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Recent Policy Studies
Retirement/Social SecurityBy Eric Montarti, Allegheny Institute for Public PolicyReport, 11/07/2008
Governmental Accounting Standards Board (GASB) Rule 45 made significant changes to the way state and local governments report post-employment retiree benefits other than pensions (OPEB). Rather than recording an expense when retirees are paid, GASB changes that standard to an accrual basis of reporting to reflect long-term obligations as they are earned. The City of Pittsburgh, Allegheny County, Pittsburgh Public Schools, and the Port Authority all offer OPEB to their retirees. All four have retiree health care packages, and the City and County offer life insurance as well. None of these OPEB plans have assets set aside to meet long-term obligations, leaving $1.2 billion in liabilities unfunded. To deal with these problems governments must explore solutions such as curtailing benefits, selling assets, pre-funding OPEB plans, outsourcing non-core functions, and employment reductions to begin reducing the liabilities.
ImmigrationBy George W. Grayson, Center for Immigration StudiesBackgrounder, 11/07/2008
Escalating violence highlighted by decapitations, torture, and kidnappings plagues Mexicans, with drug cartel hit men and run-of-the-mill thugs generally targeting their victims. Money, revenge, ransom, extortion, access to drugs, and turf battles often explain these heinous activities. On September 15, 2008, a major act of terrorism took place for the first time. These and other atrocities will profoundly change the dynamics of migration flows to the United States, which — contrary to conventional wisdom — have skyrocketed under President Felipe Calderón, who took office on December 1, 2006. How will the next putative leader of the free world react to a possible Second Surge? Will he turn a blind and patronizing eye to the callous behavior of Mexico’s pampered grandees or will he insist that they marshal their cornucopia-shaped nation’s boundless resources to inspire hope in and uplift the long-neglected downtrodden, who — absent inspired leadership — could flock to an irresponsible redeemer like López Obrador in the next presidential showdown?
ImmigrationBy Jon Feere, Jessica Vaughan, Center for Immigration StudiesBackgrounder, 11/07/2008
Immigration law enforcement has been a key ingredient contributing to the success of criminal gang suppression efforts in many jurisdictions across the United States. Since 2005, the Bureau of Immigration and Customs Enforcement (ICE) has arrested more than 8,000 gangsters from more than 700 different gangs as part of a special initiative known as Operation Community Shield. This effort has produced incalculable public safety benefits for American communities, despite being criticized periodically by immigrant and civil liberties advocates that are consistently opposed to all immigration law enforcement. Local governments and law enforcement agencies that shun involvement in immigration law enforcement are missing an opportunity to protect their communities from criminal immigrant gang activity. Policymakers should take further steps to institutionalize partnerships between state and local law enforcement agencies and ICE in order to address gang and other crime problems with a connection to immigration.
Health CareBy Scott Gottlieb, American Enterprise InstituteOn the Issues, 11/07/2008
Senator Barack Obama’s drug price and access control proposals will distort future investment decisions and smother the financial incentives that inspire innovation. Pfizer recently said it is exiting the development of drugs for common conditions like heart disease. This is part of a shift underway in the pharmaceutical industry to give up on routine medical problems in favor of discovering specialty drugs for rare diseases and unmet medical needs like cancer. The shift is driven in part by the industry’s critics in Washington, who have long maligned drug companies for targeting too many routine medical problems with drugs that were “merely” tweaks on existing medicines. Now these same detractors, led by House Democrats, are also proposing controls on access to and eventually pricing of the specialty drugs. This is one way an Obama administration would pay for the candidate’s plan to create a Medicare-like program for the under-sixty-five cohort.
Budget & TaxationBy Adam Lerrick, American Enterprise InstituteOn the Issues, 11/07/2008
Obama is promising $500 and $1,000 gift-wrapped packets of money in the form of refundable tax credits. These will shift the tax demographics to the tipping point, where half of all voters will receive a cash windfall from Washington and an overwhelming majority will gain from tax hikes and more government spending. Calculating how far top earners can be pushed before they stop—or cut back on—producing is difficult. But the incentives are easy to see. Voters who benefit from government programs will push for higher tax rates on higher earners—at least until those who power the economy and create jobs and wealth stop working, stop investing, or move out of the country.
