Putin Meeting Caps Moscow Conference...at least to me, was the energy and vitality in the streets of both Moscow and St. Petersburg. It is hard to describe, but people had a bounce

Afour and one-half hour meeting withPresident Vladimir Putin was thehighlight of the Cato Institute’s thirdconference in Russia, “A Liberal Agen-

da for the New Century: A Global Per-spective.” Andrei Illarionov, Putin’s senioreconomic adviser, assembled some of theworld’s leading free-market reformers,including former Estonian prime minis-ter Mart Laar; José Piñera, architect ofChile’s successful pension reform; and Catopresident Ed Crane, for a marathon dis-cussion of Russia’s problems and the urgentneed for free-market reforms.

A front-page article in the MoscowTimes, headlined “World’s Reformers PayPutin a Visit,” began this way:

President Vladimir Putin brain-stormed with some of the world’sleading practitioners of liberal eco-nomic reform late into the eveningFriday as he steps up his drive to meet

his pledge of doubling GDP within10 years. Among those gathered roundan oval table for nearly four hoursof discussion at Putin’s tree-surroundedNovo-Ogaryovo residence were econ-omists whose implementation of lib-eral reforms in their countries fueledthe rapid growth Putin has been seek-ing to achieve here.

Calling on Putin to take more rad-ical action were José Piñera, the for-mer labor and social minister of Chile,often dubbed the “Father of PensionReform” for pioneering private pen-sion reforms that sparked rapid eco-nomic growth; and Ruth Richard-son, New Zealand’s former financeminister whose tough stance on curb-ing inflation and bureaucracy helpedprompt an economic boom.

Participants reported that Putin said, “I

PolicyReportMay/June 2004 Vol. XXVI No. 3

In This Issue

Continued on page 18

Putin Meeting Caps Moscow Conference

Cato senior fellow José Piñera gives copies of his pamphlets on Social Security privatization to Russian president Vladimir Putin. Putin met for four and ahalf hours with Piñera, Cato president Ed Crane, and other market liberals at his residence outside Moscow at the conclusion of Cato’s April 8–9 confer-ence, “A Liberal Agenda for the New Century: A Global Perspective.”

Star Parker takes on the plantation, p. 7

Crane on Putin 2Michael Tanner: “Cato’sPlan for Reforming Social Security” 3

Capitol Hill Briefings 4Immigration: five views 8Kerry’s health care plan 14Cato Calendar 15Friedman and Schwartz

look back at A Monetary History 16Hayek celebrated 16New book on Social Security 17

tape, Milton Friedman started each event off with an excellent admo-nition that the Russians, Eastern Europeans, Chinese, and Latin Amer-icans in the audience look to the institutions in place in the UnitedStates and Great Britain one hundred years ago when the tremendousgrowth of our societies was creating the wealth that today allows usto waste it on unnecessary bureaucracies and regulations.

The many distinguished speakers included noted economist Al Har-berger of UCLA; Daniel Yergin, coauthor of The Commanding Heights:The Battle for the World Economy; José Piñera, world leader in thefight for private Social Security accounts; Mart Laar, former prime min-ister of Estonia; Ruth Richardson, former finance minister of NewZealand; and Illarionov. But more impressive even than the conferences,at least to me, was the energy and vitality in the streets of both Moscowand St. Petersburg. It is hard to describe, but people had a bounce intheir step and a smile on their face. Economic activity was every-where. Retail stores of every variety were apparently flourishing and

restaurants offered wonderful food (in contrastto the forced diet of the 1990 conference). AsCato Club 200 member August Meyer, whohas a major investment in a very successfulCostco-type chain of superstores in St. Peters-burg, put it, “It’s like watching civil societybloom before your very eyes.”

For me the highlight of the trip was a fourand one-half hour meeting with President Putinat his residence outside Moscow. Nine of usfrom the conference went to the meeting, which

was covered by some 30 journalists. Among those at the meeting werePiñera, Yergin, and Richardson. José of course pushed Putin to simpli-fy and radicalize the Social Security program in Russia. Yergin empha-sized how important it was to believe in the power of ideas to changethe world. Richardson urged the Russian president to speed up liberalreforms. And I said it was important to have confidence in the politi-cal and economic outcomes of a free society. I paraphrased the greatTaoist philosopher Lao Tse to the effect that truly strong leaders leavethe people alone. I also noted that to attract foreign capital, which Putinmust do to double the Russian economy in 10 years, as he’s pledged,Russia must have the perception and reality of the rule of law, uncor-rupted courts, and protection of contracts.

