AEI » Latest Content American Enterprise Institute: Freedom, Opportunity, Enterprise Fri, 19 Dec 2014 03:56:09 +0000 en-US hourly 1 The magic and miracle of the marketplace: Christmas 1964 vs. 2014 – there’s no comparison Fri, 19 Dec 2014 03:54:44 +0000 ...]]]> Pictured above are some color TVs from the 627-page 1964 Sears Christmas Catalog, available here at the WishbookWeb website along with many other Christmas catalogs from 1933 to 1988. The original prices are listed ($750 for the Sears color TV console and $800 for the more expensive one), and those prices are also shown converted to today’s 2014 dollars using the BLS Inflation Calculator: $5,700 for the basic console TV model and $6,100 for the more expensive model.

To put that in perspective, the pictures below illustrate what $5,600 in today’s dollars would buy in the 2014 marketplace using current prices from the Sears and Best Buy websites:


Bottom Line: For an American consumer or household spending $750 in 1964, all they would have been able to afford was a console color TV from the Sears Christmas catalog. An American consumer or household spending that same amount of inflation-adjusted dollars today (about $5,600) would be able to furnish their entire kitchen with 5 brand-new appliances (refrigerator, gas stove and oven, washer, dryer, and freezer) and buy 7 state-of-the-art electronic items (Toshiba Satellite 14″ Laptop, Garmin 5 Inch GPS, Canon EOS Rebel T5 DSLR Camera, Sony 1000 Watt, 5.1-Ch. 3D Smart Blu-Ray Home Theater System, Sharp 50 inch LED HDTV, an Apple iPod Touch 32GB MP3 Player, and an Apple iPhone 6). And of course, even a billionaire in 1964 wouldn’t have been able to purchase many of the items that even a teenager can afford today, e.g. laptop computer, GPS, iPhone, digital camera.

As much as we might complain about a slow economic recovery, the decline of the middle class, stagnant median household income, rising income inequality and a dysfunctional Congress, we have a lot to be thankful for, and we’ve made a lot of economic progress in the last 50 years as the example above illustrates, thanks to the “magic and miracle of the marketplace.”

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On the left’s dream of turning America into Scandinavia Thu, 18 Dec 2014 22:25:17 +0000 Many left-liberals have a real thing about the social democracies of Scandinavia. As University of Arizona sociologist Lane Kenworthy has put it, “Over the course of the next half century, the array of social programs offered by the federal government of the United States will increasingly come to resemble the ones offered by [the Nordic welfare states].” And he might be right, if Democrats have their way. No sooner the arrival of universal healthcare did Democrats move into their next project: universal preschool. And next perhaps a universal basic income. (Hey, where is the VAT to pay for all this stuff?) There are fans in the media, too. Again, here is New York Times reporter Neil Irwin on what lessons America can learn from Scandinavia’s high labor force participation rates  in creating a pro-work safety net:

In short, more people may work when countries offer public services that directly make working easier, such as subsidized care for children and the old; generous sick leave policies; and cheap and accessible transportation. If the goal is to get more people working, what’s important about a social welfare plan may be more about what the money is spent on than how much is spent. If correct, it could have broad implications for how the United States might better use its social safety net to encourage Americans to work. In particular, it could mean that more direct aid to the working poor could help coax Americans into the labor force more effectively than the tax credits that have been a mainstay for compromise between Republicans and Democrats for the last generation.

AEI’s Mike Strain, quoted in the Irwin piece, has a response here. So too does AEI’s Stan Veuger. Let me pull out a few of their insights. First, Strain:

I’m quoted in an article in the New York Times on the paper, and as the article reports I do think that we can learn some things from Scandinavia — better transportation, better public education — and I oppose expanding the government’s role in child care (we have enough middle-class entitlements, thank you very much). … I would make two other points as well. Americans might be willing to fork over more of their hard-earned cash to the government if they had more confidence that the government would spend the money in a productive way. … And, as I have written, very high marginal income tax rates would likely be very damaging to the long-term future of the United States. Why would a young person want to be a surgeon or an entrepreneur if the government will take seventy cents of her top dollars of income? Like Scandinavian culture, the longer-term reactions to high top rates — skill acquisition, occupational choice, general attitudes about work — are much harder to measure. And it is fine for economists to focus on what they can measure when writing their papers. But it is not fine for the public debate to assume that these effects are zero just because economists can’t measure them.