Natural Resources, Energy, Environment, & ScienceBy Kenneth P. Green, American Enterprise InstituteThe American, 11/07/2008
President-elect Barack Obama has put energy policy at the forefront of his agenda. He says that his plan will boost our national security, help us achieve “energy independence,” reduce greenhouse gas emissions, and promote job creation. Indeed, Obama vows to create around five million new jobs by increasing federal spending on renewable energy sources such as wind, solar, and biofuels. As many experts have observed, the science behind the Obama plan is dubious, particularly when it comes to ethanol. If Obama’s energy promises rely on questionable science, they rely on even more questionable economics. We are to believe that replacing conventional energy sources (especially coal) with renewables (especially wind) will create five million new “green jobs.” Unfortunately, the idea of government “job creation” is a classic example of the broken window fallacy, which was explained by French economist Frédéric Bastiat way back in 1850.
National SecurityBy Michael Rubin, American Enterprise InstituteMiddle Eastern Outlook, 11/06/2008
The development of an Iranian nuclear program continues apace. While Iran’s true intentions are a mystery, the Bush administration’s posture has been inconsistent and lackluster. The administration made little serious effort to upgrade facilities in the region or rally our allies. The absence of a clear strategy to deter Iran will give that nation a free hand in the region to pursue conventional aggression and, what is worse, a nuclear attack. It may be comforting to Abizaid, Mullen, and the electorate to believe that the United States can deter or contain Tehran’s worst ambitions, but absent any preparation to do so, Washington is instead signaling that the Islamic Republic has a green light to claim regional dominance and, at worst, carry out its threats to annihilate Israel.
Family, Culture & CommunityBy Duncan Currie, American Enterprise InstituteThe American, 11/06/2008
Measuring racial progress is all about perspective. Since Appomattox, the struggle for racial equality has seen triumphs and setbacks alike. On balance, however, the story of race relations in America is one of extraordinary change and transformation. Over the past century, the racial attitudes of white Americans have undergone a sea change. There are now 41 African Americans serving in the House of Representatives, compared to only six in 1968. Only three percent of African Americans could be described as economically comfortable in 1968. That has increased to 17 percent at present. Interracial marriage rates have increased dramatically. Of course, black progress has been hindered in recent decades by social pathologies and family disintegration. To close lingering racial disparities in income and educational attainment, we must somehow reverse the debilitating cultural trends of the past four decades.
Natural Resources, Energy, Environment, & Science
“ICLEI-Local Governments for Sustainability”: Taxpayer Dollars and Foundation Grants Help a U.N.-Inspired Group Show U.S. Cities How to Enact Climate Change PoliciesBy David Libardoni, Capital Research CenterOrganization Trends, 11/06/2008
The big push is on to control global warming by regulating the American economy. While the outgoing Bush administration hesitates to push national legislation, one environmental group is building a coalition of cities and counties to enact local laws regulating carbon emissions. “ICLEI- Local Governments for Sustainability” is a 501(c) (3) nonprofi t created by a U.N. conference. Now it’s offering advice to local politicians and recruiting “strategic partners” to build pressure for municipal energy regulation. Originally called the International Council for Local Environmental Initiatives—hence the acronym ICLEI—the group is the product of a United Nations conference: the U.N. World Congress of Local Governments for a Sustainable Future. ICLEI can increase its regional headquarters and the scope of their operations because it is well-funded. The group flourishes on a healthy mix of revenue sources, including foundation contributions, program revenues, municipal membership fees, and taxpayer support.