Finally, I said that another often overlooked aspect of attract-ing foreign investment is a free press. True, a free press is first andforemost a civil liberties issue. But foreign investors look to a freepress in developing nations as an institutional protection for theirinvestments. I suggested that the outside world is concerned thatPutin’s administration has intimidated the media in Russia and thatthis would inhibit economic growth. Overall, President Putin struckme as a man of serious intelligence with a very strong presence. Putinsaid at one point, “You should come back next year. I want to makeMoscow the center of liberal debate in Europe.” A four and one-half hour meeting suggests he may well mean it.

—Edward H. Crane

Two achievements of the CatoInstitute of which I am mostproud are our conferences inChina and the U.S.S.R. in 1988

and 1990, respectively. In each casewe held events devoted to free mar-kets and individual liberty for whatI believe was the first time in the his-tory of either Communist regime. InShanghai we brought Milton andRose Friedman, George Gilder, JimDorn, and the late economist DonLavoie. What a great event that was!

The energy among our Chineseattendees was palpable as they fol-

lowed Milton around like he was a rock star. There were so manyquestions for him that he asked us to hold apress conference so he could answer them allat once. We had to halt the conference aseveryone wanted to listen to Uncle Miltie.And Gilder got a huge round of applause ashe ended his speech with, “Let a billion flow-ers bloom!” With Tiananmen Square barelynine months away, I really didn’t appreciatehow courageous the Chinese speakers were.

The event in Moscow was also a stirringexperience. We brought Nobel laureate JimBuchanan, Charles Murray, Gilder and Dorn, and the future firstwinner of the Friedman Prize, the late Peter Bauer. Among the Sovi-et speakers were Moscow mayor Gavriil Popov, St. Petersburg may-or Anatoly Sobchak (the mentor to Russian president VladimirPutin), and Grigory Yavlinsky, still one of Russia’s leading liberals.

I had first gone to the Soviet Union in 1981 (and actually wrotean article predicting the collapse of the Evil Empire). Not much hadchanged by 1990. Communism had sucked the spirit out of thepopulation. There were no products on the shelves, no energy in thestreets, and, worse, no sense of hope. Well, perhaps a little hope, as Iwas able to present a bust of F. A. Hayek to Yevgeny Primakov, thechairman of the Council of the Union of the Supreme Soviet. Thepresentation took place at the Oktyabrskaya Hotel, used exclusivelyby the Communist Party Central Committee. We handed out CatoInstitute pins to the hotel staff that had, in addition to our logo, print-ed in Cyrillic, “private property” on the top and “capitalism” onthe bottom. That they were a hot item for the workers was proba-bly a good indication that the end of communism was at hand.

All of which brings us to the remarkable week Cato had in Rus-sia at the beginning of April. We held a two-day conference in Moscow,attended by some 300 people, half of whom came from outsideRussia (there were two dozen nations represented), and a one-dayevent in St. Petersburg for about 250 people. Ian Vàsquez of Catoand Andrei Illarionov, the libertarian economic adviser to Putin, puttogether an outstanding program. The theme was what developingnations need to do to create prosperous civil societies. Via video-

2 • Cato Policy Report May/June2004

President’s Message

Four Hours with Putin

❝ Putin said, ‘I wantto make Moscow thecenter of liberaldebate in Europe.’❞

May/June 2004 Cato Policy Report • 3

Cato’s Plan for Reforming Social Security

Cato Policy Report is a bimonthly review published by the CatoInstitute and sent to all contributors. It is indexed in PAISBulletin. Single issues are $2.00 a copy. ISSN: 0743-605X.©2004 by the Cato Institute.•Correspondence should beaddressed to Cato Policy Report, 1000 Massachusetts Ave.,N.W., Washington, D.C. 20001. •WEBSITE: www.cato.org or call202-842-0200 or fax 202-842-3490.