And Veuger:

But might policy and politics be downstream from culture? Well, that certainly appears to be the case once we look at Scandinavian culture. Scandinavians trust their fellow citizens. They think poor people have typically been unlucky instead of lazy. They vote actively and participate in civil society. They respect the rule of law, and they donate to charity. Professor Kleven recognizes all of these things, and ultimately chooses not to guess what causes what. Yet for the ambitions of American progressives, that distinction matters very much. If all of these things are so precisely because the Scandinavian countries are small and homogeneous and have been that way for quite some time, then there is not much to be learned from this Scandinavian business. The Scandinavians themselves seem quite confident that they know the answer: culture matters and that their countries are small and homogeneous matters. They are the most Euroskeptic peoples of the continent. Norway is not a member of the European Union, Sweden joined only recently, and none of the three adopted the eurozone’s common currency. They seem to like their small, homogeneous countries just fine. And perhaps that’s what Scandinavia ultimately teaches us: the value of subsidiarity, not of subsidies.

Other economists wonder if Nordic-style capitalism is as conducive to innovation. Certainly they file fewer patents and generate fewer superrich entrepreneurs. (Recall Strain’s remarks on taxes.) As economists Daron Acemoglu, James Robinson, and Thierry Verdier explain in their paper “Can’t We All Be More Like Scandinavians?”: “We cannot all be like the Scandinavians, because Scandinavian capitalism depends in part on the knowledge spillovers created by the more cutthroat American capitalism. … Some countries will opt for a type of cutthroat capitalism that generates greater inequality and more innovation and will become the technology leaders, while others will free-ride on the cutthroat incentives of the leaders and choose a more cuddly form of capitalism.”

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Negative interest rates: The Swiss Central Bank joins in Thu, 18 Dec 2014 22:02:31 +0000 Negative interest rates keep happening although economists generally assured us they couldn’t. They will soon apply to large deposits with the central bank of Switzerland, as today (December 18), the Swiss National Bank (SNB) joined the European Central Bank in the negative interest rate club.

The SNB announced that starting January 22, 2015, demand deposits over a certain threshold held with it by banks and financial institutions will have a negative interest rate of -0.25%. Further, said the SNB, “we aim to take the three-month [Swiss franc] Libor into negative territory.”  Its target range for this rate will be -0.75% to -0.25%.

As it was in the 1970s, when the Swiss imposed negative interest rates on Swiss franc deposits by foreigners, the cause of this action is the unwanted pressure for further appreciation of the Swiss currency. “We are introducing negative interest rates,” they explain, “to support the minimum exchange rate.” More clearly stated, this phrase means: to cap the maximum appreciation of the Swiss franc.

How widespread can negative interest rates become? How negative can they get? Nobody, including economists, knows.

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‘Cuba the Morning After’ Thu, 18 Dec 2014 21:15:02 +0000 Yesterday, President Obama announced a decision to reestablish diplomatic relations with Cuba. Discussions to reopen the relationship will begin immediately and will include efforts to reestablish an embassy in Havana. The president’s announcement makes particularly relevant a book by AEI emeritus scholar and Latin American expert Mark Falcoff.

In “Cuba the Morning After: Confronting Castro’s Legacy” (AEI Press, 2003),  Falcoff surveys  the damage that decades of Communist rule have done to the people of Cuba including a prostrate economy, widespread poverty and political repression. Falcoff  argues that it will be difficult, perhaps impossible, to reverse the decades-long devastation and that to expect an instantly revitalized dynamic Cuba to emerge is unrealistic.

For more on Obama’s move to change the diplomatic relationship with Cuba, read Roger Noriega’s recent piece on the matter.

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Where will Hollywood’s surrender take us? Thu, 18 Dec 2014 18:49:38 +0000 What if Golden Age Hollywood were like today’s Tinsel Town?

Charlie Chaplin would never have made The Great Dictator. Hitler’s threats would have led to it being pulled from circulation; one of the greatest anti-Nazi propaganda pieces would never have seen the light of day just before we went to war.

Sony Pictures has now confirmed that it is canceling the Christmas release of The Interview, a comedy starring James Franco and Seth Rogen, due to North Korean–directed threats against theaters. The majority of America’s main theater-chain owners caved to the outrageous and unrealistic warnings from a hitherto unknown group called “Guardians of Peace.” Not since the fatwa against Salman Rushdie and The Satanic Verses has the West so cravenly surrendered to intellectual terrorism.