International Trade/FinanceBy Daniella Markheim, The Heritage FoundationWebMemo, 11/06/2008
America’s free trade policies—that favorite bugaboo of protectionists on both sides of the political aisle—and a relatively open investment regime have cushioned the U.S. economy as domestic consumers and investors have tightened their purse strings and cashed out their mutual funds. Now that the economic storm has spread from the U.S. to much of the world, the need to keep the nation’s trade and investment barriers low and competitive is even more critical. International trade has been a source of growth for all participants, and World Trade Organization members need to make meaningful contributions towards an agreement—if one is to be had. Nations can strike the biggest blow against poverty and achieve a faster pace of economic recovery by helping to conclude the Doha Round with an agreement that eliminates trade-distorting polices in all countries, rich or poor.
Natural Resources, Energy, Environment, & ScienceBy David Kreutzer, The Heritage FoundationWebMemo, 11/06/2008
The clear political failure of the Lieberman–Warner bill last spring shows that support for global–warming legislation wanes considerably when the extraordinary costs are compared to the almost insignificant benefits. In response, those pushing restrictions on carbon dioxide (CO2) have tried to repackage global–warming legislation as jobs bills. As appealing as the repackaging seems on the surface (lots of high–paid, high–tech workers in lab coats), the support for these claims collapses once it is examined. A little thought experiment helps give perspective. Energy is a valuable input to the modern economy. Cutting CO2 makes less energy available, and when the impacts are traced through the economy, some jobs are created but more are lost. Counting only the jobs that are created distorts the analysis and invalidates the conclusions.
National SecurityBy J. Michael Barrett, Daniel Goure, Lexington InstituteReport, 11/05/2008
Chemical and biological agents, whether in the form of weapons employed by terrorists or rogue states, toxic spills or naturally occurring pandemics, pose a significant risk to the U.S. homeland. The threat is growing due to the enhanced globalization and mobility of society, the explosion in chemical and biotech expertise and the resulting ease with which chemical weapons can be created and pathogens can be covertly grown, prepared, transported and released. Early and accurate detection, characterization and warning of a chemical or biological event are critical to an effective response. To achieve these objectives, an integrated system of sensors is needed. This is particularly the case for a biological event.
Economic GrowthBy J. Scott Moody, Maine Heritage Policy CenterIssue Brief, 11/05/2008
Personal income is an important economic measure of a state’s well-being. Higher levels of personal income mean that a state’s residents are able to buy more goods and services such as homes, cars, education and health care. Fundamentally, personal income comes from two sources: the private sector and the public sector. The distinction between these two sectors is important because only the private sector creates new income. The public sector can only redistribute income through taxes and spending. In 2007, Maine’s private sector share of personal income was 67 percent and ranked as the 9th smallest in the country. However, the size of the private sector varies greatly by county. Washington and Kennebec counties had the smallest private sector shares at just 51 percent and 52.6 percent, respectively. Barely more that half of the income in these two counties comes from private sources!
EducationBy Richard Vedder, Jonathan Robe, Georgia Public Policy FoundationReport, 11/05/2008
Georgia spends more per student on colleges than the national average, but gets a smaller proportion of its students to enter college. While this could theoretically be an indication of targeting money on students likely to succeed, this is not the case in Georgia, as evidenced by low graduation rates. More importantly, the attrition from Georgia colleges is a scandal, far worse than the shameful national average. Costs of higher education are rising over time to students and taxpayers alike. A large portion of resources are used for non-instructional and even non-research purposes. Although almost impossible to measure, productivity has almost certainly been stagnant or falling. Among possible means toward improvement would be moving to a voucher approach to funding, where vouchers rise in amount at only the rate of inflation over time. Too, the state should insist that Web-based information on all facets of college life be provided by all publicly supported schools.
EducationBy Richard Vedder, Georgia Public Policy FoundationReport, 11/05/2008
Georgia spends more per student on colleges than the national average, but gets a smaller proportion of its students to enter college. While this could theoretically be an indication of targeting money at students likely to succeed, this is not the case in Georgia, as evidenced by low graduation rates. Costs of higher education are rising over time to students and taxpayers alike. Clearly, Georgia can and must operate its public universities more efficiently and productively in order to meet future educational needs without excessively burdening the state’s taxpayers. Among options worth pursuing: align tuition charges more closely with demand and supply conditions; increase the proportion of students attending technical and community colleges; promote good high school students taking college courses for concurrent credit; and encourage schools to get out of non-academic activities.
