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Gov. Corbett Should Not Change Decision Rejecting Medicaid Expansion

Michael F. Cannon

Hospitals across Pennsylvania and the nation are threatening that unless state lawmakers implement the Patient Protection and Affordable Care Act’s Medicaid expansion, the law’s new taxes and spending cuts will lead to layoffs and closures.

Let’s not forget that hospitals put themselves in this position when they lobbied for that law. Fortunately, Gov. Tom Corbett has thus far refused to punish Pennsylvania taxpayers for the hospital lobby’s mistakes.

Expanding Medicaid could cost states like Florida, Illinois and Texas $20 billion each over 10 years. Pennsylvania would be in the same ballpark.”

Unlike Corbett, some of Obamacare’s former opponents — notably Florida Gov. Rick Scott, Arizona Gov. Jan Brewer and Ohio Gov. John Kasich, all Republians — have flip-flopped and now support the expansion. They may think they’re helping local businesses, but in reality they’re sympathizing with their captors. It’s Stockholm syndrome, Obamacare style.

Originally, Obamacare would have forced states to open Medicaid to 17 million additional people. Hospitals would have received so many subsidies that they scarcely minded the law’s new taxes and spending cuts. With near unanimity, the hospital lobby strongly urged Congress to pass Obamacare “with or without bipartisan support” as a matter of “national security, equity and fairness.” The hospital lobby saw the law as “historic,” “a giant and essential step forward,” and a “major first step” full of “great improvements.”

Then in June 2012, seven Supreme Court justices let states choose whether to participate in the expansion.

Now, the hospital lobby is terrified. If states don’t expand Medicaid, hospitals won’t get their subsidies. In other words, Obamacare now means the same thing for hospitals that it has always meant for consumers and employers: certain costs, but uncertain benefits. The difference is that hospitals have only themselves to blame.

The smart play would be to call for repeal of the law, as one union that used to support Obamacare has done. Instead, the hospital lobby is doubling down.

According to one report, “Hospital associations have paid for television and newspaper ads, organized rallies, and choreographed legislative testimony,” demanding that state lawmakers unlock those subsidies. According to the hospital lobby’s curious logic, lawmakers who consistently oppose Obamacare will somehow be responsible for the harm it imposes on the hospitals that support it.

Govs. Scott, Brewer and Kasich have fallen for the cries of the hospital lobby and the promise of “free” federal dollars. Given that the expansion offers states $9 of federal cash for every $1 they spend, such flip-flops are hardly surprising. What is surprising is just how many states, including Pennsylvania, are saying no to this money and refusing to expand. Obamacare supporters are dangling an unlimited stream of federal money at the end of their line, yet only 25 states have taken the bait.

Expanding Medicaid could cost states like Florida, Illinois and Texas $20 billion each over 10 years. Pennsylvania would be in the same ballpark. And those are conservative estimates.

Actual costs will exceed those projections not only because they always do but also because President Obama and practically every politician and deficit-reduction commission in Washington have already proposed reneging on that 9-for-1 offer. To cover their ever-increasing share of the cost, states would have to raise taxes and/or cut spending for education and other services.

In dozens of states, lawmakers are fighting to rescue taxpayers from this fiscal time bomb, even at the risk of bucking the leadership of their own party. Florida House Speaker Will Weatherford, Ohio Speaker Bill Batchelder, and Arizona Senate President Andy Biggs and Rep. Adam Kwasman are standing with their GOP base and standing up to Govs. Scott, Kasich and Brewer.

With encouragement from state legislators like Rep. Stan Saylor (R-York), Corbett announced his opposition to the expansion. But his opposition may be weakening. Recently, an aide suggested Corbett may be open to expanding Medicaid in 2015.

Hospitals save lives every day. In this fight, however, the hospital lobby is no different from any other hotshot that made a bad bet and then begged for a taxpayer bailout.

Yet the cure for hospitals’ ills can only be found in Washington, not Harrisburg. Pennsylvania hospitals might join the chorus of voices demanding that Congress reopen Obamacare, but that won’t happen if Corbett develops Obamacare Stockholm syndrome. It is in Pennsylvania’s best interest that he stay strong.

Michael F. Cannon is director of health-policy studies at the Cato Institute and co-editor of Replacing ObamaCare (2012).

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Where’s the Inflation? Coming to Your Neighborhood

Gerald P. O’Driscoll Jr.

In December 2008, the Federal Reserve drove down the overnight federal funds rate to near zero. In March 2009, it announced an aggressive program to purchase mortgage backed securities.

These actions were followed by successive rounds of monetary easing, which were unprecedented in size and scope. Economists have been predicting an outbreak of inflation. Were they wrong?

If the past is prologue, the Fed will wait too long to react to inflation.”

Critics say the absence of inflation proves the doomsday forecasts were wrong. Some critics, like Paul Krugman, argue even more monetary stimulus is needed. They point to consumer price inflation, which was 1.1% for the last 12 months ending in April, to argue there is ample room for further monetary easing.

Yet Fed Chairman Bernanke’s congressional testimony on Wednesday suggests the Fed is beginning to doubt the wisdom of continuing its current policy of monetary ease.

The bottom line is that prices are rising faster than the CPI suggests.

Inflation is defined as a general increase in prices, but the increases need not and normally do not occur simultaneously. But first, I turn to what is causing the apparent inflation shortfall (even a whiff of deflation).

Milton Friedman taught us that inflation is always and everywhere a monetary phenomenon. Much money has been created and, other things equal, there should already be considerable inflation.

Other things have been far from equal.

The unprecedented leveraging up of the balance sheets of homeowners, consumers, and, above all, financial firms fueled a housing boom. When the boom collapsed, borrowers and their lenders found themselves overly indebted relative to the reduced value of the underlying assets.

All the players scrambled to deleverage, i.e., reduce their debt burden, at the same time. An entire credit structure unwound. This process has been going on at least since the collapse of Lehman Brothers in the fall of 2008. Deleveraging has many consequences, one of which is a scramble for cash and other forms of liquidity.

If banks have cash (reserves), they do not want to lend them and especially not to other banks. Each bank assumes rationally that other banks are in as bad shape as they are.

That causes a breakdown in the interbank lending market, which in normal times funds lending. The process is both a scramble for liquidity, and an effort to recapitalize institutions whose balance sheets have become impaired.

Quantitative easing was designed to halt the collapse in the credit structure. Overnight borrowing rates for banks were driven to near zero. And bank reserves at the Fed skyrocketed.

Excess reserves, those in excess of what banks are required to hold, went from essentially zero to almost $1.8 trillion today.

Reserves are the base upon which money and credit structures are erected. It is that explosive growth in reserves that formed the basis for the many predictions of price inflation made over the last four years.

The process of reserve creation should in normal times have led to rapid growth in money, and then price inflation. Based on history and theory, the predictions were sound.

The deleveraging process put a spanner in the works of money creation. The turnover (velocity) of money, the number of times a dollar is spent per year, collapsed. Depending on the measure of money used (broader or narrower), the velocity of money has declined to historic lows or to a level going back decades.

There has been money growth. The 12-month growth rate as of April 2013 for M1, a narrow measure of money, was about 12%; the 12-month growth rate for M2, a broader measure, was 7%. The stimulative effects of money growth have been muted by the decline in velocity (which is a rise in the demand for money).