And now, American business finds itself on the front lines.

The U.S. government has confirmed that North Korea is behind the attacks that have crippled Sony Pictures. For the past week, Sony’s internal computer systems have been ripped apart, with e-mails, financial details, film copies, and scripts tossed across the Internet. With that, an impoverished nation run by the most isolated regime on earth has made the gigantic American entertainment industry cower.

The truth is, we’ve been heading this way for a long time, starting with our response to Islamist assaults on those whom they believe blaspheme Mohammed. Now, we’re moving to another level.

The Kim-family regime in North Korea, now run by third-generation owner Kim Jong Un, is more or less a mafia that happens to rule a state. Next to Iran, North Korea is the world’s largest purveyor of state-sponsored terrorism. It traffics staggering levels of fake American dollars, tobacco, drugs, and of course, nuclear technology. It has tied down 30,000 U.S. troops on the Korean peninsula for years, and given China a perfect foil to use against U.S. interests in Asia. It has kidnapped Japanese citizens from their homes and sunk South Korean naval ships.

Yet this week was Pyongyang’s biggest coup so far. The multi-billion dollar U.S. entertainment industry has been brought to a shuddering halt by a government whose oppressed people might as well live in the Middle Ages.

Every terrorist organization and disruptive state will be looking on with envy at the North Korean victory and hastily scribbling notes.

A new type of asymmetric warfare, threatening the free flow of ideas (no matter how stupid) strikes at the core of Western liberties. There are innumerable ways in which copycat hostage takers can emulate North Korea, since everything today can be done from the shadows.

An academic conference on Chinese suppression of Tibet or Xinjiang separatists? Threaten to blow up the auditorium. A book exposing Vladimir Putin’s Mafioso approach to government? Blackmail the publisher with pictures of his children. What about a university that offers classes on North Korea? Take down its computers, destroy its academic records. A chain that opens up stores in an enemy of Iran? Sabotage its logistics, threaten to poison its products.

How about the producers of intellectual content in this brave new world? Expect more self-censorship — if Hollywood’s A-listers think they may be blown up for poking fun at the villains.

James Franco has been photographed accompanied by large new bodyguards already. Would Theo van Gogh, shot by an Islamist several years ago for his work, have told the truth if he knew what lay ahead? Knowing what his fate was? Let’s hope he would have.

Yet how many voices will be silenced by that fear: You know what? It’s really just not that worth it.

There has not yet been any type of government thinking about this type of threat, what the response should be, or how the free flow of ideas can be managed in a world of constant cyberwarfare.

The shadows of the cyberworld reveal more opportunity for mischief and evildoing every day. They are the ultimate badlands, but, like the train carrying in the ruthless gang in High Noon, they matter only as much as we give up our safety and security to them.

America’s entertainment industry has surrendered in the badlands’ first public battle. That choice ensures that there are many more to come.

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The oil price collapse may end the ‘Texas Miracle’ — at least for now Thu, 18 Dec 2014 18:08:11 +0000 The energy sector gives, and the energy sector takes. The stunning drop in oil prices looks like bad news for the “Texas Miracle.” (Texas is responsible for 40% of all US oil production — vs. 25% five years ago — and all of the net US job growth since 2007.) This from JPMorgan economist Michael Feroli: “As we weigh the evidence, we think Texas will, at the least, have a rough 2015 ahead, and is at risk of slipping into a regional recession.”

So perhaps a minor key replay of what happened in the Lone Star State back in 1986 when oil prices also collapsed. The oil patch bust caused Texas unemployment to rise, housing prices to fall, and, eventually, a nasty banking crisis. On the positive side, natural gas prices have not fallen along with oil — unlike in 1986 — while the Texas  employment share from oil is less today than back then. But there are reasons to worry as well:

While these are all valid, they are not so strong as to signal smooth sailing for the Texas economy. Financially, oil is a fair bit more important than gas for Texas, both now and in 1986, with a dollar value two to three times as large. Moreover, while energy employment may be somewhat smaller now, we are not talking about night and day: the current share is about 3/4ths what it was in 1986. (And given the higher capital intensity there are some reasons to think employment may be greater now in sectors outside the traditional oil and gas sectors, such as pipeline and heavy engineering construction).