Transportation/InfrastructureBy Chick Krautler, Georgia Public Policy FoundationReport, 11/05/2008
A recent fact-finding mission to Texas, led by Georgia Governor Sonny Perdue, was an excellent opportunity for Georgia’s state and regional transportation policy-makers to learn from folks who have made progress in attacking their congestion and mobility challenges through tolling, alternative funding and alternative project delivery. Texas faces many of the problems that Georgia does. A fast growing state with significant congestion in its urban centers, it has an estimated transportation funding shortfall of $66 billion and limited opportunities for new taxes. Its aggressive approach to both alternative funding opportunities and alternative project delivery mechanisms appears to be having a positive impact on developing new transportation infrastructure. Texas transportation officials repeatedly told their Georgia visitors that Texas has declared itself “open for business” in seeking private sector participation.
Health CareBy John C. Goodman, Georgia Public Policy FoundationReport, 11/05/2008
The current system encourages people to be uninsured because it offers highly subsidized or free care to the uninsured and very little subsidy for the purchase of private insurance. States should correct this perverse incentive by offering the uninsured the same subsidy for private insurance as people can expect in free care. In most states, people who choose jobs paying higher wages rather than jobs with health coverage will pay higher taxes to the state and federal governments. Currently, these higher taxes become part of the state’s general revenues. Instead, they should be dedicated to providing safety net care for uninsured patients who cannot pay their medical bills. Although the uninsured should be able to apply their subsidy to any plan approved for sale by the state, they should not be restricted to the currently available options.
LaborBy Scott Dilley, Freedom FoundationPolicy Highligter, 11/05/2008
Based on our estimates, taxpayers may pay approximately $173,000 to state employees for those workers to negotiate their contracts with state worker unions. These costs are in addition to about $1.8 million in costs for the state, as the public employer, to negotiate contracts. Legislators and the governor should consider ending the practice of release time, which muddles the distinction between whether a person is acting as a state employee or a union negotiator. Acting in both capacities at the same time is unfair to taxpayers and adds unnecessary costs to the collective bargaining process. Negotiators should be on personal leave from their state jobs. Any costs they incur for time and resources should be paid for by unions, not the state.
Budget & TaxationBy Brett Davis, Freedom FoundationPolicy Highligter, 11/05/2008
When the Washington State Legislature begins its regular session in January, lawmakers will need to close the upcoming $3.2 billion deficit. While Governor Gregoire has said she has no plans to increase taxes, there is little doubt the Legislature will consider raising taxes to balance the budget. In February 2008, when the budget shortfall was expected to be “only” $2.4 billion, House Speaker Frank Chopp (D-Seattle) said he would not rule out higher taxes in dealing with next year’s budget. While some are contemplating hiking taxes, it’s worth pointing out that Washington residents are already heavily taxed. Washington legislators must take responsibility for the situation they have created. When the legislature passed the 2007-09 budget, spending knowingly exceeded forecasted revenue by nearly $1.3 billion. This excessive spending resulted in substantial projected deficits for future biennia, which have come full circle.
National SecurityBy Bruce Klingner, The Heritage FoundationWebMemo, 11/05/2008
The Bush Administration announced on October 11 that it had removed North Korea from the state sponsors of terrorism list in return for Pyongyang’s acceptance of a six-party talks verification protocol. Details of the verification agreement have not been disclosed pending formal approval at a heads of delegation meeting. The State Department claims that all verification criteria have been satisfied, including applicability to North Korea’s uranium enrichment program and proliferation activities. There are growing indications, however, that the verification measures are not as expansive as has been depicted. Furthermore, some verification measures are tenuously based on side letters or oral agreements with North Korea. As Japanese Prime Minister Taro Aso explained to reporters, “I think the United States has agreed on what it thinks is the understanding and North Korea has agreed on what it thinks is the deal [but] the two are a little different.”
