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HOOVER DIGEST

RESEARCH + OPINION ON PUBLIC POLICY

SPRING 2016

NO. 2

THE

HOOVER

INSTITUTION

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The Hoover Institution on War, Revolution and Peace was established at Stanford Universi- ty in 1919 by Herbert Hoover, a member of Stanford’s pioneer graduating class of 1895 and the thirty-first president of the United States. Created as a library and repository of documents, the Institution approaches its centennial with a dual identity: an active public policy research center and an internationally recognized library and archives.

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» Understand the causes and consequences of economic, political, and social change

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This Institution supports the Constitution of the United States, its Bill of Rights, and its method of representative government. Both our social and economic sys- tems are based on private enterprise, from which springs initiative and ingenuity. Ours is a system where the Federal Government should undertake no govern- mental, social, or economic action, except where local government, or the people,

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from its records, to recall the voice of experience against the making of war, and by the study of these records and their publication to recall man’s endeavors to make and preserve peace, and to sustain for America the safeguards of the American way of life. This Institution is not, and must not be, a mere library. But with these purposes as its goal, the Institution itself must constantly and dynamically point the road to peace, to personal freedom, and to the safeguards of the American system.

By collecting knowledge and generating ideas, the Hoover Institution seeks to improve the hu- man condition with ideas that promote opportunity and prosperity, limit government intrusion into the lives of individuals, and secure and safeguard peace for all.

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HOOVER DIGEST

RESEARCH + OPINION ON PUBLIC POLICY

SPRING 2016

HOOVERDIGEST.ORG

THE HOOVER INSTITUTION

STANFORD UNIVERSITY

HOOVER DIGEST

RESEARCH + OPINION ON PUBLIC POLICY

SPRING 2016

HOOVER D IGEST.ORG

The Hoover Digest explores politics, economics, and history, guided by the scholars and researchers of the Hoover Institution, the public policy research center at Stanford University.

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ON THE COVER

Seventy years ago, the greatest war in history was over and the US military was preparing for new missions and technologies. America had to find a way not only to channel mil- lions of servicemen back into civilian life but to attract a million of them back into the peacetime Army—an Army that needed trained, motivated personnel. In 1946, the year this poster was printed, flag-waving and appeals to duty were out. Instead, recruiters portrayed the Army as a job—a good one, too, the job of the future. See story, page 180.

good one, too, the job of the future. See story, page 180. HOOVER DIGEST PETER ROBINSON
good one, too, the job of the future. See story, page 180. HOOVER DIGEST PETER ROBINSON

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Spring 2016

HOOVER DIGEST

THE ECONOMY

9

A World of Fresh Starts

How to foster growth and opportunity around the globe. By Michael J. Boskin

14

The Zero-Sum Fallacy

Incomes rise or fall together—what moves them is economic growth. Why we’re all in this together. By Edward Paul Lazear

17

Cast Out the “Economic Evils”

Five ideas for getting monetary policy back on track. By John B. Taylor

22

Share and Share Alike

The sharing economy isn’t just about convenience. It’s a revolution in the use of labor and assets. By Michael Spence

27

Fail and Fail Again

Like a bad penny, socialism keeps coming back. By Allan H. Meltzer

TAXES

33

The Tax Code, Unchained

We really could transform our nightmarish tax system. Here’s how. By John H. Cochrane

POLITICS

36

Stuck in the Middle

It’s the independents, not the true believers, who make or break a candidate. And they don’t think all that much of Donald Trump. By David Brady

41

What Trump Knows

The GOP may not need the Donald, but it certainly needs his supporters. By Jeremy Carl

HEALTH CARE

47

Better Ideas, Stat

Just as predicted, patients are facing higher costs, fewer choices, and swelling bureaucracy. ObamaCare needs urgent care. By Scott W. Atlas

51

ObamaCare Gets a Checkup

It’s neither dying nor thriving—but it does need some bitter medicine. By Daniel P. Kessler

56

Cadillac in the Ditch

The tax on high-cost insurance plans was running rough from the start. Here’s what that clunker has taught us. By Charles Blahous

rough from the start. Here’s what that clunker has taught us. By Charles Blahous 4 HOOVER
rough from the start. Here’s what that clunker has taught us. By Charles Blahous 4 HOOVER

61

Healthy Budget, Healthy Americans

Six ways to put consumers, and not bureaucrats, in control. By Lanhee J. Chen and James C. Capretta

64

Perils of “Consent”

What do we owe a patient whose own body has led to medical breakthroughs? Trying to figure it out could tie up progress, making everyone worse off. By Richard A. Epstein

FOREIGN POLICY

71

The End of Modernity

When it should act, America hesitates—and around the world, hard-won freedoms slip away. By Charles Hill

76

Tear Up the Map

The borders of the Middle East are unworkable. What if we drew them all over again? By Michael S. Bernstam

83

“Easier to Make the Speeches”

Barack Obama so wanted to end “Bush’s wars” and close Guantánamo. It hasn’t worked out that way. By Jack Goldsmith

TERRORISM AND DEFENSE

87

Rocketing the Casbah

In proclaiming a state, ISIS surrendered a strategic advantage, giving its bombs a return address. By Josef Joffe

91

Missile Defense Makes Sense

How outdated strategic thinking is leaving us wide open. By Frederick W. Kagan

RUSSIA

95

Comrade Frumkin’s Prophecy

Among the millions of ordinary people who ran afoul of the Soviet police state, one predicted its doom. Astoundingly enough, he survived. By Mark Harrison

IRAN

101

Reading Tolstoy in Tehran

Today, War and Peace would be set in Iran, with its oppression, tumult, and sense that everything must change. By Niall Ferguson

SCIENCE

104

Fishmongers

Genetically modified salmon have finally been approved. Why did they have to spend so much time swimming upstream? By Henry I. Miller

EDUCATION

108

Servants of All

Advice to would-be school reformers: argue less, listen more, and check your halo at the door. By Michael J. Petrilli

argue less, listen more, and check your halo at the door. By Michael J. Petrilli 6
argue less, listen more, and check your halo at the door. By Michael J. Petrilli 6

THE CONSTITUTION

111

We the (Inconvenient) People

Foes of a proposed constitutional convention don’t care about legal purity. They care about their power. By Thomas Sowell

DEMOCRACY AND FREEDOM

115

Beware the Nativist Lurch

Yes, promoting democracy can be frustrating and dangerous. But freedom and pluralism are still the only way to sustain effective, lasting governments. By Larry Diamond

120

Borders and Barriers

Overwhelmed by migrants and terrified of terrorists, Europe is rebuilding walls that only recently came down. By Timothy Garton Ash

125

Europe Stumbles

Europeans have failed to cherish, and now to defend, the nation-state system. Americans must pay heed. By Peter Berkowitz

CALIFORNIA

130

Reservoirs, Yes; Rails, No

In the latest Golden State Poll, Californians say that providing enough water must come ahead of building multibillion-dollar trains. By Jenny Mayfield

INTERVIEWS

134

Plowshares into Swords?

Hoover fellow William J. Perry worries that disarmament has stalled—and the specter of nuclear war has returned. By Kenji Kato

141

Sister Act

Ideological opposites, Kori N. Schake and her sister, a Clinton adviser, have found that family harmony is the best policy. By Meghan Daum

148

“There’s a Market for Foolish Things”

Although he insists that he has devoted much of his long career merely to pointing out the obvious, Hoover fellow Thomas Sowell feels certain he’ll never be out of a job. By Kyle Peterson

VALUES

154

Now Trending: Mob Think

America’s checks and balances have always protected us from our worst impulses. Now they’re eroding. By Victor Davis Hanson

HISTORY AND CULTURE

160

How the Cold War Ended

Hoover fellow Robert Service focuses on the historical endgame. By Duncan White

HOOVER ARCHIVES

166

On the Firing Line: A Fiftieth Anniversary

Where have you gone, William F. Buckley? A new Hoover exhibit highlights unforgettable exchanges with America’s most public intellectual. By Jean McElwee Cannon

180

On the Cover

most public intellectual. By Jean McElwee Cannon 1 8 0 On the Cover 8 HOOVER DIGEST
most public intellectual. By Jean McElwee Cannon 1 8 0 On the Cover 8 HOOVER DIGEST

THE ECONOMY

A World of Fresh Starts

How to foster growth and opportunity around the globe.

How to foster growth and opportunity around the globe. By Michael J. Boskin G lobal growth

By Michael J. Boskin

G lobal growth was anemic last year—and the forecast is only

slightly better for 2016. Something must be done to boost

incomes and expand opportunities for people everywhere. Here

are some economic resolutions that could bring good cheer this

year and beyond.

Let us begin in Europe. Despite the European Central Bank’s monetary

accommodation, a sharp depreciation of the euro, and negative short-term

interest rates, the European economy remains in the doldrums.

In 2016, Europe’s leaders must stop expecting monetary policy to solve

their problems, and instead pursue faster, firmer resolutions to the myriad

crises they face, from the intertwined growth, banking, currency, and gover-

nance crises to the escalating refugee crisis, which is threatening free move-

ment across internal borders. They must pursue supply-side fiscal, struc-

tural, labor-market, and regulatory reforms, with commonsense solutions for

the struggling periphery economies’ fiscal crises and the stronger economies’

medium-term debt woes topping the agenda.

In Latin America, the situation is more varied. After a decade of progress (with some exceptions, notably Venezuela), the region is facing serious challenges, stemming partly from a sharp decline in global commodity prices. Indeed, plummeting oil prices helped push the region’s largest economy, Brazil, into its worst recession in decades, while a major corruption scandal at Petrobras, the state oil company, has thrown the country’s politics into disarray. This makes the pursuit of economy-saving resolutions exceedingly difficult. The new leftist finance minister will probably make things worse. Political instability is undermining economic prospects elsewhere, too. In Ecuador, where President Rafael Correa, who seems intent on imitating

Venezuelan Chavismo, has eliminated term limits on his office, high inflation is a growing risk. In Latin America’s second- and third-largest economies, however, new leadership offers reason for hope. President Enrique Peña Nieto’s decision to open Mexico’s deep-water oil deposits to international energy companies will help the country overcome declining production, lagging technology, and corruption at Pemex, the national oil company. Nieto also recognizes the imperative of improving Mexico’s education system, and thus is taking on the powerful teachers’ union. In Argentina, newly elected president Mauricio Macri is nothing like his anti-business, anti-American predecessor Cristina Kirchner, who pillaged the central bank, channeling

Europe’s leaders must stop expecting monetary policy to solve their problems.

funds toward favored local governments, and even fudged national

statistics to obscure sky- rocketing inflation. Among Macri’s resolutions are market-oriented reforms and clearing the many economic land mines that Kirchner planted. He is off to a good start, having freed the peso from its official peg, reduced taxes, and moved toward freer trade. Venezuela also has reason for hope. The opposition, having won a superma- jority in parliament, defeating the ruling socialists for the first time in seventeen years, should be able to limit the harm caused by the policies of President Nicolás Maduro, heir to Hugo Chávez. But if opposition forces are to turn the economy around, they will need to win the presidency in 2019. In Asia, all eyes are on China, the epicenter of a growth slowdown that has reverberated throughout the region (and beyond). The remarkable growth spurt of the last three decades has degraded the natural environment

BUSY: Workers perform final testing at a Seagate factory in Wuxi, China, before sending computer

BUSY: Workers perform final testing at a Seagate factory in Wuxi, China, before sending computer drives to customers. China needs to rebalance its economy from exports to domestic demand. [Robert ScobleCreative Commons]

considerably, produced vast excess capacity in basic industries like cement and steel, and left the banking system saddled with bad loans. China’s government has committed to reform, but its efforts are lagging. The rebalancing of its economy from exports to domestic demand remains a major challenge, not least because its consumers are slow to cooperate. And the government maintains significant control over major companies, even some that are listed on public stock markets. To engineer the soft landing that Asia needs, China’s leaders must redouble their reform efforts. One key resolution should be to dispense state-owned companies’ profits directly to the population, to consume the proceeds or invest them elsewhere. Japan, for its part, has sunk back into recession, despite Prime Minister

Shinzo Abe’s large and costly economic-revitalization strategy. The Japanese, like many of their neighbors, hope that enactment of the Trans-Pacific Part- nership (TPP) trade deal—which would, among other things, lower tariffs on thousands of commodities and reduce nontariff barriers—will provide a much-needed boost. Africa has been a less visible success story during the past decade. Despite the many difficulties the continent faces, foreign investment and trade (not aid) provide major opportunities for growth and development. A resolu- tion to break the scientifi-

In Asia, all eyes are on China, the epicenter of a growth slowdown that has reverberated around the world.

cally illiterate opposition to genetically modified food would help boost agricul- ture and exports to Europe

substantially. In North America, Canada’s new center-left prime minister, Justin Trudeau, will be tempted to expand government spending and regulation. But he must not loosen the strings of the public purse too much. Thanks to the collapse in oil prices, western Canada is in the early stages of a serious downturn. Fortunately, there is room for Trudeau to meet the demands of his sup- porters without wasteful spending. To this end, he should press America’s next president to pursue the implementation of the TPP in a way that pro- tects NAFTA; to maintain a sound monetary policy; and to reverse President Barack Obama’s veto of the Keystone Pipeline. These steps would also be in the interest of the United States. In fact, US efforts to promote free trade should go beyond the TPP to target the revital- ization of the moribund Doha Round of multilateral trade liberalization. Both

monetary- and fiscal-policy normalization are critical. And the United States must capitalize on its expanded energy production, such as by enabling exports of oil and natural gas, to reduce its European allies’ dependence on Russian energy. But perhaps America’s most important resolution should be to return to global leadership—a role that has gradually eroded over the past decade, with devastating consequences. That erosion, rooted in deep political fissures that are evident in the current presidential campaign, is disturbing global economic, financial, and security arrangements that depend on American leadership. The United States may have a lot on its plate, but unless it leads effectively, the challenges it faces will only grow.

leads effectively, the challenges it faces will only grow. Reprinted by permission of Project Syndicate

Reprinted by permission of Project Syndicate (www.project-syndicate. org). © 2015 Project Syndicate Inc. All rights reserved.

org). © 2015 Project Syndicate Inc. All rights reserved. New from the Hoover Institution Press is
org). © 2015 Project Syndicate Inc. All rights reserved. New from the Hoover Institution Press is

New from the Hoover Institution Press is Inequality and Economic Policy: Essays in Memory of Gary Becker, edited by Tom Church, Chris Miller, and John B. Taylor. To order, call (800) 888-4741 or visit www.hooverpress. org.

THE ECONOMY

The Zero-Sum Fallacy

Incomes rise or fall together—what moves them is economic growth. Why we’re all in this together.

them is economic growth. Why we’re all in this together. By Edward Paul Lazear S peaking

By Edward Paul Lazear

S peaking about the economy a half-century ago, President John F.

Kennedy told Americans that “a rising tide lifts all boats.” Today

many disagree, including those in his party who want to be the

next Democratic president.

Hillary Clinton is one. She has repeatedly claimed, as in Omaha, Nebraska,

last year, that “the deck is stacked,” with “the wealthy getting wealthier at

the expense of hard-working families.”

Bernie Sanders also complains that the system “has been rigged by Wall

Street.” At the Democratic debate on January 17, he said that “ordinary

Americans are working longer hours for lower wages, forty-seven million

people living in poverty, and almost all of the new income and wealth going to

the top 1 percent.”

Nevertheless, what Kennedy said is as true today as it was in the early

1960s.

Most economists who have examined income data believe that the gulf

between top and bottom earners in the United States has widened. Yet data

Edward Paul Lazear is the Morris Arnold and Nona Jean Cox Senior Fellow at the Hoover Institution, co-chair of Hoover’s Conte Initiative on Immigration Re- form, and the Jack Steele Parker Professor of Human Resources Management and Economics at Stanford University’s Graduate School of Business.

from the Bureau of Labor Statistics’ Current Population Survey (CPS) from 1980 to 2014 reveal that the periods when low-income workers do best are generally the same as those when high-income workers prosper. From 1980 to 2000, the earnings of the 90th-percentile earner (the person whose earnings are higher than the bottom 90 percent of earners and lower than the top 10 percent of

earners) grew three times as fast as they did from

2000 on. The same was true of the earnings of the 20th-percentile earner, which also grew three times as fast between 1980 and 2000 as they did between 2000 and 2014. The average annual GDP grew about twice as rapidly in the earlier period as it did during the latter period. This linkage appears in bad times as well. The 90th percentile, the 20th percentile, and the median earner (defined as the earner at the 50th percen- tile) saw actual declines in real earnings in 2008–14. A more detailed analysis of CPS earnings data reinforces the point. There is a statistically strong correlation between the growth in earnings of the 90th-percentile earner, the median earner, and the earner at the 20th percentile. The middle and bottom tend to grow when the top grows. The connection between the groups is quite strong with the exception of the high- est 1 percent, where the correlation is still positive but statistically weaker in recent years. But there is no evidence that the success among top earners is at the expense of lower earners.

The “rising tide lifts all boats” metaphor is off in one respect. When a tide rises, all boats move up by the same amount. Earnings growth doesn’t follow that pattern; sometimes the bottom moves up by more than the top. In the mid-1980s, earnings of the 20th percentile grew about 40 percent more rap- idly than earnings of the 90th percentile. Over recent years, top earners have enjoyed more wage growth than those at the bottom. This is the source of the complaint that the rich have taken all the spoils of growth. But the bottom is not struggling because the top is thriving—and reducing earnings growth at the top wouldn’t increase earn- ings growth at the bottom. All groups’ earnings grow when the economy is prospering, and high growth is especially important for lower-income earners. Additionally, the lagging earnings among the least-skilled workers reflect deficiencies in demand for those workers—and this deficiency, crucially, is a result of low productivity.

An improving economy is especially important for lower earners.