As we weigh the evidence, we think Texas will, at the least, have a rough 2015 ahead, and is at risk of slipping into a regional recession. Such an outcome could bring with it the usual collateral damage that occurs in a slowdown. Housing markets have been hot in Texas. Although affordability in Texas looks good compared to the national average, it always does; compared to its own history, housing in some major Texas metro areas looks quite dear, suggesting a risk of a pull-back in the real estate market.

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It’s always Christmastime for farmers Thu, 18 Dec 2014 17:28:36 +0000 It is Christmas time once again and in my part of the world, southwestern Montana, the snow has arrived and will be with us until early March.  Most nights the temperature will fall well below 20 degrees Fahrenheit; some days the thermometer won’t rise above zero.

That’s winter time in the Northern Great Plains and the eastern Rocky Mountains, where cabin fever is a real phenomenon and ranching becomes truly hard work. In this world, cattle can be inconvenient. They need water and calories in places where they can feed and drink, and cows often calve on bitterly cold February and early March nights.

Ranching is also risky in the winter time; herds can be decimated by blizzards and what seem like mile high snow drifts. And ranchers, on the whole, are genuine risk taking entrepreneurs who, for the most part, neither seek nor receive substantial federal bailouts. Most of them also know that country of origin labelling is a bad economic idea that has reduced the prices they are paid by meatpackers and feedlots. The National Cattlemen’s Beef Association, for example, has recently argued that the US should “reform” and essentially terminate that program rather than appeal a recent WTO finding that the program violates US WTO commitments.

The federal support ranchers do get is modest and comes mainly in three forms. They receive relatively small scale disaster aid payments for excessive cattle losses caused by bad weather or disease and moderate compensation for loss of feed on the lands their cattle graze in the summer because of exceptional drought.

Ranchers also have access to federally subsidized cattle price related insurance products that are generally poorly designed and, happily from the taxpayer’s perspective, rarely used, and a heavily subsidized rainfall index insurance product associated with forage production that is more extensively exploited. But livestock insurance programs account for less than 2% of the more than eight billion dollars in annual average taxpayer funded subsidies that underwrite the US federal agricultural insurance program.

In addition, through publicly funded research and development programs, USDA and the nation’s Land Grant and other universities generate much of the science on which new medical, production and land management technologies are developed that improve the efficiency of the livestock industry. The result is that meat prices at the supermarket are lower than would otherwise be the case, though that may be hard for some to believe given the current record high prices we are paying for hamburger. The reason for these current high prices is complex, but derives from recent increases in global demand relative to global supply for meat based protein.

Many crop producer organizations have a different view about how their world should be managed, as do milk producer organizations.   The corn, wheat, soybean, peanut, rice, milk and cotton lobbies have been highly successful in obtaining substantial subsidies from the federal government over the past sixty years.  And, having enjoyed those subsidies, like Oliver Twist with respect to his daily allotment of oatmeal (but with much less justification), they want more.  By and large, they were successful in getting their “more” in the 2014 farm bill.

Of course, the difference between Oliver and most of the farmers served by those organizations is that poor Oliver was genuinely poor, in fact starving. In contrast, as was recently pointed out in The Economist, most federal crop subsidies go to farm households that have much higher incomes and are far wealthier than the average US household.

So, as at every Christmas time, we should genuinely be thankful for all the farmers and ranchers who help us enjoy better lives. But we should also expect Congress and the administration to deliver federal farm policies that focused on real needs and do not spend tax payers’ funds on programs that, for the most part, transfer incomes to the relatively wealthy in ways that waste society’s scarce resources.

Follow AEIdeas on Twitter at @AEIdeas.

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Dodd-Frank change won’t increase risk of taxpayer bailouts Thu, 18 Dec 2014 16:56:50 +0000 ...]]]> Did the government sell out to Wall Street by repealing a provision of the Dodd-Frank Act in order to pass a spending bill? “A vote for this bill is a vote for future taxpayer bailouts of Wall Street,” Sen. Elizabeth Warren warned in a passionate speech on the Senate floor. Setting polemics aside, the repeal of Section 716, the so-called swaps push-out rule, will do little to increase the risk of a taxpayer bailout of Wall Street. But it will reduce the costs of banks’ swap businesses.

The provision requires bank holding companies to push out certain swaps trades from their insured depository bank to a non-insured subsidiary. The rule mainly applied to “uncleared credit default swaps, equity derivatives and commodities derivatives,” according to Federal Deposit Insurance Corp. vice chairman Thomas Hoenig.