National SecurityBy Mackenzie Eaglen, The Heritage FoundationBackgrounder, 11/05/2008
All the military services, including the National Guard and Reserves, are experiencing lower levels of readiness after seven years of major combat operations overseas and more homeland defense missions in the United States. Symptoms include delayed, shortened, or less diverse training; cross-leveling of personnel and equipment from disparate units to plug deploying-unit shortfalls; less maintenance for worn-out weapons; and shortened rest time at home before redeploying overseas. While Congress has provided much-needed funding for many urgent needs of the services, more must be done to restore immediate readiness within the U.S. military (without sacrificing long-term readiness).
Foreign Policy/International AffairsBy Thomas M. Woods, The Heritage FoundationBackgrounder, 11/05/2008
The ascendancy of Africa in U.S. foreign policy reflects not only the continent’s growing importance to U.S. national interests but also President George W. Bush’s determination to join compassion with resources. U.S. accomplishments with its African partners are undeniably positive and will be a central theme in the Bush Administration’s overall legacy. The next Administration should build on that legacy with programs and policies that support positive African initiatives and focus on strategic U.S. priorities. The era of paternalistic big-brother relationships with Africa should be left behind, replaced by an era of increasing cooperation around shared interests from HIV/AIDS to counterterrorism.
Foreign Policy/International AffairsBy James Phillips, The Heritage FoundationWebMemo, 11/05/2008
On November 5, Secretary of State Condoleezza Rice is slated to travel to Israel, the Palestinian Territories, Jordan, and Egypt in another effort to reinvigorate the stalemated Arab–Israeli peace talks. While in the region she will meet with senior government officials from each of these nations, along with senior officials from the other members of the “Quartet”—the European Union, Russia, and the United Nations. Together with the United States, these members proposed the “Road Map” for peace in 2003 and have helped mediate subsequent peace negotiations. Rice is unlikely to score a diplomatic breakthrough on the trip because the regional environment, Palestinian political situation, and Israeli political situation are not conducive to forging an agreement.
Monetary Policy/Financial RegulationBy Daniel J. Mitchell , Heartland InstituteHeartland Perspectives, 11/04/2008
The financial crisis exists mostly because of government mistakes, particularly the Federal Reserve’s easy-money policy, the corrupt system of subsidies from Fannie Mae and Freddie Mac, and various “affordable-housing” initiatives that coerced or lured banks into extending loans to people with poor credit. These policies and others helped to create a bubble, and now the bubble has burst. Not surprisingly, politicians are using the resulting turmoil as an excuse to expand the power of government. The most troubling development is that the Treasury Department is becoming partial owners of banks — in some cases by forcing banks to “sell” shares to the government. The politicians say these steps are necessary to help the market.
Natural Resources, Energy, Environment, & ScienceBy Dennis Avery, Competitive Enterprise InstituteOn Point, 11/04/2008
My 2006 CEI Issue Analysis, “Biofuels, Food, or Wildlife? The Massive Land Costs of U.S. Ethanol,” concluded that the United States did not have enough cropland to make a significant dent in its transport fuel demand without risking radically higher food prices, while suffering a massive loss of forests and grasslands to expanded corn production. Yet even I have been astounded at the swift onset of food shortages and high crop prices which have ensued since. According to the World Bank, global food prices have increased by an average of 83 percent over the 36 months to April 2008, during which time the United States diverted ever increasing amounts of corn into ethanol. How much longer will policy makers continue to pay farmers and rural bankers to invest even more heavily in biofuel programs that create food inflation, aggravate fuel costs, and increase greenhouse gas emissions
Transportation/InfrastructureBy Randal O'Toole , Cato InstitutePolicy Analysis, 11/04/2008
In the face of high energy prices and concerns about global warming, environmentalists and planners offer high-speed rail as an environmentally friendly alternative to driving and air travel. California, Florida, the Midwest, and other parts of the country are actively considering specific high-speed rail plans. Close scrutiny of these plans reveals that they do not live up to the hype. As attractive as 110-to 220-mile-per-hour trains might sound, even the most optimistic forecasts predict they will take few cars off the road. At best, they will replace for profit private commuter airlines with heavily subsidized public rail systems that are likely to require continued subsidies far into the future.
