hoover digest, 2016, no. 2, spring

8/18/2019 Hoover Digest, 2016, No. 2, Spring

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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 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,

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

» Analyze the effects of government actions and public policies

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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.

. . . 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

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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

HOOVER DIGEST • SPRING 2016 3


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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

4 HOOVER DIGEST • SPRING 2016


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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.



24/184

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.




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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.



27/184

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 exploiting underused resources is both

unstoppable and accelerating.



28/184

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

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Jackson, and John B. Taylor. To order, call (800) 888- 4741 or visit www.hooverpress.org.



29/184

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.



30/184

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.




31/184

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



32/184

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.



33/184

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.



34/184

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,

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35/184

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.



36/184

» 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.



37/184

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.



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


We should also agree to separate the

tax code from the subsidy code.



38/184

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.



39/184

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



40/184


41/184

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.



42/184

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.



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.



43/184

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.



44/184

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




45/184

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



46/184

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



47/184

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

hoover digest, 2016, no. 2, spring

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