Many other kinds of swaps were permitted to stay within the insured depository institution, including those that are hedges for the bank’s risk exposures; those that reference interest rates, currencies, precious metals, loans, and qualified debt instruments; and credit default swaps that are cleared using a regulated clearinghouse. If a bank failed to move the banned swaps, it lost deposit insurance and the ability to borrow from the Federal Reserve.

Banks’ goal in pushing for the repeal of this provision was mostly to reduce the cost of their swaps businesses — not to increase the benefits they receive from taxpayer safety nets. Derivatives trading is expensive, requiring employees with specific skills and tailored systems and risk controls. Duplicate swaps operations within the same bank holding company is money poorly spent.

Perhaps banks’ biggest cost savings will come from jettisoning the requirement that banks shift dealer-to-dealer credit default swaps to a regulated clearinghouse. The forced migration of dealer-to-dealer credit swaps would have generated substantial new collateral requirements because clearinghouses require collateral for initial margin that is not needed under bilateral dealer collateral agreements. It would also have imposed large new daily liquidity needs.

When it comes to systemic risk and the potential for taxpayer bailouts, however, the repeal of the swaps push-out rule changes little. With or without the rule, the government protects the swaps contracts of the largest institutions.

Swaps contracts receive special treatment in bankruptcy. Counterparties are allowed to immediately close out their swaps positions and seize and sell the pledged collateral of the bankrupt counterparty rather than wait for a recovery through the judicial bankruptcy process.

If a large swaps dealer defaults without government intervention to prevent bankruptcy and stop contracts from terminating, a huge volume of collateral will be seized and dumped on the market. To prevent this massive “asset fire sale,” financial regulators grant swaps and other derivatives special treatment in their post-Dodd Frank resolution plans.

Swaps contracts that remain in the insured bank are fully protected. If the insured bank fails, the FDIC resolution process typically guarantees a failing bank’s derivatives contracts, including swaps. Legally, the FDIC has 24 hours to decide whether or not it will guarantee a failing bank’s derivative contracts. But in practice, the FDIC always protects derivatives — usually by transferring them to a healthy acquiring institution.

Swaps booked in a holding company subsidiary outside of the insured bank are also protected as long the swaps are written by a SIFI. Under the FDIC’s single point of entry plan for exercising its Dodd-Frank orderly resolution powers, the FDIC will take over the SIFI parent holding company and use its assets to guarantee all the obligations of the company’s subsidiaries in order to keep the subsidiaries open and operating. The protection not only prevents “asset fire sales,” it also prevents swap defaults from triggering bankruptcy proceedings in other countries that would bollix the FDIC’s orderly liquidation plan.

Some have claimed that because the repeal allows banks to write dealer-to-dealer credit default swaps in the insured bank, rather than shifting them to clearinghouses, it extends the government safety net. But this claim ignores the fact that the government plans to insure all swaps cleared through regulated clearinghouses.

All regulated clearinghouses are now designated as systemically important financial market utilities. This gives swaps clearinghouses access to the Federal Reserve lending safety net — just as if they were in an insured bank. And should a clearinghouse default, the FDIC will use its new orderly liquidation powers to transfer clearinghouse swap contracts to a solvent counterparty, preventing contract close out and protecting counterparties.

On balance, the repeal of the swaps push-out rule is unlikely to impose more risk to the financial system or to taxpayers. It is true that the repeal may generate more swaps activity than if the provision had been allowed to stand. But the increased activity will be attributable to the operational cost savings afforded by the change, not because the repeal added to the taxpayer-backed safety net. In fact, big banks’ swaps contracts are backed by the government either way.

Paul H. Kupiec is a resident scholar at the American Enterprise Institute.

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The Pentagon’s to-do list Thu, 18 Dec 2014 16:26:05 +0000 President Barack Obama has nominated former Deputy Secretary of Defense Ashton Carter to replace Chuck Hagel as secretary of defense. Carter is a sensible pick and is expected to be swiftly confirmed by the Senate. Once in office, he will face a mounting list of challenges with only a narrow window to act before the 2016 election cycle consumes Congressional attention.