Monetary Policy/Financial RegulationBy David R. Henderson, Jeffrey Hummel , Cato InstituteBriefing Paper, 11/04/2008
Is Alan Greenspan to blame for the current housing bubble and the ongoing financial crisis? A growing chorus charges the former Federal Reserve chairman with being an “inflationist” whose loose monetary policy caused or significantly contributed to our current economic troubles. However, although Greenspan’s policies weren’t perfect, his monetary policy was in fact tight, and his legacy is one of having overseen low and stable inflation and a striking dampening of the business cycle. Critics make the classic mistake of using interest rates to evaluate monetary policy, reasoning that if interest rates are low, recent monetary policy must have been expansionary. However, it is not the Federal Reserve but supply and demand that ultimately determines interest rates. Although central banks can push rates up or down to some degree, the globally integrated financial system reduces the Fed’s ability to significantly influence rates.
Economic GrowthBy Center for Legal Policy, Manhattan InstituteTrial Lawyers Inc., 11/04/2008
In May, Chesapeake Energy Corporation shocked West Virginians when it canceled its plans to build a $35 million, futuristic headquarters in Charleston. The company’s decision, it said, was predicated upon the decision of the state supreme court of appeals not to review a $405 million verdict—including $270 million in punitive damages—that had been levied against the company by a Roane County jury. A corporate spokesman called the court’s decision “stunning” and noted that it “sends a profoundly negative message about the business climate in the state.” West Virginia can ill afford to drive away business, for even as Trial Lawyers, Inc. profits mightily from the state’s legal system, the average West Virginian suffers. Cleaning up the state’s trial-lawyer-friendly litigation environment is not in itself sufficient to reverse these trends, but sending a strong message to businesses that West Virginia is no longer hostile to new investment would help.
Budget & TaxationBy Duncan Currie, American Enterprise InstituteThe American, 11/04/2008
Any discussion of reforming America’s federal tax system should begin with the recognition that it is already highly progressive. According to the latest Internal Revenue Service data, the top 1 percent of income earners paid nearly 40 percent of federal individual income taxes in 2006, compared to roughly 19 percent in 1980. Between 1980 and 2006, the share of federal income taxes paid by the top 5 percent jumped from under 37 percent to over 60 percent. During that same period, the share paid by the top 10 percent went from around 49 percent to almost 71 percent.
Monetary Policy/Financial RegulationBy John L. Chapman, American Enterprise InstituteThe American, 11/04/2008
“Lenin is said to have declared that the best way to destroy the Capitalist System was to debauch its currency,” John Maynard Keynes once wrote. “Lenin was surely right. There is no subtler, no surer means of overturning the existing basis of society than to debauch the currency. The process engages all the hidden forces of economic law on the side of destruction, and does it in a manner which not one man in a million is able to diagnose.” Those words seem especially relevant today. The Wall Street meltdown has provoked a frenzy of finger-pointing among politicians and pundits. Yet few commentators have identified the root cause of the crisis: the Federal Reserve’s weak-dollar policy. Instead, they have blamed deregulation, “Wall Street greed,” a global savings glut, and the sharp decline in U.S. housing prices.
Economic GrowthBy Jaime Daremblum, American Enterprise InstituteThe American, 11/03/2008
The steep fall in global commodity prices over the past several weeks has brought Argentina to the brink of fiscal collapse—alas, not an unfamiliar position for the South American country. For far too long, the Argentine government behaved as if commodity prices would keep rising forever. It spent like a drunken sailor and made unsustainable commitments to the public sector. Such irresponsible fiscal policies were promoted aggressively by Argentine President, Néstor Kirchner, and continued by his wife, Cristina, who in 2007 was elected to succeed her husband as president. In order to move forward, Argentine politicians must come to terms with what really caused their economic meltdown in 2001. As journalist and Latin America expert Michael Reid wrote, “What killed Argentina’s economy in 2001 was not ‘neoliberalism’ or the free-market reforms, but a fiscal policy incompatible with the exchange-rate regime, and a lack of policy flexibility.”