In a 2012 study published by the Kansas City Federal Reserve Bank, James Spletzer and I found that there are chronically high job-vacancy rates and

low unemployment rates in the most-skilled occupations, but the opposite in the least-skilled occupations. In good times and bad, there are many more service workers unemployed than there are job vacancies for those types of workers. But job vacancies for managers and professional workers usually outnum- ber the unemployed. Even in the housing boom year of 2006, while there were about two profes-

There is no evidence that top earners succeed at the expense of lower earners.

sional vacancies for every unemployed pro- fessional worker, there

were more than seven unemployed construction workers for every construction job vacancy. Wages move with demand. Just as high wages for skilled labor reflect strong demand for those who can do the jobs required in our advanced economy, low wages at the bottom reflect poor demand for those without the requisite skills. To raise wages at the bottom, the productivity of the least-skilled workers has to improve. Better education is at least part of the answer. Redistribution through the tax system won’t improve those skills; if anything, it will work in the wrong direction by making skill acquisition less rewarding. The earnings of individuals with low incomes are most likely to grow when the incomes of top earners also grow—and the best way to make the poor

prosperous is by improving their skills and growing the overall economy. Some boats are bigger than others, but draining the ocean won’t help boats of any size.

but draining the ocean won’t help boats of any size. Reprinted by permission of the Wall

Reprinted by permission of the Wall Street Journal. © 2016 Dow Jones & Co. All rights reserved.

Journal . © 2016 Dow Jones & Co. All rights reserved. Available from the Hoover Institution
Journal . © 2016 Dow Jones & Co. All rights reserved. Available from the Hoover Institution

Available from the Hoover Institution Press is Education in the Twenty-First Century, edited by Edward Paul Lazear. To order, call (800) 888-4741 or visit www.hooverpress.org.

THE ECONOMY

Cast Out the “Economic Evils”

Five ideas for getting monetary policy back on track.

Five ideas for getting monetary policy back on track. By John B. Taylor S eventy-one years

By John B. Taylor

S eventy-one years ago, President Truman signed the Bretton

Woods Agreements Act of 1945, officially creating the Internation-

al Monetary Fund and the World Bank. As Treasury Secretary

Henry Morgenthau put it, the Bretton Woods agreements aimed

to “do away with economic evils.”

One serious economic evil was the repeated competitive devaluations and

currency wars. The British devalued the pound in 1931 and gained a competi-

tive advantage, but they slammed other countries’ economies in doing so.

Other countries followed, including the United States, which devalued the

dollar in 1934. These actions led to harmful government restrictions and

interventions in other countries. After trying such interventions, Italy, for

example, finally devalued in 1936, matching precisely the US devaluation of

1934.

A second economic evil was the prevalence of exchange controls, in which

importers of goods were forced to make payments to a government monopoly

John B. Taylor is the George P. Shultz Senior Fellow in Economics at the Hoover Institution, the chair of Hoover’s Working Group on Economic Policy and a mem- ber of Hoover’s Shultz-Stephenson Task Force on Energy Policy, and the Mary and Robert Raymond Professor of Economics at Stanford University.

in foreign exchange, or confront multiple exchange rates and government licenses to export and import. To deal with these problems, the reformers developed a strategy. Each country would commit to two basic monetary rules. First, they agreed to swear off competitive devaluations by having any exchange-rate change over 10 percent from certain pegs be approved by a newly created IMF. Second, countries agreed to remove their exchange controls, with a transi- tion period because many had extensive controls in place. With commitment to these two rules, the IMF would provide financial assistance in the form of loans. Chicago economist Jacob Viner explained the deal: “Other countries make commitments with respect to exchange stability and freedom of exchange markets from restrictive controls, while we in turn

pledge financial aid to countries needing it to carry out these commitments.” He concluded that “it is largely an American blueprint for the postwar eco-

nomic

In important respects the blueprint succeeded. Exchange con- trols were removed, though

It seems to me a magnificent blueprint.”

it took more than a decade, and the currency wars ended, though the adjustable-peg system fell apart in the 1970s and gave way to a flexible exchange-rate system. The 1970s were difficult because monetary policy lost its rules-based footing and both inflation and unemployment rose. But in the 1980s and 1990s policy became more focused and rules-based and economic performance improved greatly. By the late 1990s, many emerging-market countries were adopting rules-based monetary policies, usually in the form of inflation targeting, and entered into a period of stability. Unfortunately, this benign situation has not held, and today the challenges facing the inter- national monetary system resemble those at the time of the creation, including currency wars and new interventions and controls. In my view the problem traces to a departure from rules-based monetary policies at both the national and interna- tional level. These deviations not only helped bring on and worsen the global

[Taylor Jones—for the Hoover Digest]

financial crisis, they have been a factor in the subpar recovery and the recent global volatility. So we need a new strategy, and it can build on the old strategy of the 1940s. We now have evidence that the key foundation of a rules-based international monetary system is simply a rules-based monetary policy in each country. Research shows that the

move toward rules-based monetary policy in the 1980s was the reason economic performance improved in the 1980s and 1990s. More

recent research shows that the spread and amplification of deviations from rules-based monetary policy are drivers of current international instabilities. And research also shows that if each country followed a rules-based monetary policy consistent with its own economic stability—and expected other countries to do the same—a rules-based internationally cooperative equilibrium would emerge. As in the 1940s we should forge an agreement where each country com- mits to certain rules. In keeping with today’s global economy, it would not be an adjustable-peg system but a flexible system in which each country—each central bank—describes and commits to a monetary policy rule or strategy for setting the policy instruments. The strategy could include a specific inflation target, some notion of the long-run interest rate, and a list of key variables to react to in certain ways.

Experience shows that the process should not impinge on other countries’

monetary strategies nor focus on sterilized currency intervention. The rules- based commitments would reduce capital flow volatility and remove some of the reasons why central

The Bretton Woods agreement, according to an economist at the time, “seems to me a magnificent blueprint.”

We need a new strategy, and it can build on the strategy of the 1940s.

banks have followed each other in recent years. Such a process would pose no threat to either the

national or international independence of central banks. It would be the job

of each central bank to formulate and describe its strategy. Participants in

the process would not have a say in the strategies of other central banks,

other than that the strategies be reported. And the strategies could be

changed or deviated from if the world changed or if there was an emergency.

A procedure for describing the change and the reasons for it would be in the

agreement.

This reform is important, but supporting reforms are also needed. A second reform would set up rules for eventually removing capital controls.

Currently, thirty-six countries have open capital accounts, but forty-eight are classified as “gate” countries and sixteen as “wall” countries with varying degrees of capital controls. The removal should be gradual and accompa- nied by adequate safety and soundness regulations. Though controversial, the reform would be conceptually the same as the agreement to remove exchange controls in 1944.

A third ingredient to the rules-based system would be a rule for the IMF

itself to apply when lending to countries. The most practical way to proceed would be to restore the Exceptional Access Framework. This sensible rule

was first put in place in 2003, but was broken in the case of Greece in 2010 when loans were made in a clearly unsustainable situation, contrary to the framework.

A fourth reform would wean the IMF from making unnecessary loans as

part of its advice-giving and monitoring activities. When the real need is simply for the IMF to give advice to a country in implementing or monitoring reforms, there is no need for a loan. The most practical way to proceed would be to greatly expand the use of the Policy Support Instrument, which was introduced in 2005. And finally, there should be an inclusive process for selecting the next managing director of the IMF, who could well be from an emerging-market country. The impacts of departures from rules-based policies have been par- ticularly hard on emerging markets.

policies have been par- ticularly hard on emerging markets. Reprinted from John B. Taylor’s blog Economics

Reprinted from John B. Taylor’s blog Economics One (http://economicsone. com).

Taylor’s blog Economics One (http://economicsone. com). Available from the Hoover Institution Press is Government
Taylor’s blog Economics One (http://economicsone. com). Available from the Hoover Institution Press is Government

Available from the Hoover Institution Press is Government Policies and the Delayed Economic Recovery, edited by Lee E. Ohanian, John B. Taylor, and Ian J. Wright. To order, call (800) 888-4741 or visit www.hooverpress.org.

THE ECONOMY

Share and Share Alike

The sharing economy isn’t just about convenience. It’s a revolution in the use of labor and assets.

It’s a revolution in the use of labor and assets . By Michael Spence W hen

By Michael Spence

W hen Amazon was founded in 1994, and eBay the follow-

ing year, the companies harnessed the connectivity of

the Internet to create new, more efficient markets. In the

beginning, that meant new ways of buying and selling

books and collectibles. Now e-commerce is everywhere, offering customers

new and used goods—and becoming a global force in logistics and retail.

Likewise, while today’s sharing-economy companies may be just out of their

infancy, their services will one day be ubiquitous.

By now, most people have heard of Airbnb, the online apartment-rental

service. The company has just six hundred employees but a million proper-

ties listed for rent, making it larger than the world’s biggest hotel chains.

Of course, what Airbnb offers is different from what hotels provide, but if

Airbnb offered options for, say, maid service or food, they could become

closer competitors than one might initially imagine.

Michael Spence is a senior fellow at the Hoover Institution, a professor of eco- nomics at New York University’s Stern School of Business, and the Philip H. Knight Professor Emeritus of Management in the Graduate School of Business at Stanford University. He was awarded the Nobel Memorial Prize in Economic Sci- ences in 2001.

The insight (obvious in retrospect) underlying Airbnb’s model—and the burgeoning sharing economy in general—is that the world is replete with underutilized assets and resources. How much time do we spend actu- ally using the things—cars, bicycles, apartments, vacation homes, tools, or yachts—that we own? What value do office buildings or classrooms generate at night?

BORROW YOUR YACHT? Answers vary by asset, individual, household, or organization, but the utiliza- tion numbers tend to be astonishingly low. One recent answer for cars was 8 percent, and even that may seem high to someone not burdened by long commutes. But those numbers are changing, as the Internet enables creative new business models that increase not only a market’s efficiency but also the uti- lization of our various assets. Hundreds of experiments are being conducted. Clearly, not all of them will experience the astonishing growth of Airbnb and Uber. Some, like Rent the Runway for designer clothes and accessories, may find profitable niches; others will simply fail.

[Taylor Jones—for the Hoover Digest]
[Taylor Jones—for the Hoover Digest]

The digital platforms that act as the basis of all this e-commerce need to

meet two related challenges. The first is to produce a network effect, so that buyers and sellers find one another often enough and rapidly enough to make a business sustainable. Second, the platform must create trust—in the prod- uct or the service—on both sides of the transaction. Trust is crucial to the

network effect; hence the need for two-way evaluation systems that encourage buy-

ers and sellers to be repeat users of the relevant platform. Small players can then act in large markets, because—over time—they become known quantities. The power of these platforms derives from overcoming informational asymmetries, by dramati- cally increasing the signal density of the market. Indeed, in order to encourage infrequent e-commerce users, innovators and investors are exploring ways to combine the

The world is full of underutilized assets and resources.

evaluation databases of separate, even rival, platforms. Whatever the legal and technical issues that must be overcome, down the road we can surely imagine the kind of data consolidation already practiced internally by retail giants like Amazon or Alibaba. There can, of course, be other incentives to support “good” behavior, such as fines and deposits (for bicycles borrowed for too long or not returned, for example). But punitive measures can easily lead to disputes and inefficiency. By contrast, refining evaluation systems holds far more promise. The urge to exploit underutilized resources should not be confined to material assets. The McKinsey Global Institute recently studied Internet- based approaches to the labor market and the challenge of matching demand for talent and skills with supply. Some sharing models—perhaps most—rely on both labor and other assets:

for example, a person and his or her car, computer, sewing machine, or kitchen (for home-delivered meals). This throwback to the cottage industries that preceded modern production is possible today because the Internet is lowering the costs of dispersion that once compelled the concentration of work in factories and offices.

COMPETITION AT LAST Perhaps inevitably, regulatory issues arise, as ride-hailing service Uber is now discovering from California to Europe. Taxis and limousines are to some extent protected from competition because they need licenses to operate; they are also regulated for customer safety. But then Uber invades their market with a differentiated product, subject largely to its own regulations for vehicles and

drivers. In the process, it threatens to lower the value of licenses just as surely as any official decision to

issue new licenses would. No wonder the taxi drivers of Paris and other French cities—hitherto pro- tected from competition—have protested so vehemently (and, on occasion, violently). An intriguing question is how far the financial sector will embrace the sharing economy. Peer-to-peer lending and crowdfunding already represent new ways of matching borrowers with investors. Clearly, issues relating to liability and insurance will have to be addressed in all sharing-economy mod- els, especially financial ones, but these are hardly insurmountable obstacles.

The Internet-led process of exploit- ing underused resources is both unstoppable and accelerating.

The truth is that the Internet-led process of exploiting underutilized resources—be they physical and financial

The truth is that the Internet-led process of exploiting underutilized resources—be they physical and financial capital or human capital and tal- ent—is both unstoppable and accelerating. The long-term benefits consist not just in efficiency and productivity gains (large enough to show up in macro data), but also in much-needed new jobs requiring a broad range of skills. Indeed, those who fear the job-destroying and job-shifting power of automation should look upon the sharing economy and breathe a bit of a sigh of relief.

the sharing economy and breathe a bit of a sigh of relief. Reprinted by permission of

Reprinted by permission of Project Syndicate (www.project-syndicate. org). © 2015 Project Syndicate Inc. All rights reserved.

org). © 2015 Project Syndicate Inc. All rights reserved. New from the Hoover Institution Press is
org). © 2015 Project Syndicate Inc. All rights reserved. New from the Hoover Institution Press is

New from the Hoover Institution Press is Making Failure Feasible: How Bankruptcy Reform Can End “Too Big to Fail,” edited by Kenneth E. Scott, Thomas H. Jackson, and John B. Taylor. To order, call (800) 888- 4741 or visit www.hooverpress.org.

THE ECONOMY

Fail and Fail Again

Like a bad penny, socialism keeps coming back.

Fail Again Like a bad penny, socialism keeps coming back. By Allan H. Meltzer C ollege

By Allan H. Meltzer

C ollege students’ enthusiasm for Senator Bernie Sanders’s “demo-

cratic socialism” has been one of the most surprising and dispir-

iting events of the presidential campaign. Apparently students

have not learned that historically all socialist systems—demo-

cratic and authoritarian alike—failed to satisfy public demands and were

abandoned after much suffering. Capitalism is the only economic system that

offers freedom, opportunity, and increased living standards to the greatest

numbers of people.

These students also must be unfamiliar with Friedrich Hayek’s The Road to

Serfdom, a brilliant critique of the 1945 British decision to adopt democratic

socialism. Hayek insisted that socialism could not work. If voters chose to

elect a non-socialist government, the socialist economic plan would be dis-

carded. The alternative was an authoritarian government that would prevent

voters from rejecting the plan.

In the seventy years since the British decision, we have seen both out-

comes. Britain kept its democracy. Voters eventually elected Margaret

Thatcher in 1979. She transformed the economy, sold the socialized indus-

tries, strengthened the market system, and enhanced freedom. Per capita

income and productivity rose. Socialists never forgave her for achieving what they failed to achieve. Subsequently, Labour governments returned to office, but they did not restore socialism. Socialism failed. Starting in the middle of the twentieth century, Argentina tried its own version of socialism: Peronism. Despite its rich supply of raw materials and productive agricultural sector, Argentina under Peronism suffered sluggish growth, high inflation, and the loss of freedom. The November 2015 elec- tion ended Peronism. Unhappy voters elected a president who promised to restore the market system, private property, and personal freedom. Social- ism failed.

[Taylor Jones—for the Hoover Digest]

Venezuela is an oil-rich country. The socialist government there has expropriated most industry and replaced professional managers with politi- cal friends who lack both skills and knowledge. Inflation soared and recently rose to more than 100 percent a year. Food became scarce, and poverty increased so much that the government stopped publishing the data. A privately produced estimate shows that the poverty rate is higher today than it was

when the United Socialist Party came to power seventeen years ago. Policies designed to help the poor by redistributing income hurt both rich and poor alike. After two decades of socialism, voters recently elected a large antiso- cialist majority to their congress. Socialism failed. Socialism failed also in Cuba, in the former Soviet Union and its satellites, and in every other place it has been tried. When the Soviet Union collapsed in 1989, its satellites promptly abandoned socialism and joined the market system. They understood from experience what US college students who today cheer socialism have not learned. And they could see that the two systems gave people different incentives. Capitalism encouraged effort and innovation. Socialism did not.

DISTORTED INCENTIVES It is easy to add other examples of socialist failure. Examples of success cannot be found because no socialist country has brought both growth and freedom. Two of the major reasons for failure are the absence of the rule of law and constructive incentives. Instead of firmly held legal rules, social- ism brings government authorities who impose arbitrary political decisions. People adapt by learning to please politicians. Consider China. The Chinese economy stagnated after the communist takeover. So Deng Xiaoping looked around: Hong Kong, Singapore, Taiwan, South Korea, and Japan had grown by allowing capitalist firms to compete in world markets. Living standards rose in those capitalist countries. Deng changed direction, inviting

Socialism and higher taxes impose a noncooperative arrangement: taking from some to give to others.

foreign capitalists to come to China if they brought their best technologies. Growth soared, not by a

miracle but by the workings of market capitalism. Vietnam later followed the path away from socialism. The countryside has many new factories owned by capitalists from Europe and the United States. Proponents of socialism often point to the Scandinavian countries, espe- cially Sweden, as successful examples of socialism. Sweden developed an extensive welfare state but it retained two central capitalist principles:

private ownership of industry and property and a strong commitment to the rule of law. The welfare state and income redistribution appealed to a homogenous population that shared a common culture. Recently Sweden’s

population has become more diverse, and the welfare system, though still extensive, has shrunk.

The facts about socialist failure and long-term capitalist success are not secret. The problems of Argentina and Venezuela are in the news even now. The mystery is why US college students ignore socialist failures to cheer for socialism and Senator

Sanders. The most likely reason is a reaction to two

well-known weaknesses of capitalism: occasional recessions and income inequality. Growth since the 2008–9 recession has been relatively slow and, for earners not in the top income groups, incomes are stagnant. Sanders does not call for old-time socialism—that is, government owner- ship of the means of production. His main proposals demand higher taxes on the highest incomes, free college education, increased Social Security payments, and a higher minimum wage. These are not new ideas, so we know what their consequences are: minimum wages reduce employment; increased Social Security payments go to people who do not work and encourage older workers to retire, so those payments reduce growth. They also widen the income distribution gap because they often go to the relatively well-off older citizens. Sanders’s promises would cost trillions of dollars. His tax proposal would not cover the costs and would lower growth. Higher tax rates for those who earn high incomes reduce savings and the return to investments, so invest- ment would decline. Reducing investment especially harms the middle class because new investment is a principal source of productivity growth, the principal way that middle-class incomes rise. The persistent success of capi- talist economies over the past two centuries in raising incomes and distribut- ing the gains widely over all income classes mainly resulted from investment that increased worker skills and productivity.