And there has been price inflation, here and around the world. A consumer price index is a measure of only a subset of all prices.

Prices of consumer goods for Americans have been held down for decades by the entry of China and India into the global economy. That process continues as other low-wage economies export more and more goods to the world.

The list includes countries such as Vietnam and, as we were recently reminded, Bangladesh. Consequently, CPI (or alternate measures of consumer prices) have not been accurate gauges of monetary stimulus for decades.

Money has many channels through which it flows in the global economy.

As we learned in the 2000s, a policy resulting in low (even negative) real interest rates affects the prices of long-lived assets disproportionately and in advance of impacting consumer prices. In an inflationary episode, prices of goods often increase sequentially, and not in tandem.

That sequencing of price increases was understood by economists as diverse in their viewpoints as Keynes and Hayek.

The process involves changes in relative prices and resource allocation, and was first explicated in the 18th century by the Irish economist Richard Cantillon.

Home prices are once again on an upward march, and we will see whether the Fed is helping inflate another housing bubble.

If a bubble is defined conventionally as an unsustainable rise in prices, bond prices are a bubble from any historical perspective. I leave it to the readers to exercise their own judgments on equity prices.

The dollar is the dominant global currency, and its quantity affects prices globally. That channel is most apparent for countries that tie or peg their currencies to the dollar. That list includes countries like Hong Kong, Singapore and even China.

Chairman Bernanke’s global helicopter drop of dollars helped fuel housing booms in Hong Kong and Singapore while the U.S. housing market remained in the doldrums.

Countries like Brazil are experiencing substantial price inflation in their consumer goods. For April 2013, the annual rate there is 6.5%.

In short, if you want to see the inflation, look beyond U.S. consumer prices and look around the globe. Monetary expansion has effects beyond domestic consumer prices. There is no presumption that an expansionary monetary policy affects consumer goods prices first.

Inflation is already here, and more is coming to your neighborhood soon. If the past is prologue, the Fed will wait too long to react to inflation.

Gerald O’Driscoll, a senior fellow at the Cato Institute, was vice president at the Federal Reserve Bank of Dallas and later at Citigroup.

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Common Core Delay Is an Opportunity for Real Education Reform: As I See It

Jason Bedrick

Gov. Tom Corbett’s decision to delay implementation of controversial national education standards provides an opportunity to refocus efforts on expanding an education initiative with proven success: Pennsylvania’s Educational Improvement Tax Credit (EITC) program.

Pennsylvania should continue to empower parents and liberate educators through school choice.”

Last week, Gov. Corbett ordered the delay of the state’s Common Core Standards, which school districts had been set to start implementing in just under two months. Common Core is a federally-backed initiative intended to create uniform standards across states.

Chief among myriad concerns, Common Core incentivizes top-down conformity. Standardized tests compel schools to teach the same concepts on the same schedule, without regard to the interests or abilities of individual students. If the goal is to provide a quality education to each unique student, a one-size-fits-all approach is clearly not the right one.

In explaining the administration’s decision, Department of Education spokesman Tim Eller emphasized that Corbett “remains committed to ensuring that all Pennsylvania public school students—regardless of zip code—have access to a quality education.” 

If so, the governor should redirect his efforts toward expanding the EITC program.

The EITC program grants 75 to 90 percent tax credits to corporations in return for donations to nonprofit scholarship organizations that fund assistance to low-income students. 

Since its inception in 2001, more than 350,000 EITC scholarships have been awarded to students so they can attend the schools of their choice. There are currently more than 45,000 low-income students receiving EITC scholarships.

While there is no research demonstrating that national standards like the Common Core would improve student outcomes, there are numerous high-quality studies showing that parental choice and competition between independent and public schools improve academic performance, raise graduation rates, and increase college matriculation.

A recent literature review by the Friedman Foundation for Educational Choice reported that 11 of 12 random assignment studies—the gold standard of social science research—found that school choice improves student outcomes. Only one found no visible, positive impact, and not one found negative results. 

Moreover, studies of Florida’s scholarship tax credit program found modest but statistically significant increases in the academic performance of both public school students and students who move to independent schools as a result of the increased choice and competition.

A wider review of hundreds of international studies using various methodologies revealed that the education systems that produce better outcomes are not those that are more centralized but rather those that are closer to a free market. The review found that by a ratio of 15-1, market-like delivery of education outperformed government monopoly.

By allowing parents to choose what’s in the best interest of their children, educational choice programs foster competition, innovation, and specialization. Unfortunately, Pennsylvania’s EITC program is severely limited. 

The program currently caps the amount of available tax credits far below the level of demand. For example, over the last twelve years, the Children’s Scholarship Fund Philadelphia has had more than 115,000 applicants for the 10,500 scholarships that it has been able to grant. In total, the EITC program is able to serve only about 2.5 percent of students statewide.

A few years ago, Florida lawmakers addressed the same issue by raising the cap on their scholarship tax credit program and instituting an automatic growth provision. Whenever contributions to the program exceed 90 percent of the credit cap, the cap increases by 25 percent in the following year. The scholarship tax credit programs in Arizona and New Hampshire have similar growth provisions to allow their programs to meet demand.

This proposal may sound expensive, but it can actually produce considerable savings. In 2011, a Commonwealth Foundation study found that the EITC program saves Pennsylvania about $512 million each year. That’s because the vast majority of low-income scholarship recipients, whose families earn less than $30,000 on average, would be attending public schools in the absence of the program. 

The average EITC scholarship is a small fraction of the more than $14,000 in total per pupil expenditures for Pennsylvania’s public school students.

There are very few programs that can simultaneously save money and measurably improve lives. The EITC program is one of them. For those policymakers who desire an education system that best meets the needs of individual children, the evidence is clear. Instead of heading down the path of greater standardization, Pennsylvania should continue to empower parents and liberate educators through school choice.

Jason Bedrick is a visiting policy analyst with Cato’s Center for Educational Freedom.

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Japan’s New Security Role in Asia

Ted Galen Carpenter

As Japan shows increasing signs of playing a more vigorous political and security role in East Asia, neighboring countries are exhibiting a range of reactions. Predictably, North Korea’s response to any manifestation of a stronger Japan is a caricature of saber-rattling paranoia. China and South Korea have responded with a mixture of nervousness and hostility, as Jeffrey W. Hornung of the Asia-Pacific Center for Security Studies ably documented recently in The National Interest. But the reaction has been surprisingly favorable in other countries.

South Korea’s wariness reflects primarily historical factors, although ongoing bilateral tensions over disputed islands (known as Dokdo in Korea and Takeshima in Japan) also play a role. The emotional wounds from Japan’s exploitive and sometimes brutal colonization of the Korean Peninsula during the first half of the 20th century have been slow to heal. Japanese officials exacerbate Korean suspicions by making clumsy, insensitive statements about that period. The most recent example was Osaka mayor Toru Hashimoto’s comment that World War II “comfort women” (young women pressed into sexual slavery by the Japanese military) had been necessary to maintain discipline.

Historical factors also play a role in China’s stance toward Japan. Chinese officials and journalists never miss an opportunity to remind listeners about Japan’s egregious behavior in their country during the 1930s and early 1940s.

But for China, current geopolitical rivalries are a larger, more important motive. Indications that Tokyo might end its self-imposed limit of spending no more than 1 percent of the country’s annual gross domestic product on the military provoke strongly negative reactions in Beijing.