Health CareBy Grace-Marie Turner, American Enterprise InstituteThe American, 11/03/2008
The centerpiece of Barack Obama’s healthcare plan may not seem revolutionary at first. Obama would seek to establish a new public health insurance program that would be offered alongside private insurance packages. This would give consumers a real choice in deciding whether the government or the private sector is better at providing medical coverage, he says. When explained this way, the Obama plan sounds like a nonpartisan, common-sense approach to healthcare reform. But don’t be fooled: it would lead to the deterioration of the private health insurance market, with the federal government—read: taxpayers—covering an increasingly large share of the U.S. population. Through the new National Health Insurance Exchange, participants would be able to purchase private coverage or buy into a new federal insurance program. On the surface, this arrangement seems fair. But ultimately, the federal government would heavily regulate the cost and content of private health insurance, albeit indirectly.
Monetary Policy/Financial RegulationBy Vincent R. Reinhart, American Enterprise InstituteThe American, 11/03/2008
Last week, the Federal Open Market Committee lowered its target for the federal funds rate by half a percentage point to 1 percent. What most people do not realize is that this target is no longer the operative instrument of U.S. monetary policy, and that the real work is being done through the massive creation of bank reserves. The main liability on the Federal Reserve’s balance sheet is now fiat money, which cannot be redeemed by the private sector. A central bank can create fiat money at will. It is not a coincidence that the country which invented paper money almost a millennium ago—China—also experienced the world’s first hyperinflation not long thereafter. But a central bank can also constrain itself. For the past 25 years, the Fed’s self-constraint of choice has been a target for the overnight federal funds rate, or the price banks charge among themselves in the trade of reserves.
Budget & TaxationBy Lee E. Ohanian, American Enterprise InstituteThe American, 11/03/2008
Barack Obama’s economic plan would raise federal tax rates on capital gains, dividends, and other forms of capital income. Many voters might respond with a collective shrug. These tax hikes would only affect the wealthiest Americans, right? Think again. Increasing taxes on capital income goes against current economic thinking on how to finance government spending. Indeed, taxing capital income ultimately hurts the very people it was supposed to help. It reduces investment, which reduces the amount of capital in the economy. A lower capital stock reduces economic growth, productivity, job creation, and wages.
Economic GrowthBy Nicholas Eberstadt, Carol C. Adelman, American Enterprise InstituteDevelopment Policy Outlook, 11/03/2008
The U.S. foreign aid system is broken and must be overhauled. That was the conclusion of the congressionally mandated Helping to Enhance the Livelihood of People around the Globe Commission, on which we served and whose final report was released in December 2007. Our commission’s consensus was no surprise: in Washington today, there are few other policy conclusions that elicit such universal and bipartisan agreement. Indeed, over the years, scholars and policymakers have acquired a better understanding of whether, where, and how foreign aid can promote growth and improve public services. With very few exceptions, those insights have yet to result in a new “business model” for U.S. foreign aid. Yet a new business model is manifestly required if development assistance is to avoid endlessly repeating past mistakes—or if it is to capitalize upon important emerging opportunities.
Monetary Policy/Financial RegulationBy John H. Makin, American Enterprise InstituteEconomic Outlook, 11/03/2008
Over the past several months as central banks and treasuries have struggled to manage a financial panic and avoid or diminish its soon-to-appear devastating impact on the global economy, I have often thought about the efforts of two great economists to understand the lessons of the Great Depression. John Maynard Keynes’s monumental General Theory of Employment, Interest and Money, published in 1936, showed how a failure to understand the nature of the demand for money contributed to the Great Depression. In their masterful 1963 work A Monetary History of the United States, Milton Friedman and Anna J. Schwartz showed the Federal Reserve’s failure to prevent a collapse in the supply of money (and thereby a devastating global depression that lasted for half a decade). The appropriate roles for monetary and fiscal policy after a financial collapse, articulated in the great scholarly works of Keynes and Friedman, provide worthy guides today.