Capitalism encourages effort and innovation. Socialism doesn’t.

HOW PROSPERITY REALLY GROWS It works like this: when a company invests in new machines or new computer programs, it must train its workers to use the new tools and systems. Learn- ing on the job increases workers’ skills. They are able to produce more, often at a lower unit cost. Productivity and profits rise. Workers earn more. Fur- ther, capitalism provides the incentive to develop new ideas that raise living standards and improve lives. It is no accident that the computer, the social network, the increased reliability of automobiles, and much more originated

in capitalist countries. Freedom and property rights encourage innovation and progress. To pay higher wages, producers must increase productivity and therefore investment must rise. The socialist program that raises tax rates on savers and businesses is counterproductive because it reduces investment. Produc- tivity growth benefits all classes. Owners of firms have more profit; workers have higher wages; consumers have lower prices. Capitalism produces a cooperative outcome from which everyone gains. Socialism and higher taxes impose the noncooperative arrangement of taking from some to give to oth- ers. As the many examples show, everyone eventually loses. Past administrations and Congresses have promised much more spending than the revenue the economy will generate. Many estimates put the unfund- ed promises for future Social Security and health care at about $90 trillion. Adding free college tuition and other promised benefits pushes the unfunded promises well above $100 trillion. Unless reformed and reduced, the prom- ises cannot be met. Voters should demand that candidates offer a program for managing past promises. Reforming health care should begin by turning Medicare over to the states and lowering federal tax rates. Competition across state lines could lead to cost savings. Competition brings new ways to improve out- comes and reduce waste. To get better policies, we need informed voters and productive incentives. Understanding the benefits and flaws of capitalism is a first step toward politi- cal reform. Our future depends on getting the policies and incentives right.

future depends on getting the policies and incentives right. Reprinted from Defining Ideas

Reprinted from Defining Ideas (www.hoover.org/publications/defining- ideas), a Hoover Institution journal. © 2016 by the Board of Trustees of the Leland Stanford Junior University. All rights reserved.

the Leland Stanford Junior University. All rights reserved. Available from the Hoover Institution Press is Puzzles,
the Leland Stanford Junior University. All rights reserved. Available from the Hoover Institution Press is Puzzles,

Available from the Hoover Institution Press is Puzzles, Paradoxes, Controversies, and the Global Economy, by Charles Wolf Jr. To order, call (800) 888-4741 or visit www.hooverpress.org.

TAXES

The Tax Code, Unchained

We really could transform our nightmarish tax system. Here’s how.

could transform our nightmarish tax system. Here’s how. By John H. Cochrane L eft and right

By John H. Cochrane

L eft and right agree that the US tax code is a mess. The presiden- tial candidates are offering reform plans, and proposals to fix the code regularly surface in Congress. But these plans are, and should be, political documents, designed to attract votes. To pre-

vent today’s ugly bargains from becoming tomorrow’s conventional wisdom, we should more frequently discuss the ideal tax structure. The first goal of taxation is to raise needed government revenue with mini- mum economic damage. That means lower marginal rates—the additional tax people pay for each extra dollar earned—and a broader base of income subject to tax. It also means a massively simpler tax code. In my view, simplification is more important than rates. A simple code would allow people and businesses to spend more time and resources on productive activities and less on attorneys and accountants, or on lobbyists seeking special deals and subsidies. And a simple code is much more clearly fair. Americans now suspect that people with clever lawyers are avoiding

much taxation, which is corrosive to compliance and driving populist outrage across the political spectrum. What would a minimally damaging, simple, fair tax code look like?

» The corporate tax should be eliminated. Every dollar of taxes that a

corporation seems to pay comes from higher prices to its customers, lower wages to its workers, or lower dividends to its shareholders. Of these groups,

wealthy individual shareholders are the least likely to suffer. If taxes eat into profits, investors pay lower prices for less valuable shares, and so earn the same return as before. To the extent that taxes do reduce returns, they also financially hurt nonprofits and your and my pension funds. With no corporate tax, arguments disappear over investment expensing versus depreciation, repatriation of profits, too much tax-deductible debt, R&D deductions, and the vast array of energy deductions and credits.

» The government should tax consumption, not wages, income, or wealth.

When the government taxes savings, investment income, wealth, or inheri- tance, it reduces the incentive to save, invest, and build companies rather than enjoy consumption immediately. Taxes on capital gains discourage people from moving or reallocating capital toward their most productive uses. Recognizing the distortion, the federal government provides a complex web of shelters, including IRAs, Roth IRAs, 527(b), 401(k), health savings accounts, life-insurance exemptions, and the panoply of trusts that wealthy individuals use to shelter their wealth and escape the estate tax. If invest- ment isn’t taxed, these costly complexities can disappear. All the various deductions, credits, and exclusions should be eliminated— even the holy trinity of tax breaks for mortgage interest, charitable dona- tions, and employer-provided health insurance. The extra revenue, over a trillion dollars annually, could finance a large reduction in marginal rates.

This step would also simplify the code and make it fairer. Imagine that Congress proposed to send an annual check to each home- owner. People with high incomes, who buy expensive houses, borrow lots

of money, or refinance often, would get bigger checks than people with low incomes, who buy smaller houses, save up more for down payments, or pay down their mortgages.

There would be rioting

in the streets. Yet that is exactly what the mortgage-interest deduction accomplishes. Similarly, suppose Congress proposed to match private charitable dona- tions. But rich people would get a 40 percent match, middle-class people only 10 percent, and poor people nothing. This is exactly what the charitable deduction accomplishes. Zeroing out deductions, credits, and corporate and investment taxes mat- ters—for permanence, for predictability, and for simplicity. If the corporate

Political debate holds tax reform hostage.

rate is drastically reduced, or if deductions are capped, it seems that the

economic distortions go away. But the thousands of pages of tax code are still in place, the army of lawyers and accountants and lobbyists is still in place, and the next administration will itch to raise the caps and the rate. Why is tax reform

paralyzed? Because political debate mixes the goal of effi-

ciently raising revenue with so many other objectives. Some want more progressivity or more revenue. Others defend subsidies and transfers for specific activities, groups, or busi- nesses. They hold reform hostage. Wise politicians often bundle dissimilar goals to attract a majority. But when bundling leads to paralysis, progress comes by separating the issues. Thus, we should agree to first reform the structure of the tax code, leaving the rates blank. We will then separately debate rates, and the consequent overall revenue and progressivity. Consumption-based taxes can be progressive. A simplified income tax, excluding investment income and allowing a full deduction for savings, could tax high-income earners’ consumption at a higher rate. Low-income people can receive transfers and credits. I think smaller government and less progressivity are wiser. But we can agree on an efficient, simple, and fair tax, and debate revenues and progressivity separately. We should also agree to separate the tax code from the subsidy code. We agree to debate subsidies for mortgage-interest payments, electric cars, and

the like—transparent and on-budget—but separately from tax reform. Negotiating such an agreement will be hard. But the ability to achieve grand bargains is the most important characteristic of great political leaders.

We should also agree to separate the tax code from the subsidy code.

also agree to separate the tax code from the subsidy code. Reprinted by permission of the

Reprinted by permission of the Wall Street Journal. © 2015 Dow Jones & Co. All rights reserved.

Journal. © 2015 Dow Jones & Co. All rights reserved. Available from the Hoover Institution Press
Journal. © 2015 Dow Jones & Co. All rights reserved. Available from the Hoover Institution Press

Available from the Hoover Institution Press is The Flat Tax, updated and revised edition, by Robert E. Hall and Alvin Rabushka. To order, call (800) 888-4741 or visit www.hooverpress.org.

POLITICS

Stuck in the Middle

It’s the independents, not the true believers, who make or break a candidate. And they don’t think all that much of Donald Trump.

And they don’t think all that much of Donald Trump. By David Brady A terrible way

By David Brady

A terrible way to forecast the 2016 presidential contest is to gauge

whose supporters are the loudest. Elections are not decided by

partisans or ideologues.

The arithmetic is pretty simple: 41 percent of voters in the

2012 presidential election described themselves as moderates, and 29 per-

cent as independents. Almost all Republicans (93 percent) and self-described

conservatives (82 percent) voted for Mitt Romney, but that wasn’t enough.

Even if Romney had won every Republican or conservative voter, it still

wouldn’t have been enough.

Because there are roughly 5 percent more Democrats than Republicans,

the GOP needs a solid majority of independents to win a national election. In

2012 Mitt Romney outpolled Barack Obama among independents, 50 percent

to 45 percent. But that didn’t take him across the Electoral College finish line.

It is safe to predict that the proportions that held in 2012 will be about

the same this year. About two-thirds of the voters will not be Republicans.

Thus it is vital to pay early attention to how each candidate is doing among independents. A long, drawn-out primary that forces candidates to make strong appeals to the party’s ideological base can hurt the eventual nominee in November. There are two ways that we can measure how independents see the Republican contenders. On the positive side, we can ask whether voters hold favorable views about

a candidate. Or, on the

negative side, we can ask whether they would rule out voting for a candi-

date. Those White House hopefuls with high favorability ratings among swing voters have good pros- pects for winning a general election. Those whom independents and moder- ates say they would not even consider supporting start with a deep, probably insurmountable, deficit. Since May 2015 the Internet polling organization YouGov has been tracking

a sample of roughly three thousand Americans, who have been asked every six weeks about the presidential race. Although Donald Trump was strong among GOP voters as the primary season began, his ratings among indepen- dents remain the worst of any candidate in the field. In three recent YouGov surveys, Trump was viewed “very unfavorably” by an average of 43 percent of independents. How did he fare among moderate voters? In August, only 17 percent of moderates had a “very favorable” opin-

ion of him; 47 percent had a “very unfavorable” opinion. Those figures have hardly budged since. Ted Cruz didn’t do much better. Only 13 percent to 16 percent of inde- pendents had a very favorable view of him in three recent YouGov surveys; 28 percent to 32 percent

viewed him very unfavor- ably. Among moderates, almost no one (6 percent to 7 percent) felt “very favor-

able” about Cruz; many (28 percent to 35 percent) felt “very unfavorable.” The problem for Trump and Cruz is not that voters don’t know who they are. Trump started out with nearly everyone being able to rate him; only about 5 percent said they didn’t know or didn’t have an opinion. As for Cruz, in June about a quarter of independents did not know enough about him. But

Almost all Republicans and self- described conservatives voted for Mitt Romney in 2012. That wasn’t enough.

The problem for Trump and Cruz is not unfamiliarity. Voters by now are quite aware of them.

over the next six months that figure dropped to 4 percent—and most of those voters had moved into the “unfavorable” camp. Not a good sign. Large proportions of independents and moderates say they have already made up their minds about the Republican field. A full 58 percent of mod- erates and 51 percent of independents told YouGov in December that they “would never vote for” Trump. The figures were a little better for Cruz, but still about half of moderates (47 percent) and almost as many independents (41 percent) said they would never pull the lever for him. How can anyone, under the circumstances, expect either of these two to win a general election? For the GOP to regain the White House, it will have to

do much better, particularly given Hillary Clinton’s better ratings. In Decem- ber, 48 percent of moderates said they would consider voting for Clinton—a full 16 percentage points better than Trump and 22 points better than Cruz. Many of the other Repub-

licans running for the 2016 nomination beat Clinton’s numbers, and unlike Trump,

none started with more than half of swing voters unwilling to consider him. Marco Rubio was the most competitive among independents: 37 percent said in December that they would consider voting for him; only 32 percent ruled him out. All the other GOP candidates were under water. Forty-seven percent of independents said they would never vote for Jeb Bush, and 43 percent said the same about Chris Christie. Moderates are a little harder on the GOP contenders. Rubio again came in first: 35 percent would consider voting for him, and 36 percent wouldn’t. Thirty-five percent of moderates also considered voting for Bush and Chris- tie, but their negatives were much higher: 48 percent ruled out Bush, and 44 percent Christie. The candidate with the lowest negatives among swing voters was John Kasich: only 30 percent of moderates and independents said they would never vote for him. The problem for Kasich is that about a fifth of these vot- ers said they had never heard of him.

About two-thirds of voters will not be Republicans.

PERSUADABLE? Candidates whom independents and moderates say they would not even consider supporting start with a deep, probably insurmount-

able, deficit. [Phil McAuliffe—Polaris]

With a large field, the percentage of people who say they intend to vote for a candidate is less relevant than the percentage who say they will not vote for him. By this measure, the GOP candidates have done very badly. Republicans may want to consider this if they are serious about one of their own becom- ing president.

are serious about one of their own becom- ing president. Reprinted by permission of the Wall

Reprinted by permission of the Wall Street Journal. © 2016 Dow Jones & Co. All rights reserved.

Journal. © 2016 Dow Jones & Co. All rights reserved. Available from the Hoover Institution Press
Journal. © 2016 Dow Jones & Co. All rights reserved. Available from the Hoover Institution Press

Available from the Hoover Institution Press is Across the Great Divide: New Perspectives on the Financial Crisis, edited by Martin Neil Baily and John B. Taylor. To order, call (800) 888-4741 or visit www.hooverpress. org.

POLITICS

What Trump Knows

The GOP may not need the Donald, but it certainly needs his supporters.

not need the Donald, but it certainly needs his supporters. By Jeremy Carl T he French

By Jeremy Carl

T he French writer Charles Péguy once said that “one must always

say what one sees. Above all, which is more difficult, one must

always see what one sees.”

While it may seem odd to begin an analysis of Donald Trump’s

presidential candidacy with a reference to a French intellectual, it is à

propos. With respect to Trump, the greatest challenge facing Republicans is

not to say what they see, but to see what they see. And the failure of the GOP

establishment (and even of many conservatives outside it) to see what they

see—their blindness to the infuriated alienation of their middle- and work-

ing-class voters—explains a great deal about the Trump phenomenon.

Trump, despite all his vulgarity and boorishness, has, along with fellow

anti-establishment candidates such as Ted Cruz and Ben Carson, given these

voters a voice that has not recently been heard. The Beltway GOP believes

its voters are having a temper tantrum. But it would be more accurate to say

that they are responding with understandable anger to a party that has failed

over several election cycles to address their legitimate fears and concerns.

This failure manifests itself not just in support for Trump. Among those expressing a candidate preference in recent polling, 85 percent of likely GOP-presidential-primary voters supported candidates who either had never held office or had come to power during or after the 2010 tea party revolt. This despite the fact that out of seventeen serious candidates who originally began the race for the Republican nomination, eleven did not fit that favored profile. The failure to “see what one sees” has never been more apparent than dur- ing passage of the budget omnibus bill in December, pushed by Speaker Paul Ryan. Its provision on H-2B visas, which allowed for the import of tens of thousands of low-skilled foreign workers to fill jobs for which there are “labor shortages,” was a frontal assault on American work- ers, made for the

[Taylor Jones—for the Hoover Digest]

sake of big business. The tone-deafness of such a move in the midst of the Trump surge was simply breathtaking. Ryan may be many things, but he is not primarily a creature of K Street. In this particular moment, he is just a man who cannot see what he sees. Perhaps he could take a cue from Rich Lowry, the editor of National Review, who recently said, “The next time I hear a Republican strat- egist or a Republican politician say that there are jobs that Americans won’t

do, that person should be shot, he should be hanged, he should be wrapped in a carpet and thrown in the Potomac River.”

ATTENTION MUST BE PAID In many ways, the Trumpenproletariat (to use Jonah Goldberg’s felicitous term) is the inheritor of the constituency of Ross Perot—and, more recently, of Sarah Palin, the last person to inspire similar loathing among GOP donors and consultants. As for the man himself, Trump is a master showman who, beneath all the bluster, is as calculating as any conventional politician. His effusions, even the most offensive of them, seem designed to move the Overton window—the range of politically acceptable discourse on any given issue—in precisely the way that benefits him. Nonetheless, despite Trump’s continued demonstra- tions of staying power, most journalists and GOP strategists have clung to the idea that he will inevitably fade. While this may be true, it is also irrel- evant to the GOP’s victory strategy, for the Trump supporters are exactly whom the GOP needs to bring into its coalition if it wants to win in 2016. It is reasonable to argue that Trump supporters are a constituency in demographic decline and that the way that Trump is pursuing them will hurt the party’s brand, but the GOP cannot win in 2016 without them. That’s not politics: that’s math. Consider the typical Trump voter. According to a recent analysis in the New York Times, Trump’s “very best voters are self-identified Republicans who nonetheless are registered as Democrats.” In the least-educated con- stituencies, Trump takes 37 percent of the GOP vote—compared with just 25 percent of those with the highest levels of education. He also—unsurpris- ing, given his focus on immigration—does very well with white middle- and working-class voters whose economic insecurity derives in no small part from competition with immigrant labor. As NBC election analyst Chuck Todd recently noted, “Republicans don’t win general elections without Donald

Trump’s

To illustrate the necessity of these voters to the Republican coalition, we can look at the results of election-simulation models from RealClearPoli- tics (RCP) and the political-data site FiveThirtyEight. These models allow users to plug in certain turnout and voting assumptions for various demo- graphic groups and predict their effect on the race at the national and state levels. In the RCP simulator, if a GOP candidate can win white voters at Reagan’s 1984 vote-share percentage of 66 percent (that is, bringing in the Reagan

We used to call them Reagan Democrats.”