The same is true of suggestions that Prime Minister Shinzo Abe’s government might seek to modify article 9 of Japan’s post-World War II constitution, which places severe restrictions on the country’s use of military force. “Given the Japanese government’s refusal to apologize for Japan’s aggression during World War II, any revision of Japan’s constitution,” an editorial inChina Daily warned, would be “a cause for concern in the rest of the world.” Tokyo’s surprisingly uncompromising stance over the past year regarding the disputed Diaoyu/Senkaku islands in the East China Sea has produced shrill accusations of renewed Japanese imperialism in the Chinese media.

But the reaction elsewhere in East Asia to Tokyo’s more assertive behavior in the political and security realms has been markedly different from the response in the two Koreas and China. Less than two decades ago, such countries as the Philippines, Australia and Singapore were adamantly opposed to a more robust Japanese military and the expansion of Tokyo’s security role beyond homeland defense. East Asian leaders also were emphatic that the United States needed to exercise a strong supervisory function regarding Japan’s military activities. Singapore’s long-time leader, Lee Kuan Yew, was the most outspoken in warning about the danger of revived Japanese militarism, but he implicitly spoke for many of his colleagues in the region.

And Washington’s stance was scarcely more trusting. In the early 1990s, General Henry Stackpole, the commander of U.S. Marine forces on Okinawa, famously stated in an interview that the U.S. military presence was “the cap in the bottle” that reassured the region against any prospect of a new Japanese imperialism.

China’s rise has changed the strategic calculations, both in Washington and in many East Asian capitals. During George W. Bush’s administration, U.S. officials worked tirelessly to strengthen the alliance with Japan and to get Japanese leaders to view the alliance as a vehicle to address other security contingencies in the region, not confine it to Japan’s territorial defense. That deepening strategic partnership has continued during the Obama years.

Several East Asian nations now seem to view Japan as an important strategic counterweight to China. When asked how his government would view a rearmed, non-pacifist Japan, Philippines Foreign Minister Albert del Rosario told the Financial Times “We would welcome that very much.” He added, “We are looking for balancing factors in the region, and Japan could be a significant balancing factor.” And such opinions are being put into action. In January 2013, Tokyo and Manila agreed to enhance their cooperation on maritime security. Ties are also growing between Japan and Singapore, as well as between Japan and Australia on such matters. Worries about the need to balance China’s growing power is evident as well in the recent summit between Prime Minister Abe and Indian Prime Minister Manmohan Singh, in which cooperation even on the highly sensitive issue of nuclear technology was high on the agenda.

Acceptance of Japan playing a political-military role commensurate with its status as the world’s third largest economic power may be slow to develop in China and the Koreas, but it is already happening elsewhere in East Asia. Rommel Banaoi of the Institute for Peace, Violence and Terrorism Research, based in Manila, succinctly captured that new perspective: “We have already put aside our nightmares of World War II because of the threat posed by China.” The principal remaining question is how effectively Tokyo will respond to that new opportunity.

Ted Galen Carpenter
, a senior fellow at the Cato Institute, is the author of nine books on international affairs, including (with Doug Bandow) The Korean Conundrum: Washington’s Troubled Relations with North and South Korea(Palgrave Macmillan).

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Our American ‘Modern Family’ Is Now Old Hat

Walter Olson and Steve Pippin

As thousands protested the recent legalization of gay marriage in France — and the U.S. Supreme Court gets ready to weigh in on the issue in June — HuffPost’s “International Spotlight” presents the views of three gay couples, all raising children, in France, the U.S. and also Canada, where gay marriage has been legal for eight years. Tomorrow: France.

The United States is seen as distinctively ‘conservative’ among the world’s great nations, yet it’s also the world’s arch-incubator of innovative social change.”

Because Modern Family is our son’s favorite TV comedy, we once asked him which of the characters he thinks he’s like. His first choice was Luke, the youngest Dunphy kid, whose role is famously written to sound like a real 13-year-old instead of a sitcom 13-year-old. Then he thought of Manny, the son of the Sofia Vergara character, who’s “like me because he doesn’t have any brothers or sisters” (or at least didn’t then). “Besides,” he added thoughtfully, with a glance at us, “his dad’s really old.” Wincing at that, and happy to change the subject, we asked whether he identified with Lily, the toddler being raised by the Eric Stonestreet and Jesse Tyler Ferguson characters. Oh, definitely, he said: “She has silly daddies.”

Perhaps we were preordained, or at least self-selected, to play the role of silly daddies: As guys of our ilk go, we’re ultra-stable, low-drama types with a 30-foot-deep nesting instinct and scant interest in nightlife. Before we got around to considering parenthood seriously, several parents in our circle of mostly straight friends had urged us to do so.

It was the women especially who kept pushing. “Have you ever considered becoming a parent?” an Obviously Competent Mom would say over the second glass of wine. “You should.”

“Thanks. I see the logic and value in the vote of confidence, but don’t you think as a parent I would count as adorably clueless?”

“Guess what? I was too!” our O.C.M. would reply. “So are most of us when we start. You’d be surprised how fast you learn. Most of all, your kid does the teaching.”

That helped, but it took more. Around 2002 or so, the comedian and talk-show personality Rosie O’Donnell stirred up a big media fuss against laws in the state of Florida that kept gay persons from becoming foster or adoptive parents.

We’ve never seen any of O’Donnell’s shows, but she made a difference for us. Before she started that conversation, it counted as a socially daring act for a gay person to embark on deliberate parenthood — on the daringness scale, somewhere between moving residence to a houseboat and dyeing one’s whiskers green. Now it began to seem more publicly familiar and acceptable.

The other half of O’Donnell’s message, the part about how many kids are waiting for families, was also needed. Sure, many fortunate kids in the natural order of things will quickly find some terrific mom and dad eager to scoop them up, but many others wait while no one shows up at all. What if one of those waiting kids were pretty much certain to get a better deal in a family like ours than anywhere else?

So we read up on parenting classics like Jean Kerr’s Please Don’t Eat the Daisies (quoting Moss Hart’s credo of parental resolve: “We’re bigger than they are, and it’s our house”).

If we were expecting to run into some sort of epic struggle against discrimination and prejudice, we found nothing of the sort. For the most part, other parents are too busy trying to cope with the same basic problems that you are — such as figuring how to remove boiled carrots mashed into carpet — to waste time arguing about differences of family structure.

When gay marriage went on the ballot last year in our own state of Maryland, opposition TV ads suggested that a family without a parent of each sex wasn’t much of a family. If only they knew how hard and long we’d thought about our own version of that question. What was our son missing by the lack of a mom? How best could we compensate? I’d be surprised if millions of single dads raising kids — widowers, or divorced men with custody — don’t agonize over the same questions.

There’s a well-known trans-Atlantic paradox about gays and family law: In Europe, many countries were much faster than the United States to enact gay marriage into law. Yet those same countries have been much slower and more reluctant to ratify parenthood by gays, and adoption — over there often administered by monolithic state agencies — remains off limits even in the Denmarks and Norways. Part of the difference, I think, is that while getting to marriage requires a change in law — and we in America tend to take our time on that — founding a family is seen as something that every American has the right to go out and do. And so by the time our “family policy” experts noticed that gays were becoming parents on purpose, it had already become a substantial social phenomenon, hundreds of thousands of families strong.

