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HOOVER DIGESTRESEARCH + OPINION ON PUBLIC POLICY
SPRING 2016 NO. 2
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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.
The Institution’s overarching goals are to:
» Understand the causes and consequences of economic, political, and social change
» Analyze the effects of government actions and public policies
» Use reasoned argument and intellectual rigor to generate ideas that nurture the
formation of public policy and benefit society
Herbert Hoover’s 1959 statement to the Board of Trustees of Stanford University continues to
guide and define the Institution’s mission in the twenty-first century:
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.
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mental, social, or economic action, except where local government, or the people,
cannot undertake it for themselves. . . . The overall mission of this Institution is,
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
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But with these purposes as its goal, the Institution itself must constantly and
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of the American system.
By collecting knowledge and generating ideas, the Hoover Institution seeks to improve the hu-
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T H E H O O V E R I N S T I T U T I O N
S TA N F O R D U N I V E R S I T Y
HOOVER DIGESTRESEARCH + OPINION ON PUBLIC POLICY
SPRING 2016 • HOOVERDIGEST.ORG
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Spring 2016 HOOVER DIGESTTHE ECONOMY
9 A World of Fresh StartsHow to foster growth and opportunity around the globe. By
Michael J. Boskin
14 The Zero-Sum FallacyIncomes 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 AlikeThe 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 AgainLike 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’show. By John H. Cochrane
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POLITICS
36 Stuck in the MiddleIt’s the independents, not the true believers, who make or
break a candidate. And they don’t think all that much ofDonald Trump. By David Brady
41 What Trump KnowsThe GOP may not need the Donald, but it certainly needs his
supporters. By Jeremy Carl
HEALTH CARE47 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 bittermedicine. By Daniel P. Kessler
56 Cadillac in the DitchThe tax on high-cost insurance plans was running rough from
the start. Here’s what that clunker has taught us. By Charles
Blahous
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61 Healthy Budget, Healthy AmericansSix 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 ModernityWhen it should act, America hesitates—and around the world,
hard-won freedoms slip away. By Charles Hill
76 Tear Up the MapThe 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 CasbahIn proclaiming a state, ISIS surrendered a strategic
advantage, giving its bombs a return address. By Josef Joffe
91 Missile Defense Makes SenseHow outdated strategic thinking is leaving us wide open. By
Frederick W. Kagan
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RUSSIA
95 Comrade Frumkin’s Prophecy Among the millions of ordinary people who ran afoul of the
Soviet police state, one predicted its doom. Astoundinglyenough, he survived. By Mark Harrison
IRAN
101 Reading Tolstoy in TehranToday, War and Peace would be set in Iran, with its oppression,
tumult, and sense that everything must change. By Niall
Ferguson
SCIENCE
104 FishmongersGenetically 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
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THE CONSTITUTION
111 We the (Inconvenient) PeopleFoes of a proposed constitutional convention don’t care about
legal purity. They care about their power. By Thomas Sowell
DEMOCRACY AND F REEDOM
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 BarriersOverwhelmed 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, thenation-state system. Americans must pay heed. By Peter
Berkowitz
CALIFORNIA
130 Reservoirs, Yes; Rails, NoIn 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
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141 Sister ActIdeological 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 historicalendgame. By Duncan White
HOOVER ARCHIVES
166 On the Firing Line: A Fiftieth AnniversaryWhere 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
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THE ECONOMY
A World of Fresh Starts
How to foster growth and opportunity around
the globe.
By Michael J. Boskin
Global 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.
Michael J. Boskin is a senior fellow at the Hoover Institution, a member of Hoover’s
Shultz-Stephenson Task Force on Energy Policy and Working Group on Economic
Policy, and the T. M. Friedman Professor of Economics at Stanford University.
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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
funds toward favored
local governments, and
even fudged national
statistics to obscure sky-
rocketing inflation. Among Macri’s resolutions are market-oriented reformsand 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
Europe’s leaders must stop expecting
monetary policy to solve their problems.
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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 Scoble—Creative Commons]
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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-
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
In Asia, all eyes are on China, the
epicenter of a growth slowdown that
has reverberated around the world.
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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.
Reprinted by permission of Project Syndicate (www.project-syndicate.
org). © 2015 Project Syndicate Inc. All rights reserved.
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.
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THE ECONOMY
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
Speaking 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.
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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. Theconnection 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.
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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-
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. Redistributionthrough 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.
Reprinted by permission of the Wall Street Journal. © 2016 Dow Jones &
Co. All rights reserved.
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.
There is no evidence that top earners
succeed at the expense of lower earners.
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THE ECONOMY
Cast Out the“Economic Evils” Five ideas for getting monetary policy back on
track.