While Carter can be certain that unexpected events will consume his time and attention as secretary – just as Russia, Ebola and the Islamic State group have for others in recent years – there are clear and predictable problems to tackle on day one. A recent hearing on the findings of the blue-ribbon National Defense Panel points to several key items that need to be on the Pentagon’s to-do list over the final two years of the Obama administration:

1) Convince the president and work with Congress to overturn the Budget Control Act’s defense cuts.

Testifying before the House Armed Services Committee, former Obama Pentagon official Michèle Flournoy called automatic spending cuts “a threat to national security” and argued that restoring defense spending to more stable, predictable levels would send an immediate signal of America’s commitment to both friends and foes alike. While Pentagon leaders have consistently opposed sequestration, the commission’s report makes a compelling case that the entirety of the Budget Control Act for defense – approaching $1 trillion over a decade – should be overturned.

If confirmed, Carter should begin showing Congress how budget reductions beyond sequestration have harmed the force and make the case for returning to the path laid out by then-Secretary of Defense Robert Gates in his 2012 Future Years Defense Program. There is a lack of understanding by policymakers about how bad the drawdown is hurting capacity and readiness and how much is required to reverse course. It goes beyond simply halting sequestration to restoring defense budget growth that is slightly above inflation to keep the Defense Department afloat.

2) Outline today’s readiness crisis and propose a readiness supplemental spending bill.

The Joint Chiefs are increasingly describing in animated and dire terms the near- and long-term readiness challenges across the armed forces. This problem has been accruing for years and began before the Budget Control Act but worsened considerably after. As noted during the same hearing, Marine Corps Commandant Gen. Joseph Dunford recently warned that half of all Marine Corps forces currently at their home bases are at “a degraded state of readiness.” Flournoy cautioned that similar circumstances exist across the services and that in the case of a major operation, uniformed personnel would be sent into harm’s way without proper training or equipment.

The National Defense Panel called for an emergency readiness supplemental aimed at triaging the military’s readiness crisis. This solution is smart because it avoids the intractable politics of artificially linking defense and non-defense spending as equals like in other budget proposals. Passing legislation for urgent priorities, such as taking care of America’s military, is something Congress would be more than willing to undertake were it outside of legal budget caps, which this would be. Carter would need to be clear that this would only be a shot in the arm for the force and not a long-term solution to budget unpredictability, instability and inadequacy.

3) Create a genuine partner in Congress on Pentagon reform efforts.

Throughout the Congressional hearing on the findings of the National Defense Panel, Flournoy further emphasized the importance of comprehensive reform in how the Pentagon conducts its daily operations. Even with additional funds, the Pentagon must look to maximize the value of each dollar and keep faith with those in uniform. While this includes providing generous compensation and benefits, it also includes ensuring that service members have the best equipment and cutting-edge training when they head into battle. As those in the department have argued, these two contracts are increasingly at odds. But scaling back infrastructure or overhead or even the number of civilians or how service members are paid need not be all pain and no gain. Elected officials must be convinced that new promises can be made with future enlistees that give more benefits to a larger number of those serving. They must also believe that smart trimming of excesses like unused infrastructure can support fielding more combat power and a greater number of jobs gained than lost as a result.

4) Revisit the Pentagon’s force-sizing construct.

The framework used to generally size and build the U.S. military has gradually been squeezed in recent decades even as the force has been asked to do more while getting smaller. During the 1990s, the Pentagon articulated a two-war standard, which called for a military large enough to fight and win two major operations nearly simultaneously. The National Defense Panel differed slightly from the Pentagon’s latest 2014 strategy by not only calling for a military sized to win one protracted campaign and fight a holding action in a second theater (as the Pentagon calls for), but to also conduct a host of other regular and ongoing missions including counterterrorism, homeland security and deterring aggression elsewhere.

Former Pentagon and State Department official Eric Edelman, testifying alongside Flournoy, noted that most Pentagon plans today are based on the assumption that the U.S. will fight and win short wars. Yet the recent past is full of anything but short operations. If the need to mobilize for a future conflict should arise, the Pentagon would be largely unprepared. The need to think through a mobilization scenario – along with the taxing demands of everyday presence, deterrence and counterterrorism mission requirements means that the Pentagon must give serious thought to altering its force-sizing construct to reflect a more realistic batch of scenarios and missions. Otherwise, Carter will struggle to reconcile how a smaller, older military can still meet even the reduced goals in the president’s 2012 strategic guidance before an already skeptical Congress and chiefs who are ready to say publicly they simply cannot meet the current strategy.