It’s a contradiction, and yet it’s not: The United States is seen as distinctively “conservative” among the world’s great nations, yet it’s also the world’s arch-incubator of innovative social change. Don’t wait around for permission; it’s not as if anyone’s stopping you! If it’s worth doing, go for it, and let the law catch up in its own time. It works, again and again. And it’s so American.

Walter Olson is a senior fellow at the Cato Institute’s Center for Constitutional Studies. Steve Pippin is a nonprofit and publishing executive and former president of the magazine Out.

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European Countries Can’t Continue on Their Spendaholic Track

Veronique de Rugy

The European Union is the latest in a series of international bureaucracies to make the case that European countries should ease their stance on austerity. The underlying assumption behind this new policy position is that so far austerity has failed. If by that one means that the large tax increases implemented by European countries were counter-productive, then that is correct. But if it means that European countries have implemented savage spending cuts, then it is incorrect.

Unfortunately, the idea that austerity has failed in Europe is evidence of the lack of clarity that has obscured most of the debate so far. Let’s be clear: European countries do not have the luxury of continuing on their current fiscal path. Who could argue, for instance, that it would have been better for Greece to continue on its spendaholic track? For many European countries, the lack of austerity means more deficit spending, which likely will trigger large increases in interest rates, debt restructuring (read defaults), capital levies and even more weakness in the banking sector.

The second problem with this simplistic view is that it fails to recognize that in the pursuit of austerity, the important question has less to do with the size of the austerity package than what type of austerity measures are implemented. Austerity can take different forms. It can be achieved by cutting spending or by raising taxes. Alternatively, austerity can be achieved by adopting a mix of spending cuts and tax increases.

The general consensus in the academic literature is that the composition of fiscal adjustment is a key factor in achieving successful and lasting reductions in debt-to-GDP ratio. The work of economists at Harvard University, the International Monetary Fund and the Organization for Economic Cooperation and Development, among others, has shown fiscal adjustment packages made mostly of spending cuts are more likely to lead to lasting debt reduction than those made of tax increases.

Most countries, it turns out, implemented spending cuts in name only and these cuts were often overwhelmed by much larger tax increases. While the finding that spending cuts are more effective at achieving debt reduction is not controversial, there is still significant debate about the short-term economic impact of fiscal adjustments. There are, however, some clear lessons:

1) Expansionary fiscal adjustments are possible.

2) While fiscal adjustment may not always trigger economic growth, spending-based adjustments are much less costly in terms of output than tax-based ones. In fact, when governments try to reduce the debt by raising taxes, it is likely to result in a deep and pronounced recession, making the fiscal adjustment counterproductive. Thus, we shouldn’t be surprised by the impact that tax-revenue based austerity has had in Europe.

3) These expansionary fiscal adjustments are more likely to succeed when they are accompanied by growth-oriented policies such as labor and goods market liberalization. Monetary policy was also proven to facilitate the spending cuts. Countries such as Germany and Finland, and other more recent examples such as Estonia and Sweden, have managed both debt reduction and some level of growth.

Veronique de Rugy is an adjunct scholar at the Cato Institute and a senior research fellow at the Mercatus Center.

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‘Robin Hood’ Tax Will Not Make Markets More Stable and Might Hurt Economic Growth

Dalibor Rohac

The Financial Transaction Tax (FTT), which is to be adopted in 2014 by 11 eurozone countries, has come under a lot of flak lately.

Most recently, Sir Mervyn King said he could not “find anyone in the central banking community who thinks it’s a good idea.”

Even the Italian government, initially committed to adopting an FTT, is now having second thoughts — particularly because the tax will affect secondary trading in government bonds.

An FTT might have unpleasant unintended consequences, damaging economic growth on the European continent and beyond.”

In stark contrast, Algirdas Šemeta, the European Commissioner for taxes, claims that the levy of 0.1% on equity and fixed income transactions and 0.01% on derivatives is a response “to the persistent demands of their citizens, who have long called for a harmonized FTT in Europe. The levy will ensure that the under-taxed financial sector finally makes a fair contribution to the public purse.”

Besides generating significant new revenues to cash-strapped European governments, “it should help to deter the irresponsible financial trading that contributed to the crisis we are in today,” says Mr. Semeta.

However, there is very little rationale for such claims.

If adopted, an FTT will not be a boon for public budgets — nor is it likely to prevent financial crises. Instead, it might have unpleasant unintended consequences, damaging economic growth on the European continent and beyond.

The proponents of the tax argue that an FTT will reduce speculative and irresponsible trading, which was allegedly behind both the financial crisis of 2008 and the sovereign crisis in Europe.

But even if one believes that the ability to trade instantly, at practically zero cost, has helped to spread the panic, an FTT is not going to help.

Growing Volatility

There is no evidence that an FTT would moderate market volatility — and attenuate sudden shifts of mood on financial markets.

A recent report by Anna Pomeranets from the Bank of Canada concluded that there have been instances when an FTT led to an increase in volatility — most significantly on the New York Stock Exchange and the American Stock Exchange, between 1932 and 1981, where increases in the FTT were associated with rising volatility, increased bid-ask spreads, and lower trading volumes.

Similarly, the idea that capital is under-taxed in current tax regimes is mistaken.

If anything, tax systems that rely on the taxation of income tend to tax savings more heavily than consumption.

An additional levy on financial transactions will further discourage individuals and firms from saving and investing. And because financial capital is among the most mobile factors of production, expect this effect to be strong — leading both to less investment and therefore lower productivity and less growth in Europe.

That investment is highly sensitive to taxation means that the tax is unlikely to yield much revenue either.

Because an FTT is applied to all transactions made with a given security, its effect is cumulative — hence the deceptiveness of the seemingly low tax rates.

But that means that its application will change the nature and frequency of financial transactions, leading to lower tax revenues than anticipated by its advocates.

Sweden’s Bad Example

After an FTT was introduced in Sweden in 1984, trading in long-term bonds declined by 85% and practically half of all the trading in Swedish stocks moved to non-Swedish markets.

The EU’s FTT directive tries to remedy this problem by being set up as an extraterritorial tax.

The transfer of any security will be taxed even if it takes places outside of the relevant jurisdiction, as long as the security is issued in the country that applies the FTT (the issuance principle) or if the investor is residing in the country that applies the FTT (the residence principle).

Such a solution, though, is much worse than the problem it purports to address.

Extraterritoriality is legally contentious.

The United Kingdom has already launched a legal challenge at the European Court of Justice, on the grounds that it harms countries that are not taking part in implementing it.

Legal issues aside, an extraterritorial tax is an attack on tax competition, reducing the incentives of governments that are not taking part in an FTT to improve their tax and institutional environments in order to attract capital flows.

Worse yet, an FTT may lead investors to leave Europe altogether, and invest and issue securities in friendlier jurisdictions.

The real losers in that process will be the citizens of the 11 European countries who signed up for this fool’s errand — including relatively poor economies such as Slovakia, Slovenia or Estonia.

Dalibor Rohac is a policy analyst at the Center for Global Liberty and Prosperity at the Cato Institute.

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The Obstacle Is That Americans Don’t Want It

Michael F. Cannon

There is nothing simple about Obamacare. It runs more than 2,000 pages. It has spawned more than 10,000 pages of regulations. The nonpartisan Congressional Research Service reports the law will create so many new government agencies that the actual number is “unknowable.” Senator Jay Rockefeller, Democrat of West Virginia, called Obamacare “the most complex piece of legislation ever passed by the United States Congress” and “just beyond comprehension.”