CATO POLICY REPORTDavid Boaz....................................................................... EditorDavid Lampo ...................................................Managing EditorTimothy B. Lee..............................................Editorial AssistantPatricia Bullock...........................................Production Designer

CATO INSTITUTEEdward H. Crane..........................................President and CEOWilliam A. Niskanen ...................................................ChairmanDavid Boaz .........................................Executive Vice PresidentTed Galen Carpenter ...V. P., Defense & Foreign Policy StudiesRay Dorman..................................................V. P., DevelopmentJames A. Dorn ........................................V. P., Academic AffairsWilliam Erickson.................V. P., Finance and AdministrationRoger Pilon ....................................................V. P., Legal AffairsRichard Pollock ....................................V. P., Communications

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James M. Buchanan......................Distinguished Senior FellowEarl C. Ravenal .............................Distinguished Senior Fellow

Randy E. Barnett ...................................................Senior FellowJames Bovard ......................................Associate Policy AnalystLawrence Gasman...........Senior Fellow in TelecommunicationsRonald Hamowy...................................Fellow in Social ThoughtSteve H. Hanke......................................................Senior FellowJohn Hasnas..........................................................Senior FellowPenn Jillette ......................................Mencken Research FellowDavid B. Kopel.....................................Associate Policy AnalystChristopher Layne ...........Visiting Fellow, Foreign Policy StudiesPatrick J. Michaels....Senior Fellow in Environmental StudiesStephen Moore .....................................................Senior FellowP. J. O’Rourke ..................................Mencken Research FellowGerald P. O’Driscoll Jr...........................................Senior FellowJosé Piñera.............................Co-chair, Social Security ChoiceJim Powell.............................................................Senior FellowRonald Rotunda ............Senior Fellow, Constitutional StudiesTeller.................................................Mencken Research FellowCathy Young .................................................Research Associate


by Michae l Tanner

Recently, Washington was sent into oneof its periodic spasms of shock andindignation when Federal Reservechairman Alan Greenspan commented

that Social Security cannot continue to payits promised level of benefits with its cur-rently projected levels of revenue. Greenspanwas not saying anything new, but politi-cians of every stripe reacted as if he hadannounced that the sun was about to standstill in the sky.

In their latest report the Social Securitysystem’s own trustees have reaffirmed thetruth of Greenspan’s statements. In doingso, they offer us another opportunity to havean honest debate about how to reform SocialSecurity and ensure a safe and secure retire-ment for our children.

The trustees confirm that Social Secu-

rity will begin to run a deficit by 2018, just14 years from now. Thus, while politiciansdithered and tried to pretend the issue wouldgo away, we moved another year closer todisaster. But the truly frightening numbersare found further into the report and makeclear the magnitude of the fiscal train wreckawaiting us.

The figure most widely cited in the mediais the “present value” of Social Security’sunfunded liabilities—$3.7 trillion—whichis the amount needed to cover shortfalls afterthe Trust Fund is exhausted in 2042. Thatnumber is an increase of $200 billion sincethe 2003 report. (Present value is the amountthat would have to be put away today, atnormal interest rates, to fund the comingshortfalls.) An additional $1.5 trillion wouldbe needed to redeem the bonds in the trustfunds, for a total unfunded liability of $5.2trillion over the 75-year actuarial period.Looking at the problem over an infinite hori-zon, the present value of Social Security’sunfunded liabilities is roughly $11.9 trillion.To put this in context, in 2018, the firstyear that Social Security will run a cashdeficit, the shortfall will be approximate-ly $16 billion, or roughly the equivalent of

the current budgets for Head Start and theWIC nutritional program. In another twoyears, Social Security’s shortfalls will near-ly exceed not just those two programs butalso the entire Departments of Educa-tion, Commerce, and Interior, and the Envi-ronmental Protection Agency. By 2030 orso, you can throw in the Departments ofEnergy, Housing and Urban Development,and Veterans Affairs. And the biggest deficitswould be still to come.

To look at it in terms of taxes, in the firstyear after Social Security starts running adeficit, the government must acquire revenuesequivalent to nearly $200 per worker. By2042, the additional tax burden increases toalmost $2,000 per worker, and by 2078 itreaches a crushing $4,200 per worker (inconstant 2004 dollars). And it continues torise thereafter. Functionally, that would trans-late into either a huge increase in the payrolltax, from the current 12.4 percent to as muchas 18.9 percent by 2078, or an equivalentincrease in income or other taxes.

This doesn’t begin to take into accountSocial Security’s other problems: a poorand declining rate of return for younger

Michael Tanner is director of health andwelfare studies, and director of Cato’s Pro-ject on Social Security Choice. He is theeditor of Social Security and Its Discon-tents: Perspectives on Choice, recently pub-lished by the Cato Institute.