Democrats) and at George W. Bush’s 2004 turnout levels (67 percent), and if African-American turnout returns to its pre-Obama level and partisan breakdown, the GOP could retake the presidency without winning a single Hispanic, Asian, American Indian, or Arab vote. It’s a staggering result. And if, as will certainly happen, the Republican nominee wins at least some significant number of minority votes, the party will not have to achieve Rea- gan percentages among whites to win. The converse is equally staggering:

assuming that white and black turnout and voting patterns stay the same as in 2012, even if the GOP won an unthinkable 53 percent of the non-black minority vote (“Hispanics” and “Asians and other”), the Democrats would win the presidency. In FiveThirtyEight’s simulation, moving the turnout of non-college-educat- ed whites halfway between their 2012 turnout and the (higher) 2012 turnout of college-educated whites while bumping their party preference a few points toward the GOP—and assuming that black turnout and Democratic voting percentages return to their historic averages—gives the GOP an electoral landslide. Trump intuitively understands this; most of his rivals do not. In short, while the Republican Party almost certainly cannot retake the presidency in 2016 with Trump as its nominee, given his high negatives and poor head-to-head poll numbers against Hillary Clinton, it also cannot win without Trump’s supporters. Any tactic that alienates them is a sure loser, no matter how many “emerging constituency” voters the party rallies under its banner. This is not to deny that the GOP should aggressively try to win all demographic groups, but simply to point out that any strategy, such as amnesty, that does so by alienating or discouraging working- and middle- class white voters will lead to certain defeat. Among all the other candidates, only Ted Cruz—who has gone out of his way to avoid alienating Trump’s supporters, while declining to embrace Trump’s toxic rhetoric—seemed to understand this. (It is no coincidence that Cruz has by far the best data operation of any candidate in the race.) Mean- while, many a Republican Candidate Ahab seems to be haplessly chasing the great Hispanic whale, which, even if miraculously caught, wouldn’t do much to improve the party’s 2016 electoral prospects.

WHO WILL ANSWER HIM? Apart from Trump’s vulgarity, his dissents from GOP policy orthodoxy upset not only K Street lobbyists but also sincere and thoughtful conserva- tive policy analysts and writers. On issues such as eminent domain, trade, and judicial appointments, to name just a few, Trump would certainly be a

disaster for conservatives. But his other dissents merit a more serious look:

Trump’s reluctance to intervene in foreign civil wars (a reluctance that Cruz shares) has much to recommend it when compared with the overreach of some of the GOP’s nation-building superhawks. And his refusal to frontally assault Medicare and Social Security shows more political sense than does the major-surgery crowd—it is a stance designed to win the “Sam’s Club Republicans” and Reagan Democrats the GOP needs in its camp. Strong establishments take insurgencies’ best issues and co-opt them. Weak and stupid establishments don’t. Right now, the GOP establishment is weak and stupid. Rather than attempting to present a forward-looking agenda that would appeal to a large number of Trump supporters and draw them into the Republican coalition, the establishment is seemingly working overtime to alienate them. Rather than pursuing an immigration policy that would protect vulnerable American workers and bring in skilled immigrants while disavowing Trump’s divisive tone and his impractical and overbroad prescriptions, it is promoting a quasi-open-borders policy that will perhaps keep maid service cheap for GOP donors—while electing a generation of Obamas. Rather than thinking through what a strong twenty-first-century Reaganite American patriotism would look like, too many candidates have embraced a hyper-militaristic nation-building strategy of which GOP voters have wearied, and which a national electorate decisively rejected in 2008 and 2012. For all his failings, his vulgarities, and his hypocrisy, Donald Trump is a man who sees what he sees—and says so. For the sake of the future of the Grand Old Party, let us hope that, with a more optimistic tone and a better set of policy prescriptions, more of us do likewise.

better set of policy prescriptions, more of us do likewise. Reprinted by permission of National Review

Reprinted by permission of National Review. © 2016 National Review, Inc. All rights reserved.

Review . © 2016 National Review, Inc. All rights reserved. Available from the Hoover Institution Press
Review . © 2016 National Review, Inc. All rights reserved. Available from the Hoover Institution Press

Available from the Hoover Institution Press is The New Deal and Modern American Conservatism: A Defining Rivalry, by Gordon Lloyd and David Davenport. To order, call (800) 888-4741 or visit www.hooverpress.org.

HEALTH CARE

Better Ideas, Stat

Just as predicted, patients are facing higher costs, fewer choices, and swelling bureaucracy. ObamaCare needs urgent care.

and swelling bureaucracy. ObamaCare needs urgent care. By Scott W. Atlas Y ears after the initial

By Scott W. Atlas

Y ears after the initial rollout of the Afford-

able Care Act (ACA), the American

people, the health care industry, and

the courts still struggle to navigate the

law. Its heavy regulations and new tax burdens have

generated numerous consequences, many of which are

harmful to patients and families.

Although supporters point to the millions of newly

insured under the law, the truth is that as many as

90 percent of those are estimated to have enrolled

into Medicaid, second-class coverage that, accord-

ing to a 2014 Merritt Hawkins report, most doctors

do not even accept. Even worse, the government’s

Department of Health and Human Services reported

in December 2014 that 51 percent of doctors on

official Medicaid state lists are not available to new

beneficiaries.

Key points

» Consolida-

tions and merg- ers, which have raised the cost of health care, are rapidly increas- ing.

» New taxes and

caps on insur- ance prices will cause private insurers to fail.

» Reforms can

strengthen con-

sumer purchas-

ing power.

Meanwhile, millions of other families have lost their previous private insur-

ance directly because of ACA decrees. For new private coverage, insurance

premiums have continued to skyrocket. Most alarming, the premiums of what were low-cost, high-deductible plans are accelerating faster than any other coverage after the passage of the ACA, directly countering the promise of more affordability when the bill was passed. Choice of doctors and hospitals through the government’s exchange-based coverage has also narrowed compared with pre-ACA individual market plans. Still unbeknownst to most consumers, though, a more insidious and even more damaging threat to health care for Americans is afoot. Under the ACA’s heightened regulatory environment and anticompetitive dictates, we have witnessed a striking acceleration of consolidation within virtually all the important sectors of health care. Hospital mergers are on a blistering pace, continuing the striking trend of increasing consolidation related to the start of the ACA, as reported in the New England Journal of Medicine, when they immediately shot up by almost 50 percent from 2009. In the five years leading up to the passage of the ACA, hospital mergers averaged about fifty-six per year. Over the five years since ACA implementation, that number nearly doubled, according to Irving Levin Associates research, with last year’s pace the highest in fifteen years.

MERGERS BOOST PRICES The last period of hospital mergers in the late 1990s increased medical care prices substantially, at times over 20 percent, according to M. Gaynor and R. Town’s report for the Robert Wood Johnson Foundation. ACA regulations on insurers and on physician practices are also driving historic merger activity among doctor practices. This also raises prices significantly for patients. J. Robinson and K. Miller in the Journal of the American Medical Association reported that when hospitals owned doctor groups, per-patient expenditures

were 10 to 20 percent higher, or an extra $1,200 to $1,700 per patient per year. C. Capps of Northwestern

Efforts should center on expanding affordable private coverage and removing the perverse incentives of the tax code.

University’s Institute for Policy Research in 2015 found that physi- cian prices increased

on average 14 percent for medical groups acquired by hospitals; specialist-services prices increased 34 percent after such groups joined a health system. As a result of the anticompetitive ACA edicts, including requiring uniform- ly bloated benefit packages, limits on deductibles, and intrusive subsidies dis- torting market forces, health insurers have been engaged in a merger frenzy.

Already among the nation’s five largest insurers, Aetna’s takeover of Humana last year and then the proposed Anthem–Cigna merger would harm patients. According to the AMA’s analysis, these two mergers would diminish competi- tion in up to one hundred and fifty-four metropolitan areas in twenty-three states. This consolidation not only reduces consumer choices for insurance but inevitably leads to serious restrictions of access to medical care. The latest alarm sounded when UnitedHealth, the nation’s largest insurer, announced that it might entirely opt out of ObamaCare’s insurance exchang-

es. It forecast a $275 million loss on its exchange insurance business in 2016 and traces the loss to the ACA reforms. But the failure of

private insurers was fully predictable. It should be no surprise that younger, health-

ier consumers say no to overpriced coverage that subsidizes premiums for everyone else and that contains bloated coverage of no value to them. Indeed, it was predicted from the start. And it was fully predictable that people would wait to buy insur- ance just before they incurred large medical expenses, since the law requires guaranteed issue of insurance at any time, without consequence. Of course, why would those individuals keep their insurance after their needed care was received? They could just re-enroll later, if and when they needed more care. Coupled with new taxes and caps on insurance prices, the eventual failure

of insurers on the hyper-regulated ObamaCare exchanges was inevitable. Consolidation within each of these sectors can be explained by the shared need to acquire sufficient size to deal with the hyper-regulatory environ- ment of the ObamaCare era. Such significant consolidation minimizes competition and limits the power of consumers. Prices increase and patient choices decrease. Ultimately, a heavily consolidated industry is also an easier target for even further government control, which could soon be felt via the ACA’s independent payment advisory board, a group of appointed bureaucrats assigned unprecedented power to cap prices that will assuredly lead to rationed care.

The premiums of what were low-cost, high-deductible plans are accelerating faster than any other coverage.

WHAT PATIENTS WANT As the ACA proceeds to erode the positives of US health care, expanding government’s role as insurer while creating even worse access and higher prices for patients, the need for a fundamentally different approach is urgent.

It is clear that the Democratic solution to unfolding problems will be more government involvement, including new caps on prices of drugs and services, and likely a push toward a bigger role for government insurance. That would be the wrong approach. The essence of ensuring affordable, high-quality health care rests on restoring the appropriate incentives for consumers, insurers, companies, and health care providers. The effort to modernize US health care should center on expanding affordable private coverage, especially high-deductible insurance and health savings accounts, and removing the perverse incentives of the tax code that have exacerbated spiraling costs and removed value-based decisions from health care. These reforms expand the purchasing power of consumers, the necessary basis for enhancing market competition, which will ultimately lead to better value and more consumer choices. And voters overwhelmingly sup- port more free-market competition over more government regulation, by 62 percent to 26 percent in a recent Rasmussen survey. An even greater major- ity, 85 percent to 7 percent, said individuals should have the right to choose between two kinds of health plan: plans with higher deductibles and lower premiums, and plans with lower deductibles and higher premiums. Govern- ment leaders have a responsibility to reform our health system to reflect these important principles held by the American people.

these important principles held by the American people. Reprinted by permission of National Review . ©

Reprinted by permission of National Review. © 2015 National Review, Inc. All rights reserved.

Review . © 2015 National Review, Inc. All rights reserved. Available from the Hoover Institution Press
Review . © 2015 National Review, Inc. All rights reserved. Available from the Hoover Institution Press

Available from the Hoover Institution Press is In Excellent Health: Setting the Record Straight on America’s Health Care, by Scott W. Atlas. To order, call (800) 888-4741 or visit www.hooverpress.org.

HEALTH CARE

ObamaCare Gets a Checkup

It’s neither dying nor thriving—but it does need some bitter medicine.

dying nor thriving—but it does need some bitter medicine. By Daniel P. Kessler M ore than

By Daniel P. Kessler

M ore than five years ago, the Affordable Care Act—what

big declared goals: to reduce the number of Americans

most of us call ObamaCare—was passed into law with two

who lack health insurance and to cut health spending that

doesn’t give good value for money. Has the law been a success? The country

is sharply divided. The most recent Gallup and Kaiser Family Foundation

tracking polls show public opinion almost evenly split, with Democrats large-

ly supporting the law and Republicans opposing it. This partisan divide in

public opinion has changed little since 2009, when President Barack Obama

won a narrow victory in Congress for his signature domestic legislation.

What is different now is that we have a few years of direct experience of

ObamaCare. The most recent research on the law’s real consequences is

more ambiguous than either side usually lets on.

ObamaCare has indeed reduced the number of Americans without insur-

ance. According to a recent study in the journal Health Affairs, around ten

million previously uninsured people gained coverage in 2014—when most of

the key provisions took effect—through expansions of Medicaid or the new

“marketplaces” (subsidized insurance exchanges) created under ObamaCare. The law thus reduced the number of uninsured people in the country from

around forty-five million (or 14 percent of the population) to thirty-five million (or 11 percent). Was this reduction in the number of uninsured worth the cost? A recent National Bureau of Economic Research study estimated the value of Med- icaid to its recipients at between 20 cents and 40 cents per dollar of expen- diture, with the majority of the value going to health care providers like doctors and hospitals. By

What is sorely needed is an hon- est discussion of the fundamental health care trade-offs we still face.

comparison, the earned income tax credit—a cash transfer program designed to enhance the incomes of

the working poor—delivers around 90 cents of value to its recipients per dollar of expenditure. Given that more than half of ObamaCare’s reduction in the numbers of the unin- sured has been from its expansion of Medicaid, this makes the law look more like welfare for the medical-industrial complex than support for the needy.

CHEAPER BUT NOT BETTER The root of Medicaid’s weakness is the program’s minimal effect on health. In 2008, the state of Oregon initiated an expansion of its Medicaid program, drawing names from a waiting list by lottery. The lottery created a rare opportunity to study the effects of Medicaid with the rigor of a randomized, controlled trial. An evaluation in the New England Journal of Medicine found that after two years, the Oregon Medicaid expansion had had no significant effects on beneficiaries’ physical health, though it did reduce their self- reported financial strain and depression. The other key goal of ObamaCare was to bend the cost curve downward. From 2010 to 2012, the period right after the law’s passage, overall health spending growth slowed significantly. Supporters attributed the slowdown to the law, claiming it was working as intended. Other analysts attributed the slowdown to the recession and other factors. Who was right? It is hard to say, given the many things that were happen- ing in health policy and the economy as a whole. But the most enthusiastic supporters of ObamaCare seem to have jumped the gun. A recent study in Health Affairs concluded that health care spending has started to rebound from its recent slow rate—although not to the rates seen in the prior decade—along with the improving economy.

Still, there are signs that an obscure aspect of ObamaCare is having an effect. The “Cadillac tax” on high-cost plans would effectively cap the exclusion of employer-sponsored health insurance from taxation. Health economists agree that the exclusion has encouraged employers and workers to choose plans with weak incentives to control low-value spending. (By giv- ing health spending preferential tax treatment, the exclusion makes health services seem cheaper than everything else.) Although it isn’t slated to go into effect until 2018, the Cadillac tax has already induced some employers to improve their plans’ incentives in anticipation.

[Taylor Jones—for the Hoover Digest]
[Taylor Jones—for the Hoover Digest]

ObamaCare also may have laid a foundation for future reform. To appeal

to price-sensitive prospective enrollees, the insurance offered in the mar- ketplaces has turned out to be significantly more cost-conscious than its employer-sponsored cous-

Giving people insurance might be the right thing to do, but it isn’t budget- neutral and can’t be.

ins. With high deductibles and networks of doctors and hospitals chosen for their willingness to offer a good deal, marketplace insurance

offers a possible blueprint for a path forward. ObamaCare, in short, is neither the triumph touted by supporters nor the disaster trumpeted by opponents. What is needed now is an honest discus- sion of the fundamental trade-offs we still face: between cost and coverage, incentives and generosity, markets and government.

IN NEED OF A VISION Unfortunately, the way ObamaCare was promoted to the American people has made this discussion difficult. The law was oversold in several ways. Premiums haven’t gone down. Many people who liked their old health plans haven’t been able to keep them. The health benefits from expanding coverage have been elusive. And the macroeconomic consequences of the law have been negative: according to the Congressional Budget Office, the disin- centives created by ObamaCare—subsidies are phased out as beneficiaries’ incomes rise—will reduce the number of hours worked by 1.5–2 percent from 2017 to 2024. The misleading way in which ObamaCare was promoted culminated in the claim that it would pay for itself. Giving people insurance might be the right thing to do, but it isn’t

The law looks more like welfare for the medical-industrial complex than support for the needy.

budget-neutral. Although it might have been good poli- tics, exaggerating the likely benefits of health reform

has reduced the scope for good-faith efforts to compromise on points where reasonable people might disagree. We see this on both sides of the aisle. Some of the law’s opponents need to acknowledge that for many Americans, modern health care is unafford- able without significant public assistance. Simply criticizing Medicaid is

not enough. We need to envision alternatives to conventional insurance that deliver a basic basket of health services at a cost we can afford. Both sides also need to recognize that the changes in incentives necessary to bend the cost curve will be highly unwelcome to many Americans. Markets for health care are the perfect example of the old saying that “every dollar of waste is someone’s income.” Changes in incentives will be resisted by a broad coalition that includes not only health care providers but also other groups with an ideological or financial interest in the status quo, such as labor unions. Who will have the political courage and tenacity to confront the difficult policy problems we still face?

to confront the difficult policy problems we still face? Reprinted by permission of the Wall Street

Reprinted by permission of the Wall Street Journal. © 2015 Dow Jones & Co. All rights reserved.

Journal . © 2015 Dow Jones & Co. All rights reserved. Available from the Hoover Institution
Journal . © 2015 Dow Jones & Co. All rights reserved. Available from the Hoover Institution

Available from the Hoover Institution Press is Entitlement Spending: Our Coming Fiscal Tsunami, by David Koitz. To order, call (800) 888-4741 or visit www.hooverpress.org.

HEALTH CARE

Cadillac in the Ditch

The tax on high-cost insurance plans was running rough from the start. Here’s what that clunker has taught us.

from the start. Here’s what that clunker has taught us. By Charles Blahous T he omnibus

By Charles Blahous

T he omnibus spending bill passed by Congress and signed into

law by President Obama late last year delays the onset of the

Affordable Care Act’s so-called “Cadillac-plan tax” for two years.

The law also weakens the effect of the tax (assuming it’s ever

collected) by making it deductible, as noted by my Mercatus Center col-

league Brian Blase. The delay may simply be a first instance, as former Office

of Management and Budget director Peter Orszag observes, of a “rolling

permanent deferral” of the Cadillac-plan tax.

The Cadillac-plan tax is (was) a 40 percent excise tax on the amount by

which health insurance plan costs exceeded annual thresholds of $10,200

(for individuals) or $27,500 (for families), starting in 2018. These thresholds

were indexed to grow more slowly than historical health cost growth, so

that over time more and more plans would be subject to the tax, producing

escalating federal revenues necessary to help fund the ambitious health

entitlement expansion of the Affordable Care Act (ACA). A key policy

intent of the tax was to offset the damaging effects of the long-standing

federal tax preference for employer-sponsored insurance, one of which is to drive excess health cost inflation. The tax has long been on shaky political ground and the new law consider-

ably reduces the chances of its ever taking effect. It’s worth understanding what caused the unraveling of the tax, and what lessons can be drawn. Here are five.