Three years later, people are still trying to figure out what Obamacare says. Last week, newspapers reported that because the employer mandate fails to specify the “minimum essential coverage” employers must offer, firms can satisfy the mandate by offering “skinny” benefits that cover hardly anything. Thus a government guarantee of comprehensive coverage could instead encourage employers to offer less-comprehensive coverage. Since Obamacare’s provisions are all connected, this glitch could send premiums and government spending even higher.

But the main reason Obamacare is encountering obstacles is simple: the American people do not want it. Recent polls show 54 percent of Americans oppose the law, 53 percent want opponents to “continue trying to change or stop it,” and 56 percent want to return what we had before. This June will mark four solid years of public oppositionSome polls show a mere third of the public supports Obamacare. Unions thatsupported it are now “frustrated and angry” over its unintended consequences. One such union is calling for repeal.

When a minority encounters obstacles to imposing its will on the majority, we call that “democracy.”

Indeed, democratic accountability forced Obamacare’s authors to give states veto power over many of the law’s provisions, and is leading states to exercise those vetoes. Two-thirds of states have refused to implement Obamacare’s health insurance “exchanges,” a move that blocks some $800 billion of new entitlement spending. Thanks to last year’s Supreme Court rulingas many as half the states may likewise veto Obamacare’s Medicaid expansion.

Yet the I.R.S. is preparing to tax, borrow and spend that $800 billion anyway, and the Department of Health and Human Services continues to coerce states into implementing portions of the Medicaid expansion that the Supreme Court rendered optional.

Obamacare may be the law of the land, but it lacks legitimacy. So does its implementation.

Michael F. Cannon is director of health-policy studies at the Cato Institute and co-editor of Replacing ObamaCare (2012).

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Obama’s Boundless War

John Mueller

In a speech last week, President Obama expressed some distaste for what he called the “boundless” global war on terror. But in some important respects, his vision of the enterprise seems even more boundless than previous definitions of the terrorism fight.

The Obama administration has been at some pains to downplay the rhetoric of war as it deals with terrorism. Yet Obama’s desire to use the weapons and methods of war against terrorists now requires him to plunge into that rhetoric and in the process extravagantly to hype the threat that terrorism presents.

Maybe if we all start shouting at the president, he’ll declare boundless victory.”

He began by declaring that that we have been at war ever since 9/11. He deems that war to be going rather well, but he concludes it must necessarily continue because “our nation is still threatened by terrorists.”

Musing on the “future of terrorism,” he acknowledges that “the threat has shifted and evolved” somewhat. But he insists a war against it will be required as long as there are Al Qaeda affiliates out there, as long as there are threats to diplomatic facilities and businesses abroad, and as long as there are “homegrown extremists” willing to set off bombs or shoot at people.

Whether there will always be violent groups saying they are affiliated with Al Qaeda is uncertain. But it seems fair to suggest that there will always be people who threaten American diplomatic facilities or businesses abroad and that there will always be extremists at home—however trivial and pathetic—who will try from time to time to do violence to other people to advance a political cause.

Consequently, the war will continue forever.

But there is more. In one of the more arresting passages in the speech, Obama points out that the terrorism threat we have now is much like the one we faced in the 1980s and 1990s, listing off a number of terrorist outrages during those decades. Therefore he seems to suggest that we must have been at war with terrorism in those decades as well even if nobody exactly noticed. Moreover, a similar litany of terrorist excesses could be brought out for just about any decade in U.S. or world history.

Consequently, not only have we been at war with terrorism for “over a decade,” not only will we be at war with it for the rest of eternity, but we have previously been at war with it for the whole of time.

That sounds pretty boundless to me.

Rather inconsistently, however, Obama ends his speech with what might be taken to be a glimmer of hope. While realistically acknowledging early in the speech that he cannot “promise the total defeat of terror,” he ends it by positing that we can still somehow achieve victory against it. We’ll know we’re there, he says, if (1) parents take their kids to school, (2) immigrants come to our shores, (3) fans take in a ballgame, (4) a veteran starts a business, (5) city streets bustle, and (6) a citizen shouts at a president.

Well actually, we do these things now, can easily do so in the future, and have done so repeatedly not only over the last horrible decade—but for all of history before that.

Maybe if we all start shouting at the president, he’ll declare boundless victory.

John Mueller is a political scientist at Ohio State and a Senior Fellow at the Cato Institute. He is the author of Overblown, Atomic Obsession, and with Mark Stewart, Terror, Security and Money.

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Bringing Civics Classes Back to Schools: Obama Impeachment?

Nat Hentoff

In 1798, only seven years after the First Amendment was ratified as part of the Constitution, President John Adams undermined the First Amendment by pushing the Alien and Sedition Acts through Congress. This law subjected citizens to imprisonment for speech that brought the president or Congress into “contempt or disrepute” (my book, The First Freedom: The Tumultuous History of Free Speech in America, Delacorte Press, 1988).

That led enough angry Americans to deny Adams a second term, bringing Thomas Jefferson, a leading opponent of the Alien and Sedition Acts, to the presidency. In 1786, Jefferson wrote to a friend about one of the anchors of our freedom of speech: “Our liberty depends on the freedom of the press, and that cannot be limited without being lost.”

But President Barack Obama, since taking office, has continually limited the First Amendment, the most singular and powerful right that distinctly identifies Americans from residents in all other countries on Earth.

Political speech is our quintessential weapon against imperious presidents towering over the Constitution’s separation of powers.

In the past few weeks, more Americans have been awakened to the diminishment of theirs and the press’s rights of free speech. Alerted to revelations of the multiple “scandals” of the Obama administration, The Wall Street Journal’s Peggy Noonan writes:

“In order to suppress conservative groups — at first, those with words like ‘Tea Party’ and ‘Patriot’ in their names, then including those that opposed ObamaCare or advanced the Second Amendment — the IRS demanded donor rolls, membership lists, data on all contributions, names of volunteers, the contents of all speeches made my members, Facebook posts, minutes of all meetings and copies of all materials handed out at gatherings.”

In this land of the free and home of the brave, the IRS asked such questions as: “What are you thinking about? Did you ever think of running for office? Do you ever contact political figures? What are you reading?” (“This Is No Ordinary Scandal,” Noonan, The Wall Street Journal, May 17).

Dig this: One respondent answered that last query simply: “The U.S. Constitution.”

For an administration that regards the word “Patriot” with suspicion, that must have been disquieting.

As for the Obama Justice Department, headed by Attorney General Eric Holder, it demonstrated its utter disrespect for the First Amendment’s freedom of the press by how it has investigated leaks of classified information to reporters:

“The Justice Department subpoenaed a sweeping two months of AP (Associated Press) phone records from Verizon Wireless last year without notifying the news organization — essentially giving the AP no chance to fight back in the courts” (“Obama’s Leak Obsession Leads to Privacy and Free Speech Abuses,” Roger Aronoff,, May 23).

Accuracy in Media’s Aronoff quotes Lynn Oberlander, general counsel for The New Yorker, who wrote on the magazine’s website: “Even beyond the outrageous and overreaching action against the journalists, this is a blatant attempt to avoid the oversight function of the courts” (“The Law Behind the AP Phone-Record Scandal,” Oberlander, New Yorker, May 14).

