, justified as a tool with which to promote "conservation" and "reduced dependence" on foreign oil.
Now that oil prices are falling sharply, the same people have reemerged with the same inevitable proposals for an oil-import tariff, this time on the grounds that the revenue could be used as a "painless" means of meeting the Gramm-Rudman-Hollings deficit targets, thus circumventing congressional paralysis in terms of budgetary discipline. This is a strange justification for a new tax, as those making this argument presumably never would support efforts by businessmen to hide price increases, that is, to make them "painless." No matter: truth in advertising does not apply to our honorable solons. But that is another story.
Let us note first that the popular argument that an oil tariff be increased on a dollar-for-dollar basis as oil prices fall is inconsistent with the goal of "kicking OPEC." Such a tariff would make US oil prices and thus consumption relatively constant regardless of changes in world oil prices. The Saudis, then, would have reduced incentives to cut their prices; why should they do so if increased sales and revenues would not result?
If the tariff is instead a constant tax per barrel, then it may exert some downward pressure on world oil prices, but the effect is likely to be quite small because the United States does not possess great market power as an oil consumer. Moreover, the tariff that is "optimal" in terms of wealth redistribution from oil producers to the US economy is not the same tariff as that which would maximize revenue to the government. Notwithstanding the beliefs of congressmen, pundits, and bureaucrats, revenues for the government are not the same as benefits for the economy. Government is hardly renowned for promotion of the general good over more-parochial concerns; only the innocent can believe that the tariff actually chosen will be that which maximizes benefits for the economy as a whole.
Furthermore, the purported "painlessness" of a tariff is an illusion. A price decrease confiscated by the government is a cost to those bearing the tax, regardless of the degree to which it is hidden by price fluctuations. Moreover, the United States is part of the world economy, so that domestic firms competing with overseas ones that are exempt from the tariff will be put at a competitive disadvantage, thus leading to a long-run shift in resource allocation. This shift will move resources toward less-productive uses, exacerbating the costs imposed upon the economy.
And do not allow anyone to tell you that administration of an oil-import tariff is a trivial matter. The tariff would have to be applied to imports of both crude and refined products in order to avoid serious distortive effects, but application of the tariff to products will produce considerable howling in Congress by innumerable special interests. Add to those the inevitable wailing from northeast heating-oil users. Add to those the various interests supporting exemptions for Mexican and Venezuelan crude oil. Add to those the pleas from owners of refineries in Puerto Rico and the Virgin Islands. Do not forget the small refiners, experts at promotion of "competitive disadvantage" arguments for any and all occasions.
Throw in some additional exemptions for petrochemical producers, and you can see that the administrative complexities, distortions, and absurdities of the Mandatory Oil Import Quota Program (1959–73) and of the price-control Entitlements Program (1975–81) were not, as Pravda would put it, accidental. This inevitable complexity, distortion, and cost means that the tariff revenues inexorably will be consumed in efforts to compensate losers and to buy off interests so as to forge a coalition. In reality, an oil-import tariff has little to do with "deficit reduction."
Proponents of an oil-import tariff actually have done us quite a favor: they have provided a new "shoot-anything-that-moves" theory of taxation. If a price rises, impose a "windfall profit" tax; if it falls, impose a "painless" tax. Since all prices in a dynamic economy shift over time, this philosophy puts the government's fingers into every possible pie. Think of the endless possibilities. Electronics prices are falling drastically; we could impose "painless" taxes and solve the technology-transfer problem once and for all. College tuitions are rising; we could impose a "windfall profit" tax and force the campus leftists to find honest work. And the hell with the deficit: we could use the revenues to enrich economists in Canoga Park whose last names begin with the letter "Z."
Benjamin Zycher is an economist in Canoga Park, California. He was a senior staff economist at the Council of Economic Advisers during 1981–83.
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]]>There exists a vast literature containing applications of economic analysis to important issues in public policy. From Milton Friedman to Thomas Sowell to Lester Thurow and beyond, whole forests' worth of paper have been allocated to expositions without jargon upon the causes of and solutions to public-policy problems. This literature is one of the true successes of the economics profession: it is reasonably rigorous, yet well-written.