» Save before you spend. After the ACA was enacted, I expressed

concern that “the legislation employs comparatively uncertain cost-saving measures as budgetary offsets for comparatively certain cost-increasing provisions.” My obser-

vation was hardly origi- nal nor was the concern applicable only to the

ACA. Legislators have a long history of enacting laws spending certain funds right away, purport- edly financed by less-certain savings to take effect later. This rarely works as advertised. Regardless of one’s view of whether the ACA’s particular savings mea- sures were ever likely to pan out, my other observation from that paper remains a broadly applicable legislative principle: “The proceeds of such

cost savings cannot safely be spent until they have verifiably accrued.” This principle was not heeded with the ACA.

» Don’t assume a favorable future political alignment. The ACA was

passed during a rare historical moment in which Democrats held the White House, the House of Representatives, and a wide majority in the Senate. The long-term fate of the ACA’s individual provisions was always likely to be a function of how a differently constituted future Congress might view them. As Orszag has noted, even congressional Democratic support for the tax collapsed after Congress switched hands.

This writing was on the wall for the Cadillac-plan tax as soon as it was enacted. I noted in 2012 that “it did not survive its initial

clash with political pressures; the form of

the tax enacted with the ACA was almost simultaneously amended in accompanying reconciliation legislation, changes that both postponed the effective date and increased the thresholds below which the tax would not apply.” Thus, “to assume that the tax will always be applied to the letter of current law is to assume that political

Policy makers ended up with a new tax that had few friends.

Candidates should be frank with voters about what needs to be done.

long-standing tax preference for employer-provided insurance.” The most direct and transparent way to address that problem would have been to scale back that tax preference. But instead

[Taylor Jones—for the Hoover Digest]

ent debate over scaling back the tax preference for employer-spon- sored insurance would undoubtedly have been

contentious, but those who supported such a provision would thereafter have ed in the objective. But instead of reflecting a growing on the necessity of attacking tax preferences, we ende that had few friends. Because of this opacity, support a small community of experts who had bought into the powerful constituencies on both sides of the aisle rose » Partisan victories can be short-lived. Politically like the Cadillac-plan tax are much easier to defe bipartisan support. If on the other hand legisl the strong and unified objections of one of t it’s often only a matter of time before tha tunity to repeal strongly disliked parts o plan tax (and other parts of the ACA) b political staying power would likely ha Contrast the ACA dynamic with, for legislation such as the 1983 Social Sec reforms were extremely difficult to en were, negotiators on opposite sides w and thus disinclined to revisit the legi tough explicit measures like taxing S and raising the retirement age were t » Don’t campaign against necessary p ACA was enacted after presidential candidate John successfully attacked for his proposal for to scale back for employer-sponsored insurance—even though exper

The fate of individu sions was always li how a differently co Congress might vie

understood his basic idea to be a necessary policy step. When this happens, elected figures find themselves with a bad choice between breaking their word and furthering large policy problems. A core reason we now lack an effective way to constrain the drivers of excess health cost inflation is that before the ACA took effect, policy makers failed to tell voters what such con- straint might involve. While it’s inevitable that candidates will want to pres- ent their platforms in the most salable light, they would do well to campaign in a way consistent with how they need to govern. And voters, for their part, should be scrutinizing candidates for whether their promises can realistically be upheld.

for whether their promises can realistically be upheld. Reprinted by permission of e21 . © 2015

Reprinted by permission of e21 . © 2015 Economic Policies for the 21st Cen- tury. All rights reserved.

Policies for the 21st Cen- tury. All rights reserved. Available from the Hoover Institution Press is
Policies for the 21st Cen- tury. All rights reserved. Available from the Hoover Institution Press is

Available from the Hoover Institution Press is Pension Wise: Confronting Employer Pension Underfunding— And Sparing Taxpayers the Next Bailout, by Charles Blahous. To order, call (800) 888-4741 or visit www. hooverpress.org.

HEALTH CARE

Healthy Budget, Healthy Americans

Six ways to put consumers, and not bureaucrats, in control.

ways to put consumers , and not bureaucrats, in control. By Lanhee J. Chen and James

By Lanhee J. Chen and James C. Capretta

W hile America’s health care system has long needed reform,

President Obama unfortunately made many parts of it

worse. His Affordable Care Act is based on more federal

spending, regulation, and coercion—and Americans are

now experiencing the many unhappy consequences.

These include millions forced out of their previous insurance plans and

into new ones with higher costs and more restricted access to physicians;

premiums increasing by double digits, even for the lowest-price silver plans

offered in states using the HealthCare.gov website; and insurance companies

losing billions of dollars because many healthy, middle-class families want no

part of ObamaCare. And those not-for-profit “co-ops” established by the law?

More than half have failed.

Lanhee J. Chen is the David and Diane Steffy Research Fellow at the Hoover Institution, a member of Hoover’s Conte Initiative on Immigration Reform, and a lecturer in public policy at Stanford University. James C. Capretta is a senior fellow at the Ethics and Public Policy Center and a visiting fellow at the American Enterprise Institute.

Congress passed a bill January 6 gutting the Affordable Care Act; the pres-

ident vetoed it two days later. Change will have to wait until the next presi- dent and Congress. But repealing the Affordable Care Act is not enough. The country has been drifting toward full federal control of health care for decades. What’s

The country has been drifting toward full federal control of health care for decades.

needed is a credible plan to reorient fed- eral policy across the board toward markets

and the preferences of consumers and patients, and away from one-size-fits- all bureaucratic micromanagement. We have worked with eight colleagues to develop such a plan. It has these important features:

» Retaining employer coverage. About 155 million Americans get health

insurance through their place of work. They should be left alone. The only change would be a new upper limit on the tax preference for employer-paid pre- miums, set so that only the most expensive 25 percent of plans would exceed it. Employers and workers alike would have an incentive to cut health spending and keep premiums below the limit to avoid triggering exposure to taxation.

This upper limit would replace the unfair and poorly designed “Cadillac” tax of ObamaCare that imposes a uniform 40 percent tax on high health-insurance premiums, with no adjustment based on the wages of workers affected.

» Tax credits. Individuals without employer coverage would get an age-

adjusted tax credit to help purchase health insurance. These credits would be more flexible than ObamaCare’s premium subsidies, because there would be no strings attached, that is, none of the current federal law’s mandated benefits. Consumers could pick any state-approved plan that met their needs

and those of their family. Together with employer coverage, these tax credits would ensure that all have access to secure insurance.

» Continuous coverage protection. Instead of forcing people to buy

government-approved insurance, we propose to give people a strong incen-

tive to stay insured: as long as they remain continuously insured, they cannot be charged higher premiums, have their benefits restricted, or be denied enrollment in a plan based on their health status.

» Medicaid reform. This program would be split into two parts, one for

able-bodied adults and their children, the other for the disabled and elderly. The federal government would give states fixed, per-person payments based on historical spending patterns for these distinct populations. States could manage the program without federal interference. Able-bodied adults and

their children could combine Medicaid with the (refundable) federal tax credit to enroll in a private insurance option.

» Medicare reform. For new retirees, Medicare would provide a fixed level

of assistance—derived from bids submitted by competing insurance carri- ers and the calculated cost of staying in traditional Medicare—which seniors

would use to purchase a health plan of their choosing. Seniors could enroll in the traditional program, which would be modernized with a uniform deduct- ible for hospital and physician services and more discretion for administra- tors to make distinctions among providers based on quality. Current retirees may choose the reformed program, or to remain in traditional Medicare with no substantial changes in their costs.

» Expanded health savings accounts. HSAs today are used in conjunc-

tion with high-deductible insurance. They provide protection against high- cost medical events without forcing people to pay premiums for plans that cover routine care. If the owners of HSAs do not spend all of the annual contributions, the money rolls over—so they can build capital for the future. Under our plan, all Americans could open and make annual contributions to an HSA, even when they are enrolled in plans with lower deductibles. An evaluation of our plan by the nonpartisan Center for Health and Econo- my showed that it would cover as many people with insurance as ObamaCare has, but without the same massive expense and high taxes. The plan would also dramatically improve the nation’s budget outlook by putting both Medic- aid and Medicare on a solid fiscal footing. The Affordable Care Act was enacted in 2010 in part because Republicans

failed to fix health care when they had the chance. They shouldn’t make that mistake again. This election year gives them an opportunity to demonstrate they have concrete plans to reverse ObamaCare and implement reforms based on consumer, not government, control.

reforms based on consumer, not government, control. Reprinted by permission of the Wall Street Journal .

Reprinted by permission of the Wall Street Journal. © 2016 Dow Jones & Co. All rights reserved.

Journal . © 2016 Dow Jones & Co. All rights reserved. Available from the Hoover Institution
Journal . © 2016 Dow Jones & Co. All rights reserved. Available from the Hoover Institution

Available from the Hoover Institution Press is Healthy, Wealthy, and Wise: Five Steps to a Better Health Care System, second edition, by John F. Cogan, R. Glenn Hubbard, and Daniel P. Kessler. To order, call (800) 888-4741 or visit www.hooverpress.org.

HEALTH CARE

Perils of “Consent”

What do we owe a patient whose own body has led to medical breakthroughs? Trying to figure it out could tie up progress, making everyone worse off.

it out could tie up progress, making everyone worse off. By Richard A. Epstein R ecently,

By Richard A. Epstein

R ecently, Rebecca Skloot, author of the bestseller The Immortal

Life of Henrietta Lacks, wrote an impassioned plea in the New

York Times, urging people to support sweeping revisions to the

Federal Policy for the Protection of Human Subjects, which is

now under active review in the Department of Health and Human Services.

These revisions are directed to the rules that now govern the collection and

use of “clinical biospecimens,” which include all the organic substances rou-

tinely removed from the human body as a consequence of surgery, childbirth,

or even normal testing. At first appearance, these materials look like waste

products best disposed of in a safe and sanitary manner. But in fact, they are

invaluable in medical research to treat cancer and a host of other genetic and

life-threatening diseases.

Without question, the most dramatic illustration of this process involves

the so-called HeLa cell line derived from the cancer cells of Henrietta Lacks,

an African-American tobacco farmer who died of cancer in 1951 at the age

of thirty-one. Skloot’s book tells her story. When Lacks was treated at Johns

Hopkins Medical Center, her cancer cells were given to the pathologist

Richard A. Epstein is the Peter and Kirsten Bedford Senior Fellow at the Hoover Institution and a member of the steering committee for Hoover’s Working Group on Intellectual Property, Innovation, and Prosperity. He is also the Laurence A. Tisch Professor of Law at New York University Law School and a senior lecturer at the University of Chicago.

George Gey. Gey found to his amazement that unlike other cancer cells, Lacks’s cells were immortal in that they could be cultured and reproduced indefinitely. Within three years of her death, her cell line had helped develop the Salk polio vaccine. In the sixty-six years since Lacks died, about twenty tons of her cell line have been reproduced and distributed worldwide for medical research. But just what did Lacks and her family get out of the arrangement? At the time, nothing. In accordance with then-standard practice, the Johns Hopkins researchers collected and used her cells without her knowledge or consent. In more recent years, she has received countless public honors for her contri- butions to medical research. But at the same time, the many researchers who worked with her cell line collected substantial royalties from the patented cells and the devices developed with their assistance. So should Lacks and her family have received some fraction of that wealth?

CELLULAR TREASURES

The issue was addressed in Moore v. The Regents of the University of California (1990), in which the California Supreme Court held that John Moore did not have property rights to his distinctive cell line. Moore had hairy-cell leuke- mia, and that resulted in

the removal of his “grossly enlarged” and diseased spleen, which proved to be a veritable treasure

trove for medical research. Moore’s case did not involve the mere use of cells drawn from his body after his death. Instead, following his initial surgery, the doctors consistently lied to Moore about the supposed medical purposes for which they collected his various body cells and fluids, which they then used to create a patented cell line of immense value. Faced with these novel facts, the California Supreme Court issued a split decision. It held that the doctors who took various bodily materials from Moore had not converted his body to their own use, on the odd ground that he did not own the cells after they left his body. Why they could not assert ownership of them before surgery was left unexplained. But, as a way to offset that decision, the court held that the doctors did breach their duty of informed consent to him. However, this did not allow Moore to recover any royalties from the doctors or any other downstream parties who benefited from using his cell line.

The seeming waste products are invaluable in research on cancer and other life-threatening diseases.

As Skloot and others insist, there is something deeply odd about letting doctors and hospitals profit from cell lines without paying a dime to the patient from whose body they were obtained, and without obtaining the patient’s permission. But what’s the best way to correct this odd state of affairs? To people like Skloot, the answer is that all medical researchers should be required to obtain “informed consent” for any research done with a biospecimen, “even if,” as the government proposal puts it, “the investigator is not being given information that would enable him or her to identify whose biospecimen it is.” Such consent would not need to be obtained for each specific research use of the biospecimen, but rather could be obtained using a “broad” con- sent form in which a person would give permission for future unspecified research uses. Skloot claims optimistically that these people will probably say yes, so that research could go on largely as before—but she thinks, as a matter of fundamental fairness, that they should be asked.

A LABYRINTH OF CONSENT There are, however, some powerful objections against the use of the informed-consent standard. The consent requirement would result in a vast increase in administrative costs. At a minimum, the new standard would ush- er in a huge expansion in the number of forms that have to first be explained and then filled out by every patient whose bodily materials are needed for medical research. This means obtaining consent from many thousands of patients, as large-scale genomic research is so common. Informed consent would severely slow down such research. We already have extensive experience with the nightmarish consent requirements under HIPAA (the Health Insurance Portability and Account- ability Act of 1996), which created a massive government apparatus for deciding whose consent is needed, and when, for the myriad uses of routine medical records. The privacy interest with respect to bodily fluids and liquids, especially after death, is far weaker. Why impose an apparatus that costs billions to implement when there is no real evidence that the current

MEDICAL IMMORTALITY: Rebecca Skloot, author of The Immortal Life of Henrietta Lacks, has spoken in support of changes to the way researchers collect and use biospecimens. Henrietta Lacks, subject of Skloot’s bestsell- ing book, was a cervical cancer patient whose cells have been tremendously useful to medical research since her death in 1951. [Mark SchierbeckerCreative

Commons]

system is broken? After all, the use of the waste products does not affect the patient’s health, well-being, or treatment, even as it facilitates its ground- breaking research. A larger issue arises if an individual chooses not to sign a blanket consent form for the use of his or her biospecimens. Can the patient decide to not sign the broad form, and limit the use of his or her biospecimens only to some but not all purposes? If consent is originally given, can it thereafter be revoked, perhaps on the ground that background disclosures were not suf- ficiently precise? Can family members intervene and claim that with minors and unconscious people, the patient is not competent to give consent? Is a hospital or physician entitled to refuse to treat a patient who does not acqui- esce? May they impose extra charges on them to offset their research losses from not being able to use their biospecimens? This complex game is not worth playing. The simple answer to all of these endless complications in the routine cases is this: each patient coming into the hospital gets the benefit of the accumulated knowledge acquired from previous patients whose biospecimens have been put to good medical use. It is not too much to insist that patients in routine cases be required to con- tinue to participate in the virtuous circle. There may not be consent, but just compensation is supplied in-kind to all patients who benefit from the medical advances made possible by the research using biospecimens. At the same time, this generalized form of compensation does not work well with the unique cases like Lacks or Moore. The magnitude of their individual contributions should be compensated somehow. But nonetheless, it does not follow, as Skloot insists, that individual consent for using these biospecimens should be required. With transactions this large, it seems highly unlikely that most patients who have been informed of the benefits that can be derived from their biospecimens would happily sign them over to a research hospital free of charge. Rather, they or their guardians would be well advised to hold out for remuneration as a condition of allowing any of their biospecimens to be used in medical research. Those patients could receive large windfalls without bearing any of the economic and develop- ment-related risks that the research hospitals bear.

CONSIDER PATENT LAW Outside the medical area, the law has long been reluctant to allow any party to exert this form of monopoly power without legal constraint. Starting with the writings of the British jurist Sir Matthew Hale in the late seventeenth century, the common law has held that common carriers with a monopoly

REMEMBERED: A historical marker along a highway near Clover, Virginia, commemorates the life of Henrietta

REMEMBERED: A historical marker along a highway near Clover, Virginia, commemorates the life of Henrietta Lacks. The woman whose cancerous cells became the HeLa cell line has been honored posthumously for her con- tributions to medical research. [EmwCreative Commons]

business were “affected with the public interest,” and thus not free to charge whatever they choose for their services. Rather, they must restrict them- selves to reasonable and nondiscriminatory rates, commonly called RAND. The system did not require public utilities to supply their services for free, but it allowed them a risk-adjusted competitive return on their initial invest- ments while denying them a monopoly profit. In modern intellectual-property law, RAND rules have been carried over to standard-essential patents, which allow competing companies to share information over an integrated network system. Choosing the right measure of compensation for these patents is never easy, but it is not impossible—and this inquiry may well be easier for biospecimens, which should be made available for medical research for a reasonable royalty interest on the basic research patents, perhaps fixed as a matter of law. Others may prefer to use compulsory arbitration to resolve disagreements over royalty rates. But

critically, both these proposals explicitly reject Skloot’s consent model, which poses a threat to the entire medical research enterprise. The problem becomes even more acute when, as with Moore but not Lacks, a live patient is asked to contribute further biospecimens to medi- cal research. Usually, the

No one should think that individual consent isn’t needed for ordinary medical treatment.

requested intrusions in this case are no greater than those in which the specimens are collected for

normal diagnostic purposes, so it is a close question as to whether these transactions should be done solely on a voluntary basis, given the holdout risk. Alternatively, it is possible to invoke the same compulsory purchase regime that works best for normal waste products. For the moment, it’s best to keep in place whatever regime is now used. My fear, however, is that any movement toward demanding consent for using biospecimens will undermine the willingness of ordinary patients to partici- pate in medical research. Of course, everyone should be uneasy with forced exchanges, and no one should think that individual consent is not needed for ordinary medical treatment. But when transaction costs get high, and monopoly power becomes a serious risk, the model of just compensation in forced exchanges should prevail. It may seem odd to apply standard indus- trial organization models to biomedical research. But the parallel is precise. The many doctors and hospitals that have vehemently resisted the new

proposals Skloot endorses may not understand the finer points of monopoly power and rate regulation. But they are right to reject unwise proposals to demand broad consent for the use of biospecimens in medical research.

consent for the use of biospecimens in medical research. Reprinted from Defining Ideas

Reprinted from Defining Ideas (www.hoover.org/publications/defining- ideas), a Hoover Institution journal. © 2016 by the Board of Trustees of the Leland Stanford Junior University. All rights reserved.

the Leland Stanford Junior University. All rights reserved. Available from the Hoover Institution Press is Issues
the Leland Stanford Junior University. All rights reserved. Available from the Hoover Institution Press is Issues

Available from the Hoover Institution Press is Issues on My Mind: Strategies for the Future, by George P. Shultz. To order, call (800) 888-4741 or visit www. hooverpress.org.