And by invading the privacy of the AP’s reporters and editors, Aronoff writes: “Associated Press CEO Gary Pruitt says that sources are now hesitant to talk to the AP because they’re concerned that they’ll be monitored by the government.”

Aronoff quotes Pruitt, who says: “Sources, just in the normal course of news gathering, recently, say we don’t necessarily want to talk to you.

“We don’t want our phone records monitored by the U.S. government.”

These Americans agree with Pruitt, as he tells Aronoff that the Justice Department’s actions are “unconstitutional.”

Aronoff cites a Foreign Policy article from last year, in which Trevor Timm reported: “America’s finest journalism is often produced with the aid of classified information.

The New York Times’ report on warrantless wiretapping and The Washington Post’s expose on CIA secret prisons, both winners of the Pulitzer Prize, are just two of countless examples” (“Obama’s Secret Hypocrisy,” Timm, Foreign Policy, June 2012).

Meanwhile, the president has now slickly “ordered a review … of the Justice Department’s procedures for legal investigations involving reporters.”

He emphasized that “journalists should not be at legal risk for doing their jobs …

“Our focus must be on those who break the law” (“Obama, in Nod to Press, Orders Review of Inquiries,” Mark Landler, The New York Times, May 24).

But, Mr. President, it was the Justice Department that broke the law.

Can you imagine Thomas Jefferson’s reaction to this news?

Obama actually had the gall to tell us that Attorney General Holder, a leading law-breaker in this operation, will direct this official fact-finding review! He directly approved removing Fox News’ First Amendment rights when “prosecutors obtained a search warrant for (Fox News reporter James) Rosen’s phone and email records.”

Next week: I, and other reporters, respond to Obama’s current canny deflections of these charges concerning his extrajudicial commands.

If Thomas Jefferson were still here, he would have instantly condemned them.

Regardless of political parties, though, where is there a Jefferson among us today? Someone who would demand an independent commission with due process rights for the primary witness, President Obama, in a possible impeachment case against him? Mounting evidence, going back to the beginning of his first term, could be examined.

Should there be an actual fully televised impeachment procedure — which could happen if We the People demanded it — public school students watching might call for a return of civics classes to their schools, newly reminded that they are self-governing Americans.

Nat Hentoff is a nationally renowned authority on the First Amendment and the Bill of Rights. He is a member of the Reporters Committee for Freedom of the Press, and the Cato Institute, where he is a senior fellow.

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If Tesla Would Stop Selling Cars, We’d All Save Some Money

Patrick J. Michaels

First of all, let’s stipulate that the Tesla model S is a pretty cool looking car, that the high-end version accelerates like a rocket, and that its massive, low center of gravity pretty much inures it against a rollover. Next, let’s congratulate Elon Musk on paying off his half-billion dollar federal loan ahead of time. Finally, thanks to everyone in the country for helping to make this possible, and for continuing to do so.

The public is still on the hook for Tesla, and will be for the foreseeable future.

The public is still on the hook for Tesla, and will be for the foreseeable future.”

First, there’s the $7500 taxback bonus that every buyer gets and every taxpayer pays. Then there are generous state subsidies ($2500 in California, $4000 in Illinois—the bluer the state, the more the taxpayers get gouged), all paid to people forking out $63K (plus taxes) for the base version, to roughly $100K for the really quick one.

The latest round of Tesla wonderment came when it reported its first quarterly profit earlier this month. TSLA stock darned near doubled in a week. Musk then borrowed $150 million from Goldman Sachs (shocking!) and floated a cool billion in new stock and long-term debt. That’s how we—the taxpayers—were repaid.

But is TSLA another Google , or just another DoubleClick? DCLK zoomed from $2 to $200 without ever showing a profit, something Tesla has yet to do with its cars. It then famously crashed.

Tesla didn’t generate a profit by selling sexy cars, but rather by selling sleazy emissions “credits,” mandated by the state of California’s electric vehicle requirements. The competition, like Honda, doesn’t have a mass market plug-in to meet the mandate and therefore must buy the credits from Tesla, the only company that does. The bill for last quarter was $68 million. Absent this shakedown of potential car buyers, Tesla would have lost $57 million, or $11,400 per car. As the company sold 5,000 cars in the quarter, though, $13,600 per car was paid by other manufacturers, who are going to pass at least some of that cost on to buyers of their products. Folks in the new car market are likely paying a bit more than simply the direct tax subsidy.

How’s this going to work in the future? As long as the competition has to pay greenmail to Tesla, probably just fine. And with California gradually ratcheting up the electric-vehicle mandate, maybe just finer. No wonder the stock price doubled and Goldman shelled out.

There’s only one slight, teensy-weensie problem. While there were enough high-end customers to supply Tesla around $400 million in gross receipts last quarter (that would be 5,000 cars at an average of $80,000 a copy), they still lost money. How many customers are there for such a pricey car?

Tesla can’t increase demand by dropping the price very much. About the only way they can do this (barring some—currently remote—major battery technology improvements) is by cutting the vehicle’s range. Nissan’s Leaf provides a bit of instruction here. Selling for around $32K (out the door) it sold pitifully few—less than 10,000 last year.

As the May 22 Wall Street Journal showed, when a battery car’s range gets in the Leaf zone (real world: 70 miles; advertised: 83) you can’t even give it away. Couple the federal $7500 with $2500 in several states, and the costs of a two year lease, allowing for reduced fuel costs, more than pay for the car. That’s right, free transportation, and sales still suck.

Tesla can’t go much below the EPA estimated 205 mile range (make that about 170 in modestly cold winter weather) of its base version before it hits the same range-anxiety wall.

If Tesla’s sales drop—not by much—the company isn’t going to be able to cover its losses by selling green indulgences. First, the primary losses increase, and then they have fewer indulgences, which are generated by car sales.

So here we have a car pushing $100,000 paid for in no small part by you and me, no matter whether Tesla paid back their federal loan or not. The small comfort is that we are off the hook for any default on that loan, but it would be more comfort if we weren’t all compelled—completely against most of our wills—to shell out around somewhere around $10K (depending on state) for every one that goes out the door. The more they sell, the more we pay.

Oddly enough, the only way to stop this craziness if for the company to stop making cars. If demand drops much, or California goes into a major fiscal crisis (they’re working on it), oddly enough, Tesla’s bankruptcy will save the rest of us some money.

Patrick J. Michaels is Director of the Center for the Study of Science at the Cato Institute and a senior fellow in research and economic development at George Mason University.

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‘My Scientists Made Me Shrink Your Car’

Patrick J. Michaels

Three years ago, I ran into former Australian Prime Minister Kevin Rudd at a ritzy Northwest Washington restaurant. We exchanged pleasantries, but before long, our conversation became unpleasant.

Since climate science is my field, I felt compelled to point out that Rudd’s support for a cap-and-trade policy for carbon emissions had recently helped cost him his job as PM. “Well, what should I have done?” Rudd replied. “My scientists, I say, my scientists, told me this is an important problem.”

Having closely followed implementation of Mr. Rudd’s cap-and-trade, my response was admittedly a little testy: “Your scientists said exactly what you paid them to tell you.” It took less than an hour for the daily newspaper The Australian to get wind of the encounter.

How government scientists plunder the till in the name of science.”