Essay

Hayek for laying the intellectual foundationsfor the modern free-market movement.

◆ February 3: At an Atlanta luncheon to pro-mote his new book, Give Me a Break: HowI Exposed Hucksters, Cheats, and ScamArtists and Became the Scourge of the Lib-eral Media, ABC News anchor John Stosselsaid that the media establishment is suffo-catingly liberal. Give Me a Break tells thestory of Stossel’s transformation from a lib-eral to a libertarian.

◆ February 4: The Constitution found at theNational Archives is not the Constitution cur-rently being enforced as the law of the land,charged Cato senior fellow Randy Barnett,author of Restoring the Lost Constitution: ThePresumption of Liberty, at a Cato Book Forum.The original document, crafted by the Foundersto create a government of limited powers, hasbeen gradually rewritten by a judiciary intenton preserving the pretext of constitutional gov-ernment while ignoring its substantive restric-tions on state power. Walter Dellinger, actingsolicitor general under President Clinton, warnedthat Barnett’s ideas could lead to unwarrant-ed judicial activism. Judge David Sentelle ofthe U.S. Court of Appeals for the D.C. Circuitdisputed Barnett’s claim that the Constitution’slegitimacy must rest on its protection of indi-vidual rights rather than on the “consent ofthe governed.” Earlier that day Barnett dis-cussed his book at a luncheon for journalists,including commenter Jeffrey Rosen of the NewRepublic.

◆ February 2: It is hard to overestimate F. A.Hayek’s influence on the intellectual historyof the 20th century, argued two authors at aCato Book Forum. Alan Ebenstein, author ofHayek’s Journey: The Mind of FriedrichHayek, said that Hayek’s most famous work,The Road to Serfdom, moved the debatebeyond the age-old disagreement over whetherhuman beings were virtuous enough for social-ism to the more practical question of whethersocialism can perform as advertised. BruceCaldwell, author of Hayek’s Challenge: AnIntellectual Biography of F. A. Hayek, stressedHayek’s nonpolitical accomplishments, not-ing that soon after writing The Road toSerfdom, he did equally groundbreaking workin the field of cognitive psychology. FormerHouse majority leader Dick Armey praised

◆ February 5: Ruth Richardson, former financeminister of New Zealand, was the principalarchitect of that country’s second wave offree-market reforms in the early 1990s. Ata Roundtable Luncheon, “New Zealand’sFree-Market Reforms: Why Squander theLegacy?” she described the fiscal, monetary,trade, and other policies that have made NewZealand one of the freest and fastest-grow-ing economies in the world.

◆ February 6: Douglas Holtz-Eakin, directorof the Congressional Budget Office, pre-sented his office’s analysis of President Bush’s2005 budget at a Cato Hill Briefing, “TheFederal Budget Outlook.” The president’sproposal, he said, would lead to a 10-yeardeficit of $1.9 trillion and a tax burden thatwill increase from 16 to 20 percent of GDPover the next decade. However, he noted, theCBO projections assume—implausibly—thatCongress adopts the Bush budget and makesno changes for the 10 years that follow. ChrisEdwards, Cato’s director of fiscal policy stud-ies, warned that 10-year projections mask amuch grimmer long-term picture.

◆ February 11: At a Cato Roundtable Lun-cheon, “Amending China’s Constitution toProtect Private Property Rights,” Chinese legalreformer Cao Siyuan argued that private prop-erty is an important component of humanrights, and advocated amending the Chi-nese constitution to protect it. Shortly afterhis Cato visit, news reports said that Caowould be subject to arrest when he returnedto China, but he assured friends that the reportswere exaggerated and that he would contin-ue to work for political and economic reforms.

◆ February 18: The American tradition ofexcluding the military from civilian policework is crumbling, argued senior editor GeneHealy in a Cato Policy Forum, “Deployed inthe U.S.A.” Some policymakers have pro-posed loosening the restrictions of the 1878Posse Comitatus Act, which bars military lawenforcement in the United States. That wouldbe a disaster, Healy argued, because the mil-itary is fundamentally trained for violent con-flict, not peaceful law enforcement. DavidKlinger of the University of Missouri arguedthat an exception to the act is needed to allowthe military to assist in the apprehension of

Cato Events

Eight Cato Briefings on Capitol HillSeminars on civil liberties, nanotechnology, immigration, and Iraq

4 • Cato Policy Report May/June 2004

Top: Former House major-ity leader Dick Armey dis-cusses the legacy of F. A.Hayek at a February 2Book Forum.