FOREIGN POLICY

The End of Modernity

When it should act, America hesitates—and around the world, hard-won freedoms slip away.

around the world, hard-won freedoms slip away. By Charles Hill T he era called modern inexorably

By Charles Hill

T he era called modern inexorably began to come to its end when,

in the second decade of the twenty-first century, a concatenation

of foretold events unraveled the so-called modern world order.

As always, the foreordained collapse was generated from

internal weakness. We need to look no further than Europe to understand

why. It has become evident that the European Union, a contrivance designed

to do away with the structural elements of that international order—the

state as its basic unit and the sovereign borders of its various nations—cre-

ated nothing in its place capable of coping with an economic crisis, fending

off threats to its security, or absorbing history’s Great Migration.

Long before this, however, the modern international system, which had

welcomed into its ranks Muslims in more than a score of delineated “states,”

had begun to feel the rise of believers dedicated to overthrowing the military,

monarchical, and autocratic regimes of those very state entities formed in

the wake of the collapse of the Ottoman empire and caliphate after the First

World War.

The dynamism of this cause would, by the twenty-first century, produce two massive Muslim powers: the Islamic Republic of Iran, which, by its 1979 revolution, won recognition as a state in the modern world order while at the same time vowing to destroy that very system; and, a generation later, the fearsome rise of the Islamic State, which by its title proclaimed the goal of all the faithful: a new world order ruled by one, and only one, order. Thus even- tuated the fulfillment of American speculation that the only serious challenge to the modern international state system could come if events such as the 9/11 attacks were, in the words of Francis Fukuyama, “driven by a system- atic idea of political and social justice that claims to supersede liberalism.” Precisely so: Islam claimed to be advancing a political and social model that rivaled and would replace Western modernity.

HOLLOWING OUT THE STATE With this entire region of the globe, “its hour come round at last” as Yeats put it, moving to cast out the international system, the four other world power centers, each in its own way, headed toward a similar outcome. Europe had disabled itself. As “the West,” its Westphalian state system had been accepted during the five modern centuries as the world order, an achievement owing to this system’s procedural character—until then, histo- ry’s only example of a dispensation open to all the world’s peoples. But, with the European Union, Europe had vacated its own concept and the Muslim world’s eruption in the Middle East poured displaced populations into that once-dominating small peninsula in the volkerwanderung foreseen by histori- ans as the harbinger of cultural and spiritual disaster. China, which in the early post-Mao period assiduously had portrayed its empire actually to be a state and had behaved as an ideal citizen of the established system, began in the early twenty-first century to turn assertive. China had not been present, it declared, at the creation of the Westphalian order, which, in any event, made no sense, particularly in its bizarre doctrine of the juridical “equality of states.” China therefore merged its heritage of Maoist ideology as an enemy of the state system with its Confucian tradition that all human relations properly are hierarchical, to be obeyed from the top down. Thus Asia’s natural leader would be the People’s Republic of China

ON PATROL: An Air Force fighter jet refuels before a mission over Syria. US Defense Secretary Ash Carter has been pursuing cooperation with other nations to intensify the campaign against Islamic State militants in Iraq and

Syria. [Tech. Sgt. Russ Scalf—USAF]

and, over time, all the world would recognize this superior system and fall in line within it. Russia too, having failed in the post-Soviet period to install itself as a

liberal political and economic state in world affairs, undertook a redefinition of itself in the new century as the avatar of Russian czars and commissars who would “smash” the

The Islamic State proclaimed its goal: a new world order ruled by one, and only one, order.

state or exhaust its powers until it would “wither away.” The new Russia would be inspired by Dostoevsky

and Orthodoxy as it carved away lands of the state of Georgia, seized Crimea, and dismembered half of Ukraine; breaking up NATO—the pre-eminent democratic alliance of states—now could be possible. Strikingly consequential has been President Putin’s military move into Syria and personal association with Ayatollah Khamenei to support Iran’s neo-imperialist archipelago of influence stretching from the Afghan bor- der to the Mediterranean via Iraq, Assad’s Syria, and Hezbollah-controlled Lebanon—and potentially an additional arc of influence from Bahrain to the Shia Eastern Saudi province to Yemen and beyond. This welded together two major anti–world order powers.

THE MAKING OF A DEFEAT As other major power centers moved into opposition to the international state system, the United States was edging away from its century-long lead- ership role within it, soon handing legitimacy, resources, and nuclear weap-

ons potential to the Islamic Republic of Iran. America’s strategic withdrawal was conducted under the cover of a presidential rhetoric of support and an asymptotic military policy

managing always to fall just short of tactics conducted to make a lasting difference on any war-fighting front. All political and analyti-

cal efforts to persuade the American presidency to change strategic direction were rebuffed. Many operationally specific alternatives were offered; what was not understood was that the significant factors were psychological and matters of national character. The United States failed to understand that:

China merged its heritage as an enemy of the state system with its Confucian tradition that all human relations are hierarchical.

» Fear was the primal force in the Middle East. People would attach

themselves to whichever party possessed the momentum for victory. As

American leadership wavered, victory was predicted for the most radical elements.

» Resolve and reliability were essential but scarce. Once the United

States revealed itself as lacking staying power, little that it said or did was credited.

A comprehensive grasp of the scale and scope of the challenge appeared

only briefly as the new century opened and was never regained. Intercon- nected dimensions of the problem invariably were disaggregated into “removing Assad” and “defeating ISIL.” And turning points were not recognized or taken, most notably the moment in late 2015 when the United States could have inventoried the

region to determine those states and parties in or on the side of world order and those who would destroy and replace it so as to firmly support the for- mer and resolutely oppose the latter.

It was not to be. The collapse of the Westphalian state system meant that

the foundations for the values they upheld—open trade, open expression, consent of the governed, and universal human rights—crumbled as well, and the remaining states of the core region of the world withered away. As the historian Edward Gibbon mused when writing about the decline and fall of the Roman empire, perhaps the time would come when the inter- pretation of the Quran would “be taught in the schools of Oxford, and her pulpits might demonstrate to a circumcised people the sanctity and truth of

the revelation of Mohammed.”

It has come to pass.

truth of the revelation of Mohammed.” It has come to pass. Reprinted from Defining Ideas

Reprinted from Defining Ideas (www.hoover.org/publications/defining- ideas), a Hoover Institution journal. © 2015 by the Board of Trustees of the Leland Stanford Junior University. All rights reserved.

the Leland Stanford Junior University. All rights reserved. Available from the Hoover Institution Press is Trial
the Leland Stanford Junior University. All rights reserved. Available from the Hoover Institution Press is Trial

Available from the Hoover Institution Press is Trial of a Thousand Years: World Order and Islamism, by Charles Hill. To order, call (800) 888-4741 or visit www. hooverpress.org.

FOREIGN POLICY

Tear Up the Map

The borders of the Middle East are unworkable. What if we drew them all over again?

East are unworkable. What if we drew them all over again? By Michael S. Bernstam T

By Michael S. Bernstam

T he Middle East is unraveling. The artificial borders drawn by

Europeans after World War I are dissolving along ethnic, tribal,

and religious lines. The nominal states of Iraq, Syria, Yemen,

and Libya have ceased to exist in practical terms. Lebanon and

Bahrain are on the brink. The rise and prospective reunification of Kurdistan threatens the present borders of Iran and Turkey. Nuclear proliferation lurks in the background. There is a comprehensive solution to this crisis that can also ameliorate the tragedy of Middle Eastern and North African refugees pouring into Europe. It offers an orderly and humane transition from the current bloody descent. The solution is to redraw the antiquated, artificial map of the Middle East, thereby creating new, homogeneous, viable nation-states.

UNSTABLE AT HEART The underlying problem is ontological, that is, it is in the nature of things. Multi-ethnic, multi-religious, multi-communal societies are inherently sus- ceptible to instability. It is extremely difficult to maintain stability in repre- sentative democracies that face competition over resources along ethnic and religious lines. The reason is income transfers: some communities get more while others get less than they produce, and the clash ensues. Stability can be maintained in a federalist democracy like Switzerland where ethnic-linguistic freedoms foster individual rights, not intercommunal

income transfers, and where the income transfers that take place go to indi- viduals, not groups for subdivision among its members. Stability can also be maintained for a considerable period in dictatorships where one community has total control, such as pre–civil war Syria, pre- invasion Iraq, Bahrain, Yemen, and Libya, or the central government rations and balances conflicting claims as in the old Soviet Union and in post–World War II Czechoslovakia and Yugoslavia. Ethnic political competition can force some countries to split up peacefully like the former Czechoslovakia and, initially, the Soviet Union, or slide into a sequence of interethnic wars as hap- pened in the former Yugoslavia and today’s Middle East.

LET THE DRAWING BEGIN The proposed solution, however discomfiting to Western politicians and scholars of pluralistic democracies, is to germinate new homogeneous

nation-states. There are four steps to this end that the West can initiate and facilitate.

» Redraw the map of the Middle East along ethnic, religious, and

other community lines. Invite the various, largely homogeneous, ethnic and religious groups to offer maps of their envisaged homelands. They will quickly realize that the sum of their individual territorial claims exceeds the total territory of the region, which makes it impossible for outsiders to reconcile overlapping claims. Communities that want their own nation- states will have no alternative but to negotiate with their neighbors and submit joint proposals of the maps to potential Western sponsors. (The

mechanism is described below.)

» Western countries will offer financial and logistical help. To

facilitate and accelerate the process, a Pax Westernania that includes the United States, Britain, France, Germany, and Scandinavian countries,

among others, will offer help to settle and resettle the different popula- tions within the new homogeneous ethnic, religious, and other communal borders, along with returning refugees from Europe to their respective kindred communities. The West will also guarantee and, when necessary, enforce the new borders.

» Assist the new states with the long process of economic and political,

preferably democratic, development. The process can take decades and might still fail. This is a nation-state setup and startup, leaving the residents of each new political jurisdiction to chart their own course—the opposite of top-down nation building by Western powers. “Of the people, by the people, for the people” means their people.

» Make terrorism self-defeating. If any of the new countries or residual enclaves outside the transition process becomes a source of international terrorism, declare such an entity hostile, blockade it, and give it a choice to stop this activity or be invaded and dismantled. Redrawing the map would localize the problem of international terrorism and facilitate defeating it at the source. Then restart the setup and startup process in the failed area. Such action helps the other new Middle Eastern and North African countries that want to develop peacefully.

A CORNUCOPIA OF INCENTIVES

A project of this scope and complexity cannot be implemented by force,

bribery, or coaxing. Only voluntary participation of tens of millions of Middle Eastern and North African residents can pull it off. Success requires a mechanism of incentives, which makes every group that cooperates in the project a winner, and every group that does not a loser.

This mechanism is analogous to a single-class airplane mode of operation. It

is the opposite of the partnership mode prevalent in bilateral and multilateral

negotiations. The latter encourages bad-faith negotiations in which the most recalcitrant party can hold up the deal in order to extort the most conces- sions and is expected to get away with cheating afterwards. Because space (territory) is limited, the first group that boards (submits a reasonable map) is the first to be served (given ter- ritorial preference). There is no

[Taylor Jones—for the Hoover Digest]

BEGINNING OF THE END: Jerusalem Mayor Hussein Effendi al-Husseini, center, and other Ottoman officials meet

BEGINNING OF THE END: Jerusalem Mayor Hussein Effendi al-Husseini, center, and other Ottoman officials meet with British troops under a white flag of surrender on December 9, 1917. The Ottoman defeat in World War I was key to the partitioning of the Middle East into states that in many cases were strife-riven and unstable. [Library of Congress]

extortion of concessions because those who come late to the process can only get a smaller space. Those who refuse to submit a map will be bumped off

the flight (not get any consideration for their claims). Any ethnic, religious, denominational, or other community, big and small, can submit its proposed map to potential Western sponsors for consideration. Since outlandish pro- posals will be dismissed, it makes no sense to submit one. The aspiring communities will find it mutually beneficial to negotiate, compromise, and draw joint and collective maps. Western sponsors will decide at which stage of border completeness they would recognize the new nation-states, one by one or

by groups, and support their population resettlement and border security. Recognition of partially

negotiated borders is per- haps the most important incentive. Incomplete deals will be treated as com- plete deals. This will signal to nonparticipants, or overreaching claimants, that it is now or never, that there is no chance to hold up the process, and it is self-defeating to wait. The early-submitting group of neighbors gets the best deal on their future borders. Their proposed borders between them and the neighbors who refused to negotiate, and the territories inside those borders, will be accepted and secured. This would motivate latecomers to rush in to negotiate to have their say, lest they be stuck with what’s left.

Multi-ethnic, multi-religious, multi- communal societies are inherently prone to instability.

MISTRUST, BUT VERIFY Kurdistan will be an obvious local leader in this process and offer others tangible proof that it works. The initial Kurdistan will be made up of the Iraqi and Syrian Kurdistan parts with the potential of the Iranian part when Iran eventually falls apart and with the assistance of a negotiated autonomy inside Turkey. Kurdistan will grow from the inside out. Also, Iranian and Turkish Kurds can choose, if they wish, to resettle in the new Kurdistan. But even the most vulnerable minorities like the various rites of the Middle Eastern Christians and the smallest minorities such as Druze, Chaldo-Assyr- ians, and Yazidis can find accommodation through this process. Western sponsors will encourage the birth of small states akin to Liechtenstein, Andorra, and San Marino situated between big states. The negotiated new borders are sustainable in this process. If some participants breach the contract later or reinterpret it without negotiated alterations, they lose the resettlement subsidy and other assistance or will

meet enforcement by force. But the most effective punishment is that the borders would be then redrawn in a contour that favors their neighbors. The borders agreed upon by neighbors without the offender will go into effect by default and be protected. Another key feature is that the process does not rely on trust. Long-seated

mutual mistrust among neighbors, even mutual hatred and recent hostilities, are not an obstacle. There is no need to trust each other in order to negotiate and develop a joint map as

long as the Western spon- sors deliver their part. Self- interest in the race not to be a loser, to be on the same

timetable with neighbors in drawing collective maps, and not to miss the best possible deal by reneging will work surer than trust. Under this framework, self-interest makes good neighbors out of bad neighbors, without love, trust, or cultural change. After the invasion of Iraq and overthrow of Saddam Hussein, Vice Presi- dent Joe Biden called for the division of Iraq into three ethnically homo- geneous communities of Shia, Sunni, and Kurd. In 2007, Stanford profes- sor James Fearon made the same argument in Foreign Affairs magazine. The insistence on maintaining unity inside Iraq’s artificial, colonial-drawn borders by President George W. Bush, supported by legions of democracy specialists in Western universities who insist on trying to transplant the multi-cultural Western model of democracy to the Middle East, precipitated

the ever-increasing bloodletting in the region. It’s time for a new, serious approach.

Incentives will make every group that cooperates a winner, and every group that doesn’t a loser.

cooperates a winner, and every group that doesn’t a loser. Special to the Hoover Digest .

Special to the Hoover Digest. Hoover senior fellow Alvin Rabushka con- tributed significantly to this article.

Alvin Rabushka con- tributed significantly to this article. Available from the Hoover Institution Press is In
Alvin Rabushka con- tributed significantly to this article. Available from the Hoover Institution Press is In

Available from the Hoover Institution Press is In This Arab Time: The Pursuit of Deliverance, by Fouad Ajami. To order, call (800) 888-4741 or visit www. hooverpress.org.

FOREIGN POLICY

“Easier to Make the Speeches”

Barack Obama so wanted to end “Bush’s wars” and close Guantánamo. It hasn’t worked out that way.

and close Guantánamo. It hasn’t worked out that way. By Jack Goldsmith N ovember’s gruesome terrorist

By Jack Goldsmith

N ovember’s gruesome terrorist attacks by the Islamic State in

the heart of Paris marked yet another setback in President

Obama’s seven-year effort to end the wars and reverse the

counterterrorism policies of his predecessor. Many will claim

that the attacks were traceable to the president’s failed policies against the

Islamic State, and to his related hesitancy in managing the implosion of

Syria. The day before the attacks, the president had sanguinely told ABC’s

George Stephanopoulos that the Islamic State had been “contained.” That

claim having been repudiated in dramatic fashion, the president immediately

faced pressure to ratchet up the fight against Islamic State. “Clearly there’s

going to have to be an intensification of our efforts,” acknowledged Ben

Rhodes, the president’s deputy national security adviser, two days later.

Barack Obama has been thinking about his legacy from the beginning

of his presidency. In the 2012 book Kill or Capture, Daniel Klaidman says

Obama’s “preoccupation with his legacy included an element of vanity—he’d

sometimes tell advisers, ‘I don’t want my name’ on a policy that might be

judged harshly in the future.” But the legacy Obama wants to leave is not

the one he will. He so wanted to be the president who ended wars, turned down the rhetorical temperature on Islamist terrorism, and sharply reversed Bush-era counterterrorism rules. But time and time again the realities of the threats, the responsibilities of his office, and the demands of domestic politics have forced him, grudgingly, to act contrary to his impulses.