The latest addition to this scholarship-for-the-masses collection is The Policy Game: How Special Interests and Ideologues Are Stealing America, by Peter Navarro. Unfortunately, it does not measure up to the prior body of policy literature. Navarro attempts to differentiate his product by including chapters on special interests and their tactics and on the differences between (modern) "liberal" and "conservative" ideology. These chapters are somewhat pedestrian but are nonetheless straightforward, and for that reason I would include this book on the "recommended reading" list for an undergraduate course in American political institutions. Each of the chapters on specific policy issues contains an unexceptional discussion of the relative roles of special-interest influence and ideological belief in public-policy outcomes.
The heart of Navarro's book lies in six chapters dealing with specific policy issues: rent control, protectionism, farm subsidies, electric utility regulation, the Equal Rights Amendment (ERA), and defense procurement. But in each chapter, Navarro shoots himself in the foot by presenting some of the silliest policy prescriptions that I have encountered in quite a while.
For example, he notes that rent control has failed to achieve its (purported) goals of reduced housing costs, neighborhood stabilization, and wealth redistribution to the poor. He does a decent job of presenting the well-known reasons for this. And what is Navarro's solution for the problems caused by tight housing markets? He advocates "iron-clad" agreements with developers that new housing units will be free from controls permanently. How this covenant is to be enforced over time is left to the reader's imagination.
Navarro argues further that localities "can finance the construction of more public housing for their low and moderate income population." He does not inform us how such housing is to be allocated, particularly when potentially eligible tenants from outside the given municipality migrate to it in order to avail themselves of such largesse. Nor is he very clear about how such programs are to be financed, particularly when those ineligible move out of the locality in order to avoid the taxes necessary to pay for the accommodations.
Navarro continues: Local demands for redistribution could be satisfied by cash transfers or "rent stamps." But who would be eligible for such subsidies? And who would finance the American equivalent of the Berlin Wall needed to control the stampede of joyous beneficiaries anxious to move to localities offering such generosity? And what would be the effect of such rent subsidies on housing prices? Is it not likely that the subsidies would be reflected by land prices, and so benefit the nonpoor?
Despite a number of analytic errors, Navarro does point out (and also exaggerate) the inefficiencies and economic costs imposed by protectionism in US international trade. And he points out, correctly, that protectionist pressures often succeed politically because such policies bestow benefits on concentrated groups, while the larger gains of free trade accrue to the benefit of the whole decentralized economy.
Again, however, Navarro's solutions fall short. The federal government could sponsor public "information" programs about the evils of trade barriers, to ensure a more informed citizenry. Such progress doubtless would be broadcast by TV stations as a public service just before the interview with the local fire chief, shown at 5:00 A.M. Sunday morning. We could have, says Navarro, "protectionist impact" statements—guaranteed to bankrupt sleeping-pill companies faster than could the FDA in its wildest dreams.
And there is more, much more. Congress could relinquish its powers over trade policy to the president and the bureaucrats. Has Navarro ever looked at the kinds of things advocated by our benevolent bureaucrats at the Commerce Department? (Hint: They are not oriented toward free trade.) And since when do politicians give up authority? The bureaucracy could "streamline its processing" of complaints about allegedly "unfair" trade policies leveled against some foreign competitors. It seems never to have occurred to Navarro that such efficiency, however unlikely in a government bureaucracy, would attract more and more complaints, thus leading to greater rather than less governmental meddling in trade matters. Navarro also advocates expansion of unemployment insurance to vastly greater numbers of workers displaced (indirectly) by import competition. Would this scheme not evolve into the federal spending equivalent of a perpetual motion machine?
Moving right along to the farm subsidy programs, Navarro commits the by-now standard quota of analytic errors but nonetheless summarizes clearly the enormous costs and waste caused by the subsidy system. He advocates a system of direct cash payments to farmers and a more market-oriented system of acreage removal, both of which would constitute net improvements over the current system.
How do we make such change feasible politically? Well, says Navarro, with a "one-time" payment to farmers of tens of billions of dollars! Now, consider the political incentives generated by such a scheme. All the farm lobby would have to do to garner such juicy payments in the future would be to lobby for new programs and then offer to end them for an appropriate price. It would be the political equivalent of kidnapping.