By John B. Taylor
Seventy-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.
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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 world. . . . It seems to me a magnificent blueprint.”
In important respects the
blueprint succeeded.
Exchange con-
trols wereremoved,
though
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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 ]
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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—eachcentral 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 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.
We need a new strategy, and it can
build on the strategy of the 1940s.
The Bretton Woods agreement,
according to an economist at the
time, “seems to me a magnificent
blueprint.”
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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.
Reprinted from John B. Taylor’s blogEconomics One (http://economicsone.
com).
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.
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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.
By Michael Spence
When 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.
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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 ]
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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.
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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 LASTPerhaps 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 valueof 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.
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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.
Reprinted by permission of Project Syndicate (www.project-syndicate.
org). © 2015 Project Syndicate Inc. All rights reserved.
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.
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THE ECONOMY
Fail and Fail Again
Like a bad penny, socialism keeps coming back.
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
Allan H. Meltzer is a distinguished visiting fellow at the Hoover Institution,
chair of Hoover’s Regulation and the Rule of Law Initiative, and a professor of po-
litical economy at Carnegie Mellon University.
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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 ]
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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
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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 communisttakeover. 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
foreign capitalists to come
to China if they brought
their best technologies.
Growth soared, not by amiracle 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
Socialism and higher taxes impose a
noncooperative arrangement: taking
from some to give to others.
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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.
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
Capitalism encourages effort and
innovation. Socialism doesn’t.
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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.
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.
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.
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TAXES
The Tax Code,Unchained We really could transform our nightmarish tax
system. Here’s how.
By John H. Cochrane
Left 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?
John H. Cochrane is a senior fellow at the Hoover Institution.
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» 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 lowincomes, 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.
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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 lessprogressivity 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.
Reprinted by permission of the Wall Street Journal. © 2015 Dow Jones &
Co. All rights reserved.
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.
We should also agree to separate the
tax code from the subsidy code.
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POLITICS
Stuck in the Middle
It’s the independents, not the true believers, who
make or break a candidate. And they don’t think allthat much of Donald Trump.
By David Brady
Aterrible 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.
David Brady is the Davies Family Senior Fellow at the Hoover Institution and
the Bowen H. and Janice Arthur McCoy Professor of Political Science at Stanford
University’s Graduate School of Business.
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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.
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
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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 44percent 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.
PERSUADABLE? Candidates whom independents and moderates say they
would not even consider supporting start with a deep, probably insurmount-
able, deficit. [Phil McAuliffe—Polaris]
About two-thirds of voters will not be
Republicans.
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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.
Reprinted by permission of the Wall Street Journal. © 2016 Dow Jones &
Co. All rights reserved.
Available from the Hoover Institution Press is Across
the Great Divide: New Perspectives on the FinancialCrisis, edited by Martin Neil Baily and John B. Taylor. To
order, call (800) 888-4741 or visit www.hooverpress.
org.
40 HOOVER DIGEST • SPRING 2016
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POLITICS
What Trump Knows
The GOP may not need the Donald, but it certainly
needs his supporters.
By Jeremy Carl
The 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.
Jeremy Carl is a research fellow at the Hoover Institution and a member of
Hoover’s Shultz-Stephenson Task Force on Energy Policy and Arctic Security Ini-
tiative.
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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 ]
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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
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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 notpolitics: 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 partfrom competition with immigrant labor. As NBC election analyst Chuck Todd
recently noted, “Republicans don’t win general elections without Donald
Trump’s voters. . . . We used to call them Reagan Democrats.”
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
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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 embraceTrump’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
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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.
Reprinted by permission of National Review. © 2016 National Review, Inc.
All rights reserved.
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.
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HEALTH CARE
Better Ideas, StatJust as predicted, patients are facing higher
costs, fewer choices, and swelling bureaucracy.
ObamaCare needs urgent care.
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.
Meanwhile, millions of other families have lost their previous private insur-
ance directly because of ACA decrees. For new private coverage, insurance
Scott W. Atlas, MD, is the David and Joan Traitel Senior Fellow at the Hoover
Institution.
Key points
» Consolida-
tions and merg-
ers, which have
raised the cost ofhealth care, are
rapidly increas-
ing.
» New taxes and
caps on insur-
ance prices will
cause private
insurers to fail.
» Reforms canstrengthen con-
sumer purchas-
ing power.
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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 PRICESThe 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
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.
Efforts should center on expanding
affordable private coverage and removing
the perverse incentives of the tax code.
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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 requiresguaranteed 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 minimizescompetition 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.
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.
The premiums of what were low-cost, high-deductible plans are accelerating
faster than any other coverage.
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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