5) Continue the Pentagon’s promising launch of a “third offset” strategy.

Recently, Pentagon officials have articulated the need to develop a “third offset” strategy to combat America’s declining military technological superiority. The initiative is designed to cultivate creative plans and programs that will help maintain America’s military preeminence for the next generation. Yet previous offset strategies relied on substantial technological innovations such as nuclear weapons and the information technology revolution. As former Ambassador Edelman argued during the hearing, in the absence of higher budgets, the Pentagon may lack the resources to invest in the types of technologies that could deliver a true breakthrough advantage in the future. While understanding that technology has its limits when it comes to warfighting, the next secretary of defense must balance short- and long-term interests and invest in innovation. The need to shore up readiness, buy back some capacity cuts that have gone too far and still invest in capability and innovation is another reason Carter should seek a return to 2012 defense spending levels. All three priorities are unaffordable under current plans, period.

There is plenty for the next secretary of defense to tackle head on and no time to lose. If confirmed, Carter would surely hit the ground running. Yet if he is to have a successful tenure at the Pentagon, he will have to address these items and more. He should shamelessly steal a few solutions from the National Defense Panel to allow the Defense Department to begin rebuilding as soon as possible.

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Congress creates another tax-preferred savings account Thu, 18 Dec 2014 15:56:21 +0000 All income tax systems, including our own, impose a penalty on saving. A worker who consumes today pays tax on her wages; a worker who saves to consume in the future pays the same tax on her wages plus a second tax on the return earned on her savings, resulting in a higher percentage tax burden. The saving penalty interferes with Americans’ decisions about the timing of their consumption and slows the capital accumulation that drives long-run economic growth.

Over the years, Congress has displayed considerable ambivalence about the saving penalty. It has created dozens of tax-preferred accounts that allow savers to escape the penalty by removing either the first tax (making contributions to the account tax-deductible) or the second tax (making account withdrawals tax-exempt). Each type of account has its own, often complicated, contribution limits and eligibility rules. And, each account requires that savings be used for a different purpose, such as retirement (traditional and Roth IRAs and 401(k)s), education (Coverdell and 529 accounts), health care (HSAs), and so on.

Soon, there will be one more tax-preferred savings account. Congress has passed, and President Obama will soon sign into law, the Achieving a Better Life Experience (ABLE) Act, which will create a new ABLE account. The account is a good idea within the context of the current income tax system, but highlights the system’s inherent limitations.

The Act will allow annual contributions of up to $14,000 (rising with inflation in future years) to be made to an ABLE account by, or on behalf of, an individual who became blind or significantly disabled before age 26. Contributions will not be tax deductible, but the money will grow tax-free inside the account. Withdrawals used to meet the beneficiary’s education, housing, transportation, and certain other expenses will be tax-free. (Withdrawals for other purposes will trigger income tax, plus a 10% penalty, on the portion of the withdrawals attributable to tax-free earnings rather than the original after-tax contributions.) Also, if the beneficiary applies for Medicaid or Supplemental Security Income, the account balances will often not be counted against the programs’ asset limits.

The new ABLE accounts will allow disabled individuals and their families to save for their future needs without facing the income tax’s saving penalty. The accounts fall short of a complete solution for the challenges facing individuals with disabilities, for reasons explained by Howard Gleckman of the Urban-Brookings Tax Policy Center. But, numerous disability advocacy organizations welcome the accounts as a step forward.

More broadly, the new law should prompt us to rethink our tax treatment of saving. We have an array of complicated rules to measure and tax the income from saving and another array of complicated rules to remove the tax from dozens of types of savings that Congress has singled out for favorable treatment. Meanwhile, the large portion of national saving done outside tax-preferred accounts faces the income tax’s saving penalty, impeding economic growth.

Rather than continuing to identify, one by one, the “good” types of saving that should be spared the income tax penalty, Congress should remove the penalty from all saving and let Americans decide for themselves which kinds of saving are best. In short, we should replace the income tax with a progressive consumption tax. One such tax is the personal expenditure tax, in which individuals are allowed to deduct all of their saving from their income. Another is the Bradford X tax, in which individuals pay tax only on labor income and businesses pay a cash flow tax that doesn’t affect marginal investment incentives.

ABLE accounts will help many people by removing the income tax’s saving penalty in one more situation. Now, let’s take the next step and end the saving penalty for everyone.

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