The book turns next to electric utility regulation, the sole area in which Navarro has any substantial expertise as a policy analyst. Analytic errors aside (again), Navarro summarizes nicely the problems caused by regulatory lag and rate suppression by many public utility commissions (PUCs.) (Navarro's dire warnings about future blackouts, however, are overblown: because of the PUCs, future electricity generation will be much more costly than necessary, but mere availability is unlikely to be a problem.) The obvious answer is to deregulate electricity generation; because transmission and distribution costs have fallen relative to generation costs, much greater competition for service to any given community is now economic.
Navarro apparently does not support this clear solution. His proposal? First, appointment rather than election of PUC commissioners. Navarro gives no thought to the implications of this proposed change; after all, do appointed judges make systematically better decisions than elected members of Congress? Do we really want decisionmakers to be less rather than more accountable? Second, Navarro argues, curiously, that utilities ought to combine both "hard" (central generating plants) and "soft" (wind, solar, geothermal, etc.) sources of electricity. This is despite the uneconomic nature of most soft generation. Finally, he argues that regulation ought to be on a regional instead of a state-by-state basis. Is there any evidence that greater centralization of governmental authority leads to enhanced economic productivity?
The chapter on defense procurement contains, aside from still more analytic errors, the standard discussion of weapons complexity, perverse Pentagon incentives, and budgetary uncertainty. Part of the discussion is incoherent; for example, Navarro complains at one point that weapons complexity precludes acquisition of large numbers of weapons, so that scale economies cannot be achieved. He then advocates later that given weapons be produced by two (or more) firms in order to enhance "competition." He seems not to realize that such "dual-sourcing" probably would exacerbate the scale-diseconomy problem even more. Navarro wants defense bureaucrats to "insist" on accurate cost estimates; but how can "accuracy" be measured ex ante? And how is this to be enforced in a way consistent with the bureaucrats' institutional incentives? The bureaucracy, after all, is in business to induce Congress to approve weapons, not reject them.
Above all, Navarro wants more "arms control" as a means of "reducing tension" and thus the need for weaponry, begging the question whether arms produce tension or tension produces arms. Does "arms control" make the United States (and the world) more or less safe? What are the incentives faced by the Soviet leadership? Even if agreements can be "verified," how can they be enforced? Navarro displays not the slightest insight into the answers to or even the existence of such issues.
And finally, there is the chapter on the Equal Rights Amendment. With trumpets blaring, and errors of analysis aplenty, it is an utterly unabashed propaganda parade for the ERA. For Navarro, women's rights and the ERA are synonymous. He would have us believe that the anti-ERA movement has been composed solely of Mormons, proselytizing fundamentalists, housewives, mothers, and other assorted Neanderthals, while ERA proponents are "largely well-educated, working women who prided themselves on their rationalism (and who) refused to stoop to (Phyllis Schlafly's) level." And where was Navarro during the boycott and other assorted pressure tactics, during the demands for the (clearly illegal) extension of the deadline, and during the attempts to bribe Illinois legislators into voting for the ERA?
As Navarro would have it, the ERA failed because of a lack of "charismatic leaders." Had Gloria Steinem or Betty Friedan led the fight—Navarro here is being absolutely serious—the ERA would have passed. Now there are two who really would have played in Peoria!
Throughout the chapter, Navarro asserts the widespread existence of discrimination against women. His evidence? The wage gap, which he adjusts to 60 cents from the famous 59 cents. Does he control for education? No. For experience? No. For labor-market mobility? For myriad other factors, many intangible, that determine market wages? Sorry. Navarro simply advocates that the ERA be passed in the name of "equality." Nowhere does he consider what the courts could read into an embryonic monster like the ERA. This chapter has to be seen to be believed.
I have noted in passing several times the analytic errors in this book, discussion of which would consume another whole article. Here is an example: Navarro correctly argues that rent control reduces the mobility of renters, because artificially low rents induce them to remain in controlled apartments longer than would be the case otherwise. He then argues that this "lock-in effect" increases unemployment, "as workers are less willing to commute longer distances to find and hold jobs."
This conclusion is incorrect: because rent control reduces the supply of housing—and thus of workers for any given cost of commuting—in a given area, wages will be bid up there and down elsewhere, so that the result would be inefficiency in the allocation of labor instead of increased unemployment. (This assumes that the demand for labor in the two areas is unchanged, which probably would not be true because of other perverse effects of rent control.)