Clinton administrationsolicitor general WalterDellinger and Judge DavidSentelle of the U.S. Courtof Appeals for the D.C.Circuit critique RandyBarnett’s Restoring theLost Constitution at a Feb-ruary 4 Book Forum.

domestic terrorists. Former Rep. Bob Barr(R-GA) warned that such militarization wouldbe a disaster because the definition of “ter-rorist” would quickly be stretched to encom-pass a wide variety of domestic law enforce-ment activities.

◆ February 19: At a Cato Roundtable Lun-cheon, Jeffrey Rosen, professor of law atGeorge Washington University and legal affairseditor of the New Republic, discussed his newbook, The Naked Crowd: Reclaiming Secu-rity and Freedom in an Anxious Age. Heargued that libertarians have been “heroes”in resisting efforts to give government exces-sive powers after September 11 but have beenless effective in developing appropriate poli-cies for preventing terrorism. Participantsincluded Stuart Taylor and Jonathan Rauchof the National Journal, David Plotz of Slate,Declan McCullagh of News.com, and PaulRosenzweig of the Heritage Foundation.

◆ February 24: When it comes to econom-ic reforms in the Third World, the simplerthe plan, the better, argued Robert E. Ander-son, author of Just Get Out of the Way:How Government Can Help Business inPoor Countries at a Cato Book Forum.Many privatization efforts, for example, getbogged down in complex rules that leavethe state entangled in private decisions foryears. Simeon Djankov of the World Bankargued that well-intended regulation caneasily become excessive, driving economicactivity into the informal sector or stran-gling a developing economy altogether.

◆ February 25: Advances in missile technolo-gy have raised the specter of terrorists takingdown commercial aircraft using shoulder-firedsurface-to-air missiles. Experts debated possi-ble defenses at a Cato Policy Forum, “Flyingthe Unfriendly Skies: The Threat to Com-mercial Aircraft.” Alvin Schnurr, from defensecontractor Northrop Grumman, described onepossible response to this threat: a truck-mount-ed, laser-based anti-missile system that couldbe deployed at airports. David Forbes, of Boyd-Forbes Security, expressed skepticism at theneed for such expensive countermeasures andwarned that weapons manufacturers wouldadapt rapidly to them. Cato director of defensepolicy studies Chuck Peña said that the gov-


ernment has a responsibility to protect its cit-izens but questioned whether the counter-measures would be worth the cost.

◆ February 25–29: Cato’s annual BenefactorSummit was held at the L’Auberge Del MarResort and Spa near San Diego. Cato Bene-factors heard from senior Cato scholars anddistinguished guests. Greenpeace founder PatrickMoore criticized the environmentalist move-ment’s distortion of science. Cato senior fellowRandy Barnett argued for a restoration of lim-ited, constitutional government. Fox Newscommentator Andrew Napolitano discussedrecent attacks on civil liberties. Benefactors alsoenjoyed the beautiful California weather, par-ticipating in biplane rides, hiking, mountainbiking, tennis, and golf.

◆ February 26: Experts discussed the grow-ing quagmire in Iraq and the prospects forU.S. withdrawal from the region at a CatoPolicy Forum, “Transition in Iraq: The July1 Deadline and Beyond.” Esther Schraderof the Los Angeles Times said that militaryofficials are privately conceding that troopswill be in Iraq for several years. Amb. EdwardPeck, former chief of the U.S. mission in Bagh-

dad, warned that imposing democracy on anIraqi populace that has no experience withdemocratic values is an exercise in futility.Johanna Mendelson-Forman of the UN Foun-dation stressed the importance of setting cleargoals for the Iraqi occupation. Withoutdecisive action, she said, the United States willlose the sympathy of the Iraqi people and willface an increasingly hostile populace. Cato’sChris Preble said that he was cautiously opti-mistic about the deadline but pessimistic aboutthe long-term prospects for Iraqi democracyand U.S. withdrawal from the region.