That brief interaction with Mr. Rudd is indicative of a widespread problem: The government of Australia, and pretty much every other nation, funds research scientists and then relies on them for policy guidance. It is in the best interest of these government-funded scientists to ensure their fields — and therefore their jobs — are deemed of great importance.

The problem is particularly costly when it comes to environmental science>.

In the United States, government-funded scientists are required to produce a National Climate Assessment every four years. The assessment is produced by the U.S. Global Change Research Program, a 13-agency behemoth with multibillion-dollar annual funding. Under its empowering legislation, the assessments are “for the Environmental Protection Agency for use in the formulation of a coordinated national policy on global climate change .”

The research program and the individuals who write such reports are the largest consumers of federal largesse on climate science. Would they ever produce a report saying that their issue is of diminishing importance — so much so that EPA regulations of greenhouse gases are simply not needed? No, not unless they are tired of first-class travel and the praise of their universities, which are hopelessly addicted to the 50 percent “overhead” they charge on science grants.

The perils of science-by-government-funded-committee became apparent in their first assessment in 2000. The models they used were worse than no forecast at all.

If, for example, the U.S. Global Change Research Program’s computer models were given a multiple-choice test with 100 questions and four possible answers each, simply spitting out random numbers would, within statistical limits, get around 1 out of 4 (25 percent) correct. The initial assessment, however, would get only 1 out of 8 answers correct (12.5 percent) — essentially performing twice as badly as a random series of numbers.

The research program was aware of this problem and published its report anyway.

The reigning assessment is the 2009 version, which has been considered authoritative and is largely the basis for the EPA’s greenhouse-gas regulations. It was missing so much science that I produced an addendum, in exactly the same format as the original, which was actually longer and contained more references.

Later this year, the U.S. Global Change Research Program is scheduled to publish its quadrennial replacement. The draft has been circulated for public comment. In its 1,200 horror-studded pages, almost everything that happens in our world — sex, birth, disease, death, hunger and wars, to name a few — is somehow affected, usually for the worse, by pernicious emissions of carbon dioxide. Before the end of the 60-day public comment period, 133 single-spaced pages of comments from my organization alone barely scratched the surface of the report’s failings.

The main problem is that the new draft ignores the spate of science since 2010 detailing the long-predicted (at least, by some of us) lowering of temperature projections. You can read about this in The Economist, The New York Times, and the United Kingdom’s Spectator, but you won’t find it in the current research program’s document. As our review says, “Without the addition of the new projections, the [National Climate Assessment] will be obsolete on the day of its official release.”

Later this year, government science goes international with the release of the next Scientific Assessment of Climate Change by the United Nations body that tracks the issue. It suffers from the same problem as the draft research program document — because the same people produced both reports. It, too, will serve as the basis for policy, and it, too, will be obsolete the day it is published.

In Big Science, money is power. Money is publications. Money is promotion and tenure, television time, awards, rewards and a permanent ticket out of coach. There’s simply no incentive for scientists to do anything but perpetuate their issues.

This is why, in 2018, when former President Barack Obama is confronted about his mandate of tiny cars because of dreaded climate change, he might say, “Well, what should I have done? My scientists, I say, my scientists, told me this is an important problem.”

Patrick J. Michaels is Director of the Center for the Study of Science at the Cato Institute and a senior fellow in research and economic development at George Mason University.

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European Integration or Disintegration?

Dalibor Rohac

First, there were only a handful of cranky Tory backbenchers and libertarian Nigel Farage who were receptive in the 2000s to the growing popular discontent over the way the European Union was being run. Seen as a fringe movement and part of British political folklore, few expected euroskepticism to get much traction.

The coming out of Nigel Lawson, former chancellor of the exchequer, seems to be a game–changer. Writing about leaving the European Union, the Tory peer concluded that “the economic gains would substantially outweigh the costs.” Lord Lawson was soon followed by two Cabinet ministers — Education Secretary Michael Gove and Defense Secretary Philip Hammond — who also indicated that they would favor Britain’s exit.

Finally, writing in Financial Times, columnist Wolfgang Munchau acknowledged that “[a] departure need not be a disaster if the terms are negotiated with skill” — a statement that only weeks ago would look out of place on the opinion pages of a newspaper that had traditionally embraced the euro and European integration with fervent enthusiasm.

For the first time in years, it seems that the British are willing to have an open discussion about the costs and benefits of EU membership, without running the risk of being labeled as political extremists.

While so far this shift has been mostly a British occurrence, it does not have to remain one — indeed, it should not. For many countries in Europe, the costs of being part of the EU are very salient — particularly for those that are part of the eurozone and are expected to contribute toward the bailouts of less–than–solvent countries on the eurozone’s periphery.

Neither should this shift be only, or predominantly, about a binary choice between being a part of the EU versus leaving it. While many small, open economies on the European continent might benefit from the common market, there ought to be space for an open–ended debate about the EU’s governance and its dysfunctions.

Instead of having such a debate, Europeans were long fed the mantra of ever–closer union. It was assumed that the EU’s problems would be solved by deeper integration and tighter policy coordination. The monetary union was a part of that process, as was the growing body of EU directives, regulating everything from privacy issues to mobile–phone roaming charges. At the onset of the crisis, a banking and fiscal union were proposed as fixes to the macroeconomic imbalances that were becoming apparent in the eurozone’s periphery.

Only a small group of politicians tried to challenge that consensus. With exceptions, euroskeptics were not a savory bunch, as they were dominated by groups such as the Front National in France or the True Finns. The more thoughtful skeptics were often embarrassed to express their concerns, for fears of being ostracized and lumped together with the likes of the French right–winger Marine Le Pen.

However, closer integration has not been delivered. In 2013, the EU economy is expected to contract by 0.1 percent, following a year of negative growth. Unemployment is at a record high, with youth unemployment in some countries hovering well above 50 percent. Instead of becoming an economic powerhouse, Europe is flailing.

Today, there seems to be an opportunity to have an adult conversation about what has gone wrong with the European project. British Prime Minister David Cameron can help to set the tone for that discussion, but other European leaders need to join in as well. Many areas are in a desperate need of change.

Take regulation. The European Commission estimates that the administrative burden that EU–wide legislation imposes on businesses is $160 billion — and that does not include the economic costs that regulation creates by distorting incentives to produce and innovate. Another overdue problem: agricultural subsidies. Some 38 percent of the EU budget for 2014 to 2020 — or $470 billion — is going to be spent on farm subsidies.

The list is much longer. The past few years have seen the creation of a permanent bailout fund for the eurozone’s members in fiscal distress, with very little in terms of a cost–benefit analysis to justify it. There is an ongoing, silent power grab by European institutions, which can be illustrated by a recent note by the European Commission in which the commission asks member states to subject their economic policymaking to EU control: “The Commission considers it important that national plans for any major economic–policy reforms are assessed and discussed at EU–level before final decisions are taken at the national level.”

For far too long, the thoughtful dissenters were being mocked into hiding. With the political equilibrium shifting in Britain, however, it is no longer possible to simply ignore the discontent with the direction taken by European political elites. Although the denizens of Brussels’ corridors of power may not realize it yet, the time to renegotiate the “social contract” guiding the Continent is now.

Dalibor Rohac is a policy analyst at the Center for Global Liberty and Prosperity at the Cato Institute.