STYMIED FROM THE START Frustrations began early in his presidency. On January 29, 2010, Obama met with his National Security Council to discuss his administration’s collapsing plan to prosecute 9/11 mastermind Khalid Sheik Muhammad in a New York civilian federal court instead of in George W. Bush’s controversial Guantánamo Bay military commissions. The New York trial was one of many efforts to fulfill the president’s campaign pledge to restore the rule of law to US counterterror- ism policy. But Republicans had successfully portrayed this and other reforms as soft on terrorism, and the trial plan lacked political support among key Democrats. At the meeting White House Chief of Staff Rahm Emanuel advised the president that a New York trial might hurt his chances for a second term. Displeased with the dawning reality that Muhammad would remain in Guantánamo Bay and be tried by military commission, Obama closed the meeting by reading a statement by federal judge William Young at the crimi- nal sentencing of Richard Reid, the shoe-bomber who tried to blow up an air- plane en route from Paris to Miami in December 2001. Young’s remarks were a paean to American liberty that celebrated the justice that civilian courts “fairly, individually, and

Ending war has proved to be much more than a matter of definitions.

discretely” administer. According to Klaid- man, the disheartened

president gazed around the room without focus after reading Young’s statement. “Why can’t I give that speech?” he asked his senior advisers. And then without another word he stood up and left the room. Obama’s question symbolizes his vexed failure to reverse Bush-era policies in other contexts. His administration continued indefinite military detention at Guantánamo Bay, bulk surveillance, Bush-era state secrets, and limitations on habeas corpus overseas. This White House has also dramatically expand- ed the drone program, targeted and killed an American citizen overseas, used significant military force in Libya without congressional authorization, unilaterally extended the 2001 statute authorizing war against Al-Qaeda to the Islamic State, and cracked down unprecedentedly on leakers.

Obama has also been unable to fulfill his vows to end wars. In a 2013 speech at the National Defense University, he proclaimed that “history advises” and “democracy demands” that war against Islamist terrorists, “like all wars, must end.” The president added that “unless we discipline our thinking, our definitions, our actions, we may be drawn into more wars we don’t need to fight.” But ending war has proved to be much more than a mental or defini-

tional exercise. Last fall the president reversed his pledge to bring home all American troops from Afghanistan before the end of his presidency. The main reason: preventing Al-Qaeda or Islamic State from gaining a foothold there. The president

withdrew all US troops from Iraq by the end of 2011, as promised, only to witness the rise of Islamic State in

the resulting security vacuum. He described Islamic State as a “jayvee team” just before it seized Fallujah in January 2013. By the summer of 2014, the terrorist organization’s growing menace required Obama to order bombing in and redeploy troops to Iraq, both of which have intensified in the intervening months, and now will intensify further.

Time and time again the threats, the responsibilities, and the demands of domestic politics have forced Obama to act contrary to his impulses.

CHASTENED BY REALITY Obama’s aim to end “Bush’s wars” is in shambles. The more pressing legacy question now is whether he will be seen to have contributed to, and done too little to redress, the threats from Islamic State. The president faces a related legacy conundrum with his desire to fulfill his early pledge to close the Guantánamo Bay detention facility. A strict congressional ban stands in his way. The only way Obama can succeed in his legacy quest is to exercise presidential powers to override the ban—powers that are very much like those the Bush administration claimed in order to disregard the torture statute, and powers that candidate Obama harshly criticized and promised not to replicate. Whether the president closes the detention facility or not, his legacy will take a hit. These grim realities and unhappy choices have thwarted Obama’s desire to deliver speeches like Judge Young’s. Obama is of course not the first presi- dent to learn this lesson. In December 1962, a reporter asked John F. Kenne- dy whether his experience as president had matched his expectations before

entering office. By this point in his presidency, Kennedy had been through the botched Bay of Pigs invasion, a disastrous meeting with Khrushchev in Vienna, the Cuban Missile Crisis, and the Berlin crisis. Reflecting on these and other experiences, Kennedy said the problems he

faced, and “the responsibilities placed on the United States,” were “greater than I imagined them

Whether or not the president closes Guantánamo, his legacy will take a hit.

to be, and there are greater limitations upon our ability to

bring about a favor- able result than I had imagined them to be.” The former senator added that his attitude was “probably true of anyone who becomes president, because there is such a difference between those who advise or speak or legislate, and between the man who must select from the various alternatives proposed and say that this shall be the policy of the United States.” And then Kennedy answered the doleful question that Obama asked his national security team, forty-eight years before Obama asked it: “It is much easier to make the speeches than it is to finally make the judgments.”

the speeches than it is to finally make the judgments.” Reprinted by permission of Time (www.time.com).

Reprinted by permission of Time (www.time.com). © 2015 Time Inc. All rights reserved.

Time (www.time.com). © 2015 Time Inc. All rights reserved. Available from the Hoover Institution Press is
Time (www.time.com). © 2015 Time Inc. All rights reserved. Available from the Hoover Institution Press is

Available from the Hoover Institution Press is Ronald Reagan: Decisions of Greatness, by Martin and Annelise Anderson. To order, call (800) 888-4741 or visit www.hooverpress.org.

TERRORISM AND DEFENSE

Rocketing the Casbah

In proclaiming a state, ISIS surrendered a strategic advantage, giving its bombs a return address.

a strategic advantage, giving its bombs a return address. By Josef Joffe A word of comfort:

By Josef Joffe

A word of comfort: terror, no matter how spectacular, cannot

score strategic victories against the West. ISIS cannot break

a nation-state’s will, nor render it defenseless the way Hitler’s

armies subjugated France and Poland in a matter of weeks.

That is the good news. And the bad? Modern terror embodies the most

efficient use of violence in the annals of warfare. It extracts maximal gain

from a minimal investment of people and materiel; a handful of killers with

AK-47s and suicide vests is enough to paralyze a metropolis like Paris, and

in 2001, New York. Even the mere threat of another attack has immobilized

Brussels. Since 9/11, the tally has been awesome. Hundreds of billions have

been spent on homeland security and domestic intelligence, not counting mil-

lions of working hours lost in security lines at airports round the globe. Ter-

ror is imposing an astronomic transaction tax on the world. This, to be sure,

is not a strategic victory for the terrorists, but it is a burden approaching the

costs of real war, not to speak of the toll on freedom that fear exacts.

Josef Joffe is the Marc and Anita Abramowitz Fellow in International Relations at the Hoover Institution, a member of Hoover’s Working Group on the Role of Military History in Contemporary Conflict, a senior fellow at Stanford Univer- sity’s Freeman Spogli Institute for International Studies, and publisher-editor of the German weekly Die Zeit.

Given terror’s toll on targeted societies whose authorities are bound by sacred constitutional procedures, the enemy must be fought and defeated on his own territory. His advantage in asymmetric warfare is small-scale units, anonymity, dispersal, surprise, and concealment among the civilian popula- tion. As Mao Zedong famously put it, terrorists can swim like fish in the sea.

LIVE BY THE STATE, DIE BY THE STATE Yet by behaving as a state, ISIS has sacrificed these classic strengths on its home turf, though not abroad. Now terror has a return address—its “capi- tals” are Raqqa and Mosul. ISIS has an administrative infrastructure and an economy of sorts, such as its oil refineries. It fights in large formations with heavy weapons that require supply trains, bases, and communication networks. In contrast to Al-Qaeda and similar groups, it is out in the open, so to speak. All these targets tilt the advantages of asymmetric warfare in favor of the West. Now the West can use its best weapons: airpower, precision and stand-off munitions, network-centric warfare, and space-based intelligence. The bad news is that the West does not use what it has. US bombing runs

in Syria and Iraq were initially in the single-digit numbers per day. Now, with some coalition support,

Terror is imposing an astronomic transaction tax on the world.

they have risen to forty to fifty. Yet these sorties are dwarfed by orders of mag-

nitude when compared with the air campaigns in Afghanistan, Iraq I and II, Libya, and even tiny Serbia. The West’s key handicap is the ordeal of coalition-building. The theory of public goods tells us that any collective effort requires a great organizer who recruits the group and assumes the greatest burden. In Afghanistan and Iraq, the United States shouldered this task, as it did in the post–World War II era with the creation of NATO and a slew of other alliances during the Cold War. The forty-fourth president, given to “a little nation-building at home” and averse to the use of force, has put America on the road to retraction. Two pernicious consequences follow. One: like nature, the international system abhors a vacuum, and so, the revisionist and revolutionary forces— Russia, Iran, and ISIS—have filled the void. Two: counterforces do not orga- nize themselves in the absence of a lead nation. Saudi Arabia, Jordan, and Egypt lack both the wherewithal and the “convening power”; so does France, though it has declared itself at war with ISIS. A single aircraft carrier, the Charles de Gaulle, is no substitute for ten American battle groups. Nor has

France been able to harness a European coalition (the best the Germans will do is to dispatch recon aircraft and military instructors). The absence of an American strategy is all too evident: it is a bit more bombing and a few more special forces on the ground. Of course, the United States could be more effec-

tive short of an invasion. Unlike traditional terror groups, ISIS offers a target-

rich environment. Raising the number of sorties to eight hundred to twelve hundred per day, as in the initial phases of Iraq I and II, would indeed “decimate” ISIS, to use President Obama’s words. Bunker busters could be deployed against its tunnel net- works, which, it must be conceded, would require a much higher tolerance for collateral damage. Additional special forces could be brought in to recon- noiter and precision-target enemy positions.

The bad news is that the West does not use the advantages it has.

TERRITORY DENIED Such a strategy would not seek to build order where state failure is rampant. But it would weaken and dislodge ISIS. The task is to keep the terror group perpetually off balance. Might the self-proclaimed Islamic State retaliate in Europe? Perhaps, especially since its sleepers are already in place. But destroying its bases would also have a longer-term effect. Like the Taliban/ Al-Qaeda alignment fifteen years ago, ISIS depends on territorial control that allows it to extract taxes, turn oil into cash, and train recruits. Can it be done without ground forces? As long as the Saudis cannot fully count on US protection (which would also deter Iran and warn Russia), a Sunni army is pie in the sky.

Coalitions live on commit- ment. Why would Riyadh and its allies assume the risks if Obama’s America has treated adversaries bet-

ter than allies in the Middle East? Yet US ground forces, one must assume, are in the cards only if the country suffers another 9/11. Such realism does not invalidate the general point about the endemic vul- nerability of ISIS. The effort must be sustainable sine die, hence modest. The task is to deploy the West’s best weapons to chase and chasten ISIS now, and forever more. There will be no final victory against terror made in the Middle

US ground forces to confront terror- ists, one must assume, are not in the cards—unless the country suffers another 9/11.

East. Given the bottomless fault lines in this “civilization of clashes,” to set Niall Ferguson against Samuel Huntington’s “clash of civilizations,” the West cannot repair broken states, let alone bring democracy to the region. But it can, as Obama has vowed, “decimate” ISIS and its successors.

as Obama has vowed, “decimate” ISIS and its successors. Subscribe to The Caravan , the online

Subscribe to The Caravan, the online Hoover Institution journal that explores the contemporary dilemmas of the greater Middle East (www. hoover.org/publications/caravan).

greater Middle East (www. hoover.org/publications/caravan). Available from the Hoover Institution Press is Skating on
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Available from the Hoover Institution Press is Skating on Stilts: Why We Aren’t Stopping Tomorrow’s Terrorism, by Stewart Baker. To order, call (800) 888- 4741 or visit www.hooverpress.org.

TERRORISM AND DEFENSE

Missile Defense Makes Sense

How outdated strategic thinking is leaving us wide open.

How outdated strategic thinking is leaving us wide open. By Frederick W. Kagan A merican thinking

By Frederick W. Kagan

A merican thinking about missile defense

has been incoherent from the beginning.

Key points

» Missile defense

systems cannot be used for at- tack.

» Regardless of

the nuclear deal, Iran is serious about building long-range mis- siles.

» The threat

from Russian missiles also has increased.

The issue is superficially simple: the Soviet

Union threatened the American people with

nuclear missiles, so the United States should naturally

have tried to defend itself against those missiles. Missile

defense is among the most unequivocally defensive military

systems one can imagine. It cannot be used for attack. Yet

the United States signed the Anti-Ballistic Missile Treaty

with the Soviets and has refrained from serious efforts to

build and deploy large-scale missile defense ever since.

This policy never made sense and now makes even

less. The proliferation of long-range precision missiles

that can strike the United States and our allies with

either nuclear or conventional warheads requires that America develop and

field effective missile defense against all likely foes.

Frederick W. Kagan is a member of the Hoover Institution’s Working Group on the Role of Military History in Contemporary Conflict. He is the Christopher DeMuth Chair and director of the Critical Threats Project at the American Enter- prise Institute.

Objections to missile defense have always been based on the belief that it would be destabilizing. The United States persuaded itself that the most effective way to prevent nuclear war with the Soviet Union was through “mutual assured destruction” or MAD, under which stability in a nuclear world required the nuclear states to know that all would be destroyed if any started a war. The Soviets, interestingly, did not accept this view and strove instead to achieve nuclear predominance. They feared that American technological advantages would allow the United States to field an effective defensive system, however, that would nullify their growing lead in missiles and warheads. So they lent their propaganda resources eagerly to the fight against the Strategic Defense Initiative pursued by Ronald Reagan, with a large measure of success. Whatever sense MAD might have made in the 1970s, it makes no sense today. America would not be more secure, nor the world more stable, if our potential adversaries such as Iran and China, to say nothing of Al-Qaeda, knew they could destroy us utterly at the outbreak of major war. Presidents Bush and Obama have both seemed to realize this fact and worked somewhat tepidly to deploy and enhance systems that could defend against Iranian mis- siles aimed at Europe or at our forces in and around the Persian Gulf. The nuclear agreement with Iran heightens the urgency of missile defense because of the way the Iranians have interpreted the deal. They reject any constraints on their ability to deploy missiles of all ranges and payload weights, and claim that the agreement itself does not impose any such con- straints upon them. They are right about that—the constraints, such as they are, are in the UN Security Council Resolution endorsing the agreement, not the agreement itself. They have gone beyond claiming their rights to develop missiles, moreover, and are ostentatiously building, testing, and fielding them. Tehran went out of its way, in fact, to test a missile that violated a UN Security Council resolution just days before that resolution was to be can- celed. Iran is serious about building a long-range missile arsenal whatever its designs on a nuclear weapon might be. Yet the legacy suspicion of missile defense continues to paralyze the United States, helped, once again, by Russia. Geometry shows that missile defenses designed to protect Europe or the United States from Iranian missiles should be placed in Eastern Europe. It also shows that defenses located there can- not interfere with Russian missiles launched against the United States. Yet Vladimir Putin has persuaded many people that the deployment of American missile defense systems in Eastern Europe would be an intolerable provoca- tion of Russia and has largely scuttled them.

[Taylor Jones—for the Hoover Digest]
[Taylor Jones—for the Hoover Digest]

Putin’s claims were nonsensical as well as unscientific when he began mak- ing them. The United States had no desire or intention of trying to defend itself against Russian missiles, despite the fact that Russia’s nuclear arsenal is still large enough to destroy America completely. His intrusion into the discus- sion of how to defend against Iranian missiles seemed to come from nowhere. But we must now look again at the complacency with which we contem- plate Russia’s arsenal. Putin has threatened to use his nuclear weapons on numerous occasions, including in response to non-nuclear attacks. He has upgraded Russia’s missile delivery systems and deployed them further west as part of an effort to intimidate Europe. He has thus deprived us of the abil- ity to protect against Iranian missiles even as he has increased the threat his own missiles pose. This nonsense must end. Both American and Israeli technology has been demonstrated to be able to shoot down incoming ballistic missiles with very high accuracy. Such systems should be expanded and deployed to protect US bases and our allies in Europe and the Middle East from any and all potential missile attacks. Meanwhile missile development has continued, and we now face increasing threats from cruise missiles and hypersonic missiles, against both of which current systems would likely prove ineffective. So another round of missile defense research must be launched to respond to those new threats. Missile defense is not destabilizing. It does not cause war. It saves lives. Just ask the people of Israel living under the shadow of Iron Dome. Develop- ing effective defense against the most dangerous weapons on the planet is a strategic and moral imperative.

weapons on the planet is a strategic and moral imperative. Subscribe to the online Hoover Institution

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the Leland Stanford Junior University. All rights reserved. Available from the Hoover Institution Press is Nuclear
the Leland Stanford Junior University. All rights reserved. Available from the Hoover Institution Press is Nuclear

Available from the Hoover Institution Press is Nuclear Security: The Problems and the Road Ahead, by George P. Shultz, Sidney D. Drell, Henry A. Kissinger, and Sam Nunn. To order, call (800) 888-4741 or visit www.hooverpress.org.

Comrade

RUSSIA

Frumkin’s

Prophecy

Among the millions of ordinary people who ran afoul of the Soviet police state, one predicted its doom. Astoundingly enough, he survived.

one predicted its doom. Astoundingly enough, he survived. By Mark Harrison C omrade Frumkin is a

By Mark Harrison

C omrade Frumkin is a forgotten prophet of the twentieth century.

This got him into a lot of trouble. In 1951, his case came to the

Party Control Commission in Moscow for investigation. His story

is one of many found in the Soviet secret-police archives housed

at the Hoover Institution. Frumkin was accused of adopting “a Trotskyist

standpoint on matters of building socialism.”

Who was Frumkin? We have few details. In Russia, Frumkin would be

seen as a Jewish name. In 1951, this Frumkin should have been on his

guard. Born in Russia in 1903 into a working-class family, he was a mature

man by the time of our story. He joined the Communist Party in 1925, and

in 1935 he graduated from the Lenin Military-Political Academy in Lenin-

grad. From there he was sent to teach in military schools in Bryansk, then

Gorky.

War broke out. Two years passed until Frumkin was taken into the Red Army in 1943. He served in the political department of a rifle division, responsible for education and morale. After demobilization he became an administrator of training establishments in the ministry of trade, and then at

a transport ministry college. This college was located just outside Pushkino,

a small town north of Moscow. It was there that the incident took place. By the time of the investigation Frumkin had been moved on—or down—to work in the political department of the Moscow-Bryansk railroad. The scan- dal broke like this. On April 11, 1951, Frumkin gave a lecture to teachers at the college where he worked. The title of Frumkin’s lecture was not one that appeals naturally: “The conditions of material life of society.” In the course of the lecture Frumkin remarked:

Transitional forms of production relations can exist not only dur- ing the transition from capitalism to socialism but also, conversely, during the transition from socialism to capitalism.