◆ March 5: Jeremy Leonard, a consultant withthe Manufacturers Alliance/MAPI, warnedthat the United States must reform its eco-nomic policies to regain its manufacturingcompetitiveness at a Cato Hill Briefing, “Man-ufacturing, U.S. Competitiveness, and theGlobal Economy.” American businesses, hesaid, are burdened by high taxes, frivolouslawsuits, and skyrocketing health care costs.Cato senior fellow Alan Reynolds agreed andargued that free trade was not to blame forAmerican job losses. Cato’s Chris Edwardsnoted that punitive corporate income tax rates

Continued on page 6

At a Baghdad conference oncivic education in February,

Cato’s Tom Palmer showshow to use the Constitution

as a teaching tool. SouthAfrican legal scholar David

McQuoid-Mason listens.

Columnist DebraDickerson commentson Star Parker’s bookUncle Sam's Planta-tion at a March 25Book Forum.

are discouraging companies from setting upshop in the United States.

◆ March 8: Pennsylvania State Universityprofessor Richard Gordon blamed the declineof nuclear power on sky-high constructioncosts and the availability of cheaper alter-natives like natural gas at a Cato PolicyForum, “Whither Nuclear Power?” Increas-ing safety regulations and persistent costoverruns drove up costs to utilities, whichstopped ordering new plants after 1973. PeterBradford of Yale argued that the NuclearRegulatory Commission’s liability limita-tions, coupled with a light regulatory hand,fueled an unsustainable boom in nuclearpower plant construction in the late 1960s.James Hewlett, an analyst at the U.S. Ener-gy Information Administration, blamed thecost-plus financing method of many nuclearplant contractors for the soaring costs.

◆ March 10: The publication of F. A. Hayek’sThe Road to Serfdom in 1944 helped sparka revival in the market liberal vision. At aCato Book Forum, Nobel laureate JamesBuchanan argued that Hayek’s vision of afree society helped sustain that movementover the last six decades. Hayek’s foundingof the Mont Pelerin Society in 1947 helpedto bring his era’s leading champions of a free

society together. Cato president Ed Cranesaid Hayek, who accepted the title of dis-tinguished senior fellow at Cato, had a greatinfluence on the Institute. Historian LeonardLiggio credited Hayek with encouraging free-market scholars to focus more on empiricalresults. Daniel Yergin, coauthor of The Com-manding Heights: The Battle for the WorldEconomy, presented a short video—adapt-ed from the PBS series based on his book—on the intellectual argument between Hayekand John Maynard Keynes.

◆ March 15: At a Cato Policy Forum, “Mili-tary Manpower Requirements: Too Much orNot Enough?” National Defense University’sJanice Laurence warned that the war in Iraqand other military commitments are placingunprecedented stress on the men and womenof the U.S. military. Chris Preble argued thatthe United States must reduce its military com-mitments around the world, focusing itsresources on bringing al Qaeda to justice.Michael Vlahos of Johns Hopkins Universitywarned that “military transformation” is aeuphemism for nation building, and such achange would reduce the military’s effective-ness at its primary task, which is to prevailin combat. All three agreed that instituting adraft would be a mistake, as the needs of today’shighly skilled military would not be well servedby a flood of raw conscripts.

◆ March 15: The United States economy will“go critical” if dramatic changes are not madeto its entitlement programs, warned LaurenceJ. Kotlikoff, coauthor of The Coming Gen-erational Storm: What You Need to Knowabout America’s Economic Future, at a CatoBook Forum. Kotlikoff argued that funda-mental reforms of Social Security and Medicareare needed to plug a projected fiscal gap in thetens of trillions of dollars. Barry Bosworthof the Brookings Institution argued thatKotlikoff’s book had a hysterical tone, andinsisted that the gaps in Social Security’s financescould be bridged with technical adjustmentsto the program. Medicare is a more seriousconcern, he conceded, but charged that Kot-likoff’s plan fails to provide any credible mech-anisms for controlling costs. Kevin Hassett ofthe American Enterprise Institute warned thatentitlements threatened European-level taxesand economic stagnation.