For all the importance of his overall topic, Navarro's is a mediocre book. Buy it only if you have $18.95 to spare. But then, one can think of much better things to do with spare change.
Zycher is an economist in Canoga Park, California. During 1981–83 he was a senior staff economist at the Council of Economic Advisers.
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]]>Recently, she could be found risking life and limb in battle with yet another bastion of masculine bigotry. The local business club? The government of the sovereign state of Saudi Arabia? Hardly. Miss Allred had chosen instead a far more insidious practitioner of "sex discrimination on its face," to wit, the infamous Yellow Balloon children's hair salon of west Los Angeles, against which, you guessed it, a lawsuit was filed, with Miss Allred as lawyer.
Precisely what was Yellow Balloon's crime against humanity? After all, when I last took my children, unlimited animal crackers were offered to all without regard to race, creed, religion, or sexual orientation. Well, in this day and age, that's not good enough; Yellow Balloon's crime was its practice of charging more for girls' haircuts than for those of boys, "even if their haircut takes less time and less expertise."
Now, anyone who has lived in the real world knows that, on average, girls' haircuts are more time-consuming and intricate than those of boys. Market prices cannot make allowances for the infinitude of differences between individuals; market processes therefore tend to drive prices toward roughly efficient levels. In markets where it is practical to do so, individual negotiation smooths whatever rough edges may remain. That is obviously impractical in the haircut business.
Moreover, little thought is required to discern the implications of Miss Allred's pricing standards were they to be implemented everywhere. Equality of prices for girls' and boys' haircuts would create, on average, a subsidy from boys to girls, because boys would be charged too much for haircuts and girls too little. The market would not permit this situation to prevail; salons soon would specialize in either boys' or girls' haircuts, thus leading to the very segregation of the sexes purportedly rejected by advocates of sexual "equality."
This absurd outcome is not difficult to predict, thus suggesting that "equality" is not the true goal of these fanatics. Instead, their aim is a politicization of all aspects of everyday life; such bureaucratization would increase greatly the extent of governmental control over individual behavior. It is this control that is the real objective of the Gloria Allreds of this world, whose only solution to any perceived problem is government coercion.
In short, it is intimidation that is the name of the game. How else can we explain such phenomena as the sidewalk press conference held in front of the Yellow Balloon, without even the courtesy of prior notification of its owner? How else can we explain Miss Allred's demand that the owner admit—in writing—past "discrimination"? (To her credit, the owner refused, although she ended up settling out of court to avoid further legal expenses.)
Does Miss Allred have nothing better to do with her time? Apparently not: bullying such individuals as the owner of the Yellow Balloon, who is attempting only to earn an honest living, is precisely one means through which political power can be enhanced. Except in degree, is there really a fundamental difference between such tactics and the white paint used in 1930s Germany?
In short, more—much more—is involved here than mere excess in the pursuit of "justice" by advocates for women and the other myriad competitors for oppressed status. This excess is the result in part of competition for publicity and influence among "rights" proponents, that is, those seeking greater political power. That they have found it necessary to concentrate upon such silliness as children's toys and haircuts speaks volumes about the small actual role of "discrimination" in modern American life. Hence, the ever-greater and more absurd lengths to which these extremists must travel in order to achieve ever-more microscopic ends.
Given this, what explains the ability of such pests as Miss Allred not only to command attention but actually to prevail in judicial and bureaucratic proceedings? One answer is that it is precisely the judiciary and the bureaucracy—our least democratic and accountable institutions—that facilitate the exercise of power by extremists. This is only one reason that markets ought generally to be preferred over political processes and that decisionmaking by elected officials ought generally to be preferred over that by judges and bureaucrats.
In any case, during a simpler time, such silliness as that represented by the Yellow Balloon episode would have been dismissed by sensible people as the work of mere cranks, deserving only of a freshly laundered straightjacket. Modern times, unfortunately, have witnessed the rise to respectability of sheer inanity, given full credence by the television cameras. This unwillingness to classify obvious stupidity as such is a measure of the depths in which modern democratic processes have allowed themselves to become mired.
Benjamin Zycher is an economist in Canoga Park, California. From 1981 through 1983 he was a senior staff economist at the Council of Economic Advisers.
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