This obscure remark caused uproar. As the investigator noted later, Frumkin had contradicted Josef Stalin’s teaching, which was “entirely clear.” When could “transitional production relations” arise? According to Stalin, only in moving from a lower form of society to a higher form. Capitalism was a lower form, and socialism was higher. You could move only up, not down. The direction of travel from capi- talism to socialism was upward: no problem. But to travel in the other direc- tion, from higher to lower? The listeners protested. What was this “transition from socialism to capitalism”? One commented:

Comrade Frumkin’s statement contradicts the laws of historical

development of

tion that the socialist system should be replaced by the capitalist [system].

It would follow from this formula-

Another asked:

Why has so much blood been spilt in the struggle for socialism, if a return to capitalism is inevitable?

Actually, Frumkin had not said either of the things he was accused of here. He had not said that going from socialism to capitalism was desirable nor had he said that it was inevitable. He had implied that it was possible. But no one cared about that. If you allowed that something was possible, you had opened the door for the next person to debate its merits and for the

person after that to demand it. If Frumkin was not an actual enemy, the mere thought that a capitalist counterrevolution was possible made him instantly into a potential enemy.

LOOSE WORDS

Already in a hole, Frumkin dug deeper. He went on to defend his error to the audience by giving three historical examples where a transition from social- ism to capitalism—from the higher to lower form of society—had actually taken place. These were as follows (the explanations are my own):

» “The fall of the Paris Commune.” This happened in 1871. In the wake of

France’s defeat by Prussia in the war of 1870, the national government aban- doned Paris. The city was taken over by armed militias and radical factions. An elected city council (the French word is commune) enacted many progres- sive social and economic measures. After a few months the commune was bloodily crushed by the French national army.

» “The crushing of the Hungarian Soviet Republic.” This happened in

1919. World War I ended in the breakup of the Austro-Hungarian Empire. In Hungary, an independent republic was proclaimed but proved unstable. In March 1919 the communists seized power and formed a government led by Béla Kun. At war with Romania and Czechoslovakia, the government soon collapsed amid bloodshed. Hungary fell into a fascist dictatorship.

» “The defection of Yugoslavia to the camp of imperialism.” This hap-

pened in 1948. The communists, led by Josip Broz Tito, came to power in Yugoslavia at the end of World War II. Owing little to Stalin or the Red Army, Tito felt free to pursue independent policies in Southeast Europe, which Stalin could not accept. In 1948, Stalin accused Tito of going over to the side of the imperialists, implying that Yugoslavia could no longer be regarded as a socialist state.

THINKING FOR HIMSELF Sitting in the Hoover Archives as I skimmed Frumkin’s story for the first time, I felt growing excitement. Here was a thinker—a real intellectual. Nobody told Frumkin to think originally about these things. He did it all by himself. When challenged, he came up with a good, solid argument. In history, you can use evidence to validate arguments in more than one way. The usual way is to use evidence to illustrate and exemplify. Here was a clear case of another way, to argue by counterexample. If someone tells you that X can’t happen or that Y can never lead to Z, all you need to destroy that argument is to find a single case where it did happen that

way. Frumkin had destroyed Stalin’s argument by finding not one but three heavyweight counterexamples. But that was dangerous for everyone! No one could admit this. It was a moment of acute peril for Frumkin, his students, and his inquisi-

tors. I thought to myself that the investigators would have to find a way to disprove Frumkin’s argu- ments—but how? What

would they say? What could they say? For Frumkin was

What if the road to socialism could run backward?

right! But my excitement was for nothing. The investigators did not try to argue against Frumkin. They just declared that he was wrong. They announced:

“These examples are incorrect.” When first challenged, Frumkin took half a step back. The problem, he conceded, “was not fully worked out and was for discussion.” This was not what the party authorities wanted to hear. Under repeated attack over the next few weeks, Frumkin dug his heels in. During this period he was criti- cized at a party committee meeting in the college, and then he was repri- manded by the township party committee “for the political error that he committed and for reluctance to correct it at the proper time.” (But at least they were calling it an error, not a crime.) Eventually the matter came to the Party Control Commission. As the pres- sure rose, Frumkin gave in. He accepted his mistake, which he now put down to a “slip of the tongue.” Stalin himself had admitted that socialism could

be overthrown violently from the outside. Frumkin now agreed that he had

confused this with the possibility that socialism could give way to capitalism from the inside. Now that he

Comrade Frumkin, wittingly or not, had become a rare thing in the USSR:

an actual historian.

accepted his mistake, and had received a party rep- rimand, the party control investigator proposed no

further action. What sort of a person was Frumkin? If we could see him today there would be nothing, probably, to distinguish him outwardly from a million other low- level functionaries. Behind an ordinary pair of eyes, however, lurked a flash of genius that led him, for a few weeks in 1951, to defend the dangerous idea that history could go in reverse. The events he foretold came about in 1991. By that time he would have been in his late eighties. There’s only a small chance that comrade Frumkin lived to see his prophecy come true.

HUNTER AND HUNTED: Josef Stalin, whose secret police would destroy so many lives in the

HUNTER AND HUNTED: Josef Stalin, whose secret police would destroy so many lives in the Soviet years, was himself the subject of police surveillance in the czarist era, as these booking photos attest.

MISTAKES CAN BE MADE When we see the pattern of cases such as that of Comrade Frumkin, we can- not help but notice that most people who were accused by Soviet authorities during Stalin’s last years were now surviving. In the 1930s, Stalin’s vengeance had been truly terrifying. It struck people down, left and right, without hesi- tation and without mercy. It felled them for crimes they had committed that would not have been crimes in any other country or time. It destroyed them and their families for crimes they had committed, or might have commit- ted, or somebody thought they might have committed. It punished them for crimes they had only thought of, and for crimes they had not imagined but might one day contemplate under circumstances that had not yet arisen. It ordered their killing in the hundreds of thousands, just in case. A decade later, the country was the same, and its ruler was the same, but the atmosphere had changed greatly. Blood would no longer be spilled indiscriminately, on suspicion alone. Completely innocent people would still

be killed on trumped-up charges—but no longer randomly: there would be

some reason of state behind it. Guilty people would still be killed on trumped- up charges that had absolutely nothing to do with their real crimes. People would continue to live in fear. But the Soviet state was learning to be more careful of its greatest treasure: its people. The rulers couldn’t go on shoot- ing people for the smallest

Events in 1991 would vindicate Frumkin. Whether he lived that long, we don’t know.

thing. Human beings make mistakes. As long as you were willing to admit your mistakes, to confess them honestly and come clean

before the party, you could begin again. You could be forgiven. Your file would never be thrown away, but your case would be closed until you caused it to be reopened.

A few things were still unforgiveable. Misconduct in the war was one. Cow-

ardice, desertion, serving the enemy on occupied territory in any capacity:

these were beyond forgiveness. For other things you could be forgiven once,

and forgiveness was still conditional on confession and repentance. Conceal- ment of past stains, repeated mistakes, and the failure to acknowledge them would continue to put you outside the community. But if you were open with the party and worked to correct your mistakes, the party would now give you a second chance.

In these small ways, Soviet society was making the first steps toward a

more humane form of communism. This was a community that was learning to care for its lost sheep, and to show that it cared by not killing them at the first sign of potential departure from the flock.

at the first sign of potential departure from the flock. Excerpted from One Day We Will

Excerpted from One Day We Will Live Without Fear: Everyday Lives under the Soviet Police State, by Mark Harrison (Hoover Institution Press, 2016). Research for this book was conducted in the Hoover Institu- tion Library and Archives. © 2016 by Mark Harrison.

tion Library and Archives. © 2016 by Mark Harrison. New from the Hoover Institution Press is
tion Library and Archives. © 2016 by Mark Harrison. New from the Hoover Institution Press is

New from the Hoover Institution Press is One Day We Will Live Without Fear: Everyday Lives under the Soviet Police State, by Mark Harrison. To order, call (800) 888-4741 or visit www.hooverpress.org.

IRAN

Reading Tolstoy in Tehran

Today, War and Peace would be set in Iran, with its oppression, tumult, and sense that everything must change.

oppression, tumult, and sense that everything must change. By Niall Ferguson T here can never be

By Niall Ferguson

T here can never be too many adaptations of War and Peace, the

greatest novel ever written. I therefore welcome the BBC’s new

six-part series to the United States. For me, however, it is no

mere substitute for Downton Abbey. Its themes are far more

profound, and more urgent.

If War and Peace were written today, where would it be set—and who

would write it? I posed these questions at a dinner in Silicon Valley. The

best answer came from the Iranian historian and Hoover Institution col-

league Abbas Milani.

My working hypothesis was that a War and Peace for today would be set

in the Middle East, perhaps in the Arab world. I had in mind Baghdad as St.

Petersburg, with an Iraqi Pierre caught up in the events that followed 9/11. In

my version, the American-led invasion of Iraq in 2003 would be analogous to

Napoleon’s invasion of Russia in 1812.

Milani had a better idea. Iran, he argued, had much more in common with

the Russia of Tolstoy’s day than any Arab country. “Take Isaiah Berlin’s book,

Russian Thinkers. All you need to do is change the names and you have Iran in our time.” In Iran today, as in 1860s Russia, the regime is autocratic and repressive but intellectual life is vibrant. And, as in Tolstoy’s time, there is a heated debate in contemporary Tehran between Westernizers and the staunchly orthodox—though in this case the orthodoxy is Shi’ite Islam, not Eastern Christianity. An Iranian Tolstoy, Milani argued, would start his novel in the mid-1970s— the time when he himself returned from the United States as a freshly minted PhD. Just as Tolstoy’s Pierre starts out as a naive enthusiast for Napoleon, so the young Professor Milani was a convinced Marxist. And just as the events of 1812 gave Pierre a thorough lesson in the wickedness of Bonaparte, so the events of 1979 revealed to Milani the limits of his imported ideology. He and his fellow leftists foolishly believed they could make common cause with the Islamic revolution led by Ayatollah Khomeini. A spell in jail, and the execu- tions of many of his comrades, taught him otherwise. “If the purpose of history is the description of the flux of humanity and of

peoples,” Tolstoy wrote in his dazzling final chapter, “the first question to be

answered

What is the power that moves nations? That same question poses itself in our time. What was the power that caused Islam to revive as a political force in the 1970s? Why, so soon after the overthrow of the shah, did Iraq invade Iran, launching one of the longest and bloodiest wars of the Cold War era?

will be: what is the power that moves nations?”

The Western world desperately needs an Iranian genius, able to illu- minate his country’s experience as Tolstoy illuminated Russia’s.

The consequences of the eight-year Iran-Iraq War haunt us to this day. Slowly, gradually, we are all coming to understand that the sec- tarian divide between Sunni

and Shia—which that war did so much to revive and deepen—could produce another great conflict in our own time. Saudi Arabia’s execution of the Shi’ite cleric Sheikh Nimr Baqr al-Nimr on January 2 has significantly increased the tension between Riyadh and Tehran, at a time when sectarian strife is already tearing Iraq and Syria apart. No one knows what lies ahead in the Middle East, to say nothing of North Africa. Few people can seriously believe that the tide of violence will suddenly recede.

Just as what happened in 1812 had consequences for all of Europe, and indeed for the British and French empires around the world, so the events

that followed the Iranian Revolution have affected us all. Today, no greater question confronts

Europeans than how to contend with another great “flux of humanity”—the massive migration from the Muslim

world triggered by the Syrian civil war and the chronic instability, unfreedom, and poverty of other Islamic countries. Yet we struggle to understand, much less to answer, the question. The Western world desperately needs an Iranian genius, able to illuminate his country’s experience as Tolstoy illuminated Russia’s. For what Tolstoy and his literary contemporaries achieved proved invaluable. It gave us an understanding of the Russian people that withstood even the menace of Stalin. Today, a great part of our difficulty—and it extends all the way to the top—is that we do not well understand the Iranian people, much less the people of the Sunni world. Two scenes are immortal in War and Peace: Prince Andrei’s heroic near- death at the Battle of Austerlitz, and the coup de foudre when Pierre first sees Natasha. What would I not give for equivalent moments of illumination from

some unknown Persian masterpiece!

As in Tolstoy’s time, there is a heated debate in contemporary Tehran between Westernizers and the staunchly ortho- dox—though the orthodoxy is Shi’ite Islam, not Eastern Christianity.

the orthodoxy is Shi’ite Islam, not Eastern Christianity. Reprinted by permission of the Washington Post .

Reprinted by permission of the Washington Post. © 2016 Washington Post Co. All rights reserved.

Post . © 2016 Washington Post Co. All rights reserved. Available from the Hoover Institution Press
Post . © 2016 Washington Post Co. All rights reserved. Available from the Hoover Institution Press

Available from the Hoover Institution Press is The Myth of the Great Satan: A New Look at America’s Relations with Iran, by Abbas Milani. To order, call (800) 888- 4741 or visit www.hooverpress.org.

SCIENCE

Fishmongers

Genetically modified salmon have finally been approved. Why did they have to spend so much time swimming upstream?

Why did they have to spend so much time swimming upstream? By Henry I. Miller T

By Henry I. Miller

T he Food and Drug Administration has approved a genetically

engineered salmon that grows faster but is otherwise indistin-

guishable from its wild cohorts. It will be the first “transgenic”

food animal on the market created with the molecular tech-

niques of genetic engineering, although thousands of other such animals have

been available for research purposes or as pets.

Ronald L. Stotish, the CEO of the company that crafted the fish, com-

mented that its approval “is a game changer that brings healthy and nutri-

tious food to consumers in an environmentally responsible manner without

damaging the ocean and other marine habitats.”

It’s a game changer, all right, but not quite in the way that he implies. The

genetic changes made to the fish—the addition to the genome of a growth

hormone gene from the chinook salmon and a regulatory DNA sequence

from the ocean pout—were minor and confer no detectable difference in its

appearance, ultimate size, taste, or nutritional value. The AquAdvantage

salmon merely grows to maturity about twice as fast, a tremendous econom-

ic advantage to those farming the fish in a closed system.

The availability of such a salmon will indeed be a boon to consumers seeking

low-fat and affordable options for sources of high-quality protein, especially in

the face of food price inflation and the obesity epidemic, and given that supplies of many varieties of wild Atlantic and Pacific salmon are being depleted. However, the length and politicization of the review of this poor fish, which floundered in regulatory limbo for an astonishing two decades, has virtu- ally destroyed an entire once-promising sector of biotechnology: the use of molecular genetic engineering techniques to produce improved food animals. This fish story illustrates much of what is wrong with federal regulation and offers a deplorable example of the Obama administration’s inappropriate, politics-motivated meddling.

SOMETHING’S FISHY It took the FDA more than a decade just to decide how it would regulate the AquAdvantage salmon. Characteristically, the agency decided on the most onerous pathway, treating the new construct in genetically engineered ani- mals as though it were a veterinary drug, similar to a flea medicine or pain reliever. After several years of deliberation, regulators concluded as early as 2012 that the AquAdvantage Atlantic salmon has no detectable differ- ences and that it “is as safe as food from conventional Atlantic salmon.” And because the fish will all be sterile females and farmed inland, there is negligi- ble possibility of any sort of “genetic contamination” of the gene pool or other environmental effects. (Even in a worst-case scenario, these coddled, farmed fish would be poorly adapted to compete in the wild.) When the FDA completed its environmental assessment in April 2012 and was ready to publish it—the last necessary hurdle before approving the salmon for marketing—the White House mysteriously intervened. The review process vanished from sight until December of that year, when the FDA was finally permitted to publish the assessment

(the unsurprising verdict:

“no significant impact”), which should then have gone out for a brief period of public comment before approval. The reason the FDA

delayed publishing the needed environmental assessment was exposed by science writer Jon Entine. He related that the White House interference “came after discussions [in the spring of 2012] between Health and Human Services Secretary Kathleen

The politicization of the review of this poor fish, which floundered in regulatory limbo for an astonishing two decades, has virtually destroyed an entire once-promising sector of biotechnology.

TREADING WATER: Atlantic salmon similar to these have been genetically modified, but the modified version

TREADING WATER: Atlantic salmon similar to these have been genetically modified, but the modified version has been biding its time in regulatory lim- bo for two decades. The farmed fish are designed to reach maturity quicker, offering many advantages. Almost four years ago the FDA concluded that the fish, all sterile females and farmed inland, posed negligible risk of any sort of “genetic contamination” or other environmental effects and were safe to eat.

[Thomas Kitchin and Victoria Hurst—Design Pics]

Sebelius’s office and officials linked to Valerie Jarrett at the Executive Office [of the President], who were debating the political implications of approv- ing the [genetically modified] salmon. Genetically modified plants and animals are controversial among the president’s political base, which was thought critical to his re-election efforts during a low point in the president’s popularity.” A delay in the availability of cheaper salmon isn’t the end of the world, of course, but the FDA has also unnecessarily and inexplicably delayed small- scale field trials of mosquitoes genetically engineered to control disease- causing mosquitoes. The mosquitoes to be released are males (which do not bite) engineered to contain a specially constructed gene designed to kill their offspring, after they mate in the wild. The mosquitoes have been extensively tested in a half-dozen other countries and are approved for commercial use in Brazil, so the delay in the United States of even a single field trial is presum- ably political, reflecting the White House’s bias against genetic engineering.

TIME IS MONEY Regulatory incentives and disincentives are potent. The vastly inflated

development costs caused by overregulation (at not only the FDA but also the Department of Agriculture and the Environmental Protection Agency) are the primary reason

that more than 99 percent of genetically engineered crops that are being culti- vated are commodity crops

grown at huge scale—corn, cotton, canola, soy, alfalfa, and sugar beets. Hawaiian papaya is one of the few examples of significant acreage being devoted to a genetically engineered specialty crop. But the majority of American genetic engineering’s ingenuity remains in laboratories and never progresses even to field trials. Unrealized innovations in the food-animal sector include pigs and chickens that excrete less-toxic manure and pigs with leaner muscles. To put the length of the AquAdvantage salmon review into perspective, Amanda Maxham listed on the blog Voices for Reason these innovations that were introduced—essentially with no regulatory delay—around the same time AquaBounty applied for FDA approval of the AquAdvantage salmon:

the Nokia 9000 cell phone (which weighed almost a pound and had a mono- chrome screen), the 28.8k dial-up modem, Amazon.com and eBay.com, Inter- net Explorer, the original Sony PlayStation, and the DVD.

American innovation deserves better from our regulators and their politi- cal masters.

This fish story illustrates much of what is wrong with federal regulation and political meddling.