EducationBy Mark Schneider, American Enterprise InstituteEducation Outlook, 11/03/2008
American higher education absorbs a larger share of gross domestic product than that of other countries, but it has not produced a particularly high proportion of college graduates. College graduation rates are actually worse than the very low benchmark of high school graduation rates, but higher education institutions are not held accountable. The costs of this abysmal performance to students and taxpayers are high. Colleges let many students begin who do not have the skills and talent needed to graduate with the expectation that even if many fail, an open access system gives students opportunities to grow and succeed. At minimum, the flow of information needs to be improved so that students and their families can choose colleges at which they will have a higher likelihood of success. We also need to consider seriously how to hold colleges and universities more accountable for their performance.
Monetary Policy/Financial RegulationBy Peter J. Wallison, American Enterprise InstituteFinancial Services Outlook, 11/03/2008
The current financial crisis has sharpened interest—on the part of both the public and policymakers—in both stronger regulation and the extension of regulation to new areas. One of the theories for doing so is concern that the failure of one institution can, by passing its losses to others, create systemic risk. In this analysis, the current crisis is presented as an example of systemic risk becoming reality. To prevent a recurrence, greater regulation, covering a wider range of participants in the financial markets, is necessary. However, there is as yet no evidence that the current crisis was the result of systemic risk, which is characterized by a kind of contagion. Instead, the crisis appears to have arisen from the failure of traditional regulated institutions—in a particularly dramatic case of herd behavior—to limit their risk-taking.
Regulation & DeregulationBy John E. Calfee, American Enterprise InstituteHealth Policy Outlook, 11/03/2008
Wyeth v. Levine, which will be heard by the Supreme Court on November 3, 2008, is a lawsuit at the boundary between the state tort liability system and Food and Drug Administration (FDA) regulation of pharmaceuticals. The essential question is whether a pharmaceutical firm that fully complies with FDA regulations, including the provision of safety information, can be sued in state courts for failure to warn about drug safety, side effects, and other concerns. Patients will be better off if FDA preemption is upheld by the Supreme Court, but the path to that conclusion lies in the facts of the case itself, in the nature of the liability system, and especially in certain features of the FDA.
International Trade/FinanceBy Desmond Lachman, American Enterprise InstituteInternational Economic Outlook, 11/03/2008
The current global financial market crisis will claim its share of casualties. Prominent among them may be any further expansion of the European Monetary Union. It is also more than likely that today’s global financial market crisis will mark the end of any serious challenge by the euro to the U.S. dollar as an alternate international reserve currency. Not only will a deep and long global economic recession put severe strain on the current fifteen-country euro area, it will also expose the acute external vulnerabilities of those twelve Eastern European countries that are aspiring to full euro area membership.
Retirement/Social SecurityBy Andrew G. Biggs, American Enterprise InstituteOn the Issues, 11/03/2008
As the financial crisis takes its toll on the American economy and the stock market, Senator Barack Obama has used this situation to refocus attention back to Social Security reform, criticizing personal investment accounts. A careful examination of their returns shows that they would have done well even given the market’s recent losses. While it is not clear that markets will offer growth in the future, personal retirement accounts could prove a valuable way to prefund retirement benefits and reduce the cost burdens on the workers of tomorrow.
Monetary Policy/Financial RegulationBy Charles W. Calomiris, American Enterprise InstituteOn the Issues, 11/03/2008
Media reports and the Barack Obama campaign continue to propagate the fiction that the current financial crisis was caused, in large part, by Republican deregulation. The commonly used example is the 2004 change in the Securities and Exchange Commission’s rule on net capital. The rule change, which proved unsuccessful in avoiding the problems at Lehman Brothers and Bear Stearns, was not an example of deregulation but of failed regulation. Even after documenting the many ways that Washington encouraged the housing bubble, the media and Democrats continue to search for evidence to blame it all on “deregulation.” One alleged perpetrator, the Gramm-Leach-Bliley Act, was released without charges after the record revealed that Senator Joe Biden voted for it and Bill Clinton signed it into law. More to the point, investment banks were already free—prior to the 1999 law—to invest in the same assets that have wreaked such havoc today.