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Preserving Their Monopoly on Monopoly Money

Richard W. Rahn

“The need to slough off the outworn old to make possible the productive new is universal. It is reasonably certain that we would still have stagecoaches — nationalized to be sure, heavily subsidized and with a fantastic research program to ‘retain the horse’ — had there been ministries of transportation around 1825.”

Entrepreneurs are trying to create superior money, which is needed for global economic well-being, to replace the dollar and other failing government-created currencies. Unfortunately, these innovations are being strangled in their cribs by power-hungry central bankers and politicians. The best known of these new experimental currencies — “Bitcoin” — is now under attack by several U.S. government agencies.

The U.S. Federal Reserve System is responsible for creating and maintaining the value of the U.S. dollar, yet the dollar is now worth only one-23rd as much as it was when the Fed was created in 1913. Of late, the Fed has been keeping interest rates below the rate of inflation, which means that savers are suffering from a loss of real capital (equivalent to a large tax increase on savings), while, at the same time, small businesses and individuals are finding it is nearly impossible to obtain reasonably priced loans unless they are homebuyers. Similar situations are true with the other major world central banks.

Governments the world over are financing massive deficits by selling their debt to the central banks — the ultimate global Ponzi scheme. Smart people see the coming disaster and are looking for alternatives to government-created (central bank) money. Some are buying gold, which served as largely successful, global, nongovernment-created money for much of time before the World War I. Gold buyers, while feeling more secure about holding something real, are at risk because governments hold more than 20 percent of all gold, and even relatively small sales of gold by one or more governments can cause the price to drop substantially. Government officials hate the idea of private people using alternatives to the government monopoly money. From 1933 until 1973, the U.S. government even prohibited private individuals from owning gold coins or bullion.

In the age of the Internet, it is possible to create digital money with or without backing of something real. This possibility gives hope to most people because they could be liberated from the yoke of government money.

As you probably have read, Bitcoin is a brilliant software innovation, whose developers, for good reason, have chosen to remain secret. Bitcoin enables individuals to sell and buy goods and services using a privately created digital currency, which allows a high degree of privacy and anonymity. The maximum number of Bitcoins is fixed, and the current market value is determined by supply and demand. The use of Bitcoins has been growing rapidly, but the total value is minuscule compared to the dollar and other major currencies. As an economist, I see many problems with Bitcoin as a true money substitute, even though I very much applaud the innovation.

About two weeks ago, the Department of Homeland Security obtained a warrant to seize an account tied to the largest Bitcoin exchange with the allegation that the transactions were “part of an unlicensed money-services business,” even though Bitcoin is not issued by a central bank and hence is not legal tender. (Those of you who still play the board game Monopoly — beware. The Obama administration may soon be after you.) The Obama administration’s Treasury Department, run by the same folks responsible for the IRS, claim that the holder of the Bitcoin account did not register with the Treasury’s Financial Crimes Enforcement Network. The network claimed that the account could be used for “money laundering.”

Money laundering has no precise legal definition because it is based on so-called “intent” rather than an actual activity. For example, you and a friend could engage in identical money transactions. However, if you had the “intent” to not reveal the source of the money, and your friend did not have that intent, you could be sent to jail, but not your friend. Intent is very hard to prove, and that is why very few people are convicted of the primary crime of “money laundering.” It is almost always an add-on charge for someone who is charged with some other primary crime. Money laundering is a new crime. There was no prohibition until 1986. This kind of vague law is the type of law loved by totalitarians because it makes it easy to go after one’s political or other opponents. As Stalin’s longtime head of the NKVD, a predecessor of the KGB, Lavrentiy Beria was reported to have said, “You name the person, I will find the crime.”

If statutes against money laundering can be applied to something that is neither legal money, nor even a physical good, but a software innovation, then there is absolutely no limit to the power of those in government to shut down any activity they do not like, for whatever reason. Perhaps, in order to distract the media from his own well-publicized conflict-of-interest problems, Gary Gensler, Obama-appointed chairman of the Commodity Futures Trading Commission (CFTC), just announced that the commission might also try to regulate Bitcoin as if it were soybeans.

I have a long list of government agencies that need to be shut down in order to protect innovation, economic growth and, most importantly, liberty. After the recent Bitcoin outrage, the Financial Crimes Enforcement Network and the Commodity Futures Trading Commission just shot up to near the top of the list — next to the IRS.

Richard W. Rahn is a senior fellow at the Cato Institute and chairman of the Institute for Global Economic Growth.

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The Biggest Tax Catch

William G. Shipman

While pundits, politicians and economists are distracted by marginal tax rates and a possible Internet sales tax, President Obama may be preparing for the biggest of all trophies: a wealth tax. He doesn’t say this, of course, but he is baiting his hook, and looking for the optimal place and time to cast his line. Most people don’t see this coming. Should it happen, though, it will be very difficult to protect yourself.

This all started — at least the public part — with the president’s 2014 budget, which proposes to limit tax-deductible saving to an amount that will provide an annual benefit of $205,000. The budget document states that “the maximum accumulation that would apply for an individual at age 62 is approximately $3.4 million.”

While pundits, politicians and economists are distracted, President Obama may be preparing for the biggest of all trophies: a wealth tax.”

Putting the numbers aside for the moment, this initiative targets one’s wealth as well as one’s income. If an individual’s tax-qualified wealth — both defined contribution and benefit plans — approximates $3.4 million, then future tax-deductible contributions would not be allowed. If the level drops below $3.4 million, say because of poor market returns, then additional contributions would be allowed. If it is already above $3.4 million, it is not clear how, or if, the excess would be taxed. At the moment, only tax-qualified wealth is targeted. The budget document also suggests that retirees need only $205,000 in annual income.

Let’s say one has no tax-qualified wealth, but has financial assets of $5 million. That level, according to the president’s own calculations, would provide retirement income greater than $205,000. This starts the slippery slope. Is it fair that one retires with more wealth than is necessary to provide $205,000 per year? Although the question itself may repulse you, it is common progressive language when it refers to income: “Shouldn’t higher-income folks contribute just a little more?” Now, just replace the words “higher income” with “wealthier.”

We have become conditioned to income taxes since the 16th Amendment to the Constitution was ratified on Feb. 3, 1913. It states: “The Congress shall have power to lay and collect taxes on incomes .” The amendment is silent on taxing wealth. Should Mr. Obama try to tax financial wealth, from an administrative point, it would be pretty easy.

Each year, investors receive from custodian banks 1099 forms, which report dividend and interest income. They don’t receive the sum total of their assets on the 1099s, but they do in their periodic reports. In fact, those data are readily available with a mouse click. If the federal government required those data, it would be a relatively trivial software application to provide year-end financial asset levels on the 1099s.

The federal government could then attempt to levy a tax on financial wealth that exceeds some threshold. The political argument has already been well tested when related to income. The American public accepts progressive tax rates, or the view that higher-income folks should pay proportionally more. The debate is only how much, or what marginal tax rates should apply. As it relates to financial wealth, the president could then argue that the concept is the same, and the debate should rest only on the appropriate marginal tax rates.

With high budget deficits, frightening levels of government debt and unfunded liabilities in the tens of trillions of dollars, politicians’ appetite for additional resources will not be satiated. The president knows this as he watches his ideological opponents casting their lines for small fish while he may be preparing for the biggest trophy of all since 1913.

William G. Shipman is chairman of Carriage Oaks Partners and co-chairman of the Cato Institute Project on Social Security Choice.

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