◆ March 15–17: Cato kicked off the 2004 ses-sion of Social Security University with a CatoHill Briefing entitled “Social Security 101: TheProgram and the Problem.”Mike Tanner, direc-tor of Cato’s Project on Social Security Choice,described the inequities in the current SocialSecurity system and the threats to its long-termsolvency. The system will be insolvent within40 years, he said, but budgetary strains willbegin much earlier. The second day, entitled“Personal Accounts: Fact and Fantasy,” fea-tured William Shipman, co-chairman of Cato’sProject on Social Security Choice. Shipmancontrasted market-oriented reforms with thestatus quo, noting that the long-term rate ofreturn from pay-as-you-go systems is limitedto the rate of growth of real wages, which iscurrently about 2.5 percent. Mike Tannerwrapped things up on day three, with “Eval-uating Proposals for Social Security Reform,”in which he compared a dozen different plansfor Social Security reform. Tanner highlightedseveral common themes among the plans. First,there are no painless solutions—all the plansinvolved some combination of tax hikes,benefit cuts, or new debt. Second, plans thatincluded personal accounts had lower long-term costs and offered a higher rate of returnthan those that did not. Finally, while it is pos-sible to achieve solvency without personalaccounts, the plans that do so are an extraor-dinarily bad deal for younger workers.

◆ March 18: Former U.S. attorney general BillBarr joined Cato’s Adam Thierer to surveythe state of telecom regulation at a CatoHill Briefing, “Telecom Reform after the D.C.Circuit Decision: Is It Time for a New Tele-com Act?” Barr, now general counsel atVerizon, argued that technological change isblurring traditional distinctions among video,data, and telephony services. Barr argued thattechnological innovation in the telecom sec-tor has been most rapid in areas where reg-ulators have pursued a hands-off strategy.Thierer argued that Congress should consid-er passing a new Telecommunications Act toclarify regulatory uncertainty and to take astronger deregulatory stance.

◆ March 23: Winning the war on terrorismwill require more than military victory in theMiddle East or the capture of Osama binLaden. If violent terrorism is to be eradicat-


EVENTS Continued from page 5

At a March 18 Hill Briefing, Bill Barr, attorney gen-eral in the first Bush administration, argues thatCongress and the FCC must take a stronger dereg-ulatory stance to spur continued innovation in thetelecom sector.


ed permanently, the spread of violent Islamistideas must be stopped. Panelists at a CatoPolicy Forum, “Nurturing Minds or Fos-tering Hatred? U.S. Involvement in Educa-tion in Muslim Countries,” discussed howthe United States could best promote thespread of liberty and individual rights in theMuslim world. Andrew Coulson of the Mack-inac Center argued that many parents sendtheir children to madrassas—religious schoolsthat often teach violent anti-Americandogma—because they cannot afford to sendtheir children to better schools. Omer Taspinarof the Brookings Institution argued that justthe kind of growth Coulson describes wasachieved with Turkey’s export-led growthmodel. The Carnegie Endowment for Inter-national Peace’s Husain Haqqani offered anhistorical perspective on the madrassasand stressed that political reform is a pre-condition for educational reform.

◆ March 24: Cato chairman William A.Niskanen presented the findings of his newbook, Autocratic, Democratic, and Opti-mal Government: Fiscal Choices and Eco-nomic Outcomes, at a Cato Book Forumat George Mason University. He present-ed three different theoretical models of gov-ernance and concluded that democraticgovernments tend to dramatically out-perform autocratic ones, but both fall shortof the theoretical ideal. Richard Wagner,professor of economics at George MasonUniversity, praised Niskanen’s ability toconstruct simple models of complex situ-ations in a way that leads to reasonableand useful empirical results.

◆ March 25: The welfare state has spawnedsocial chaos in the underclass, charges StarParker in Uncle Sam’s Plantation: How BigGovernment Enslaves America’s Poor andWhat We Can Do about It. Columnist DebraDickerson argued that although some whiteracism exists, society today offers minorityyouths many more opportunities than in pastdecades. Manhattan Institute senior fellowJohn McWhorter argued that those who seeracism as the root of every social problemare fanatics, driven by self-loathing and aweak grasp of reality. Fortunately, he said,younger generations are less likely to suc-cumb to such fanaticism.

◆ March 25: Wayne Crews, Cato’s direc-tor of technology policy, and computerindustry experts debated how industry andgovernment could best deal with risingthreats to cybersecurity at a Cato City Sem-inar in Silicon Valley, “Digital Pearl Har-bor: How Real Is the Cybersecurity Threat,and Who’s Responsible Anyway?” HowardSchmidt of eBay argued that with thevast majority of Internet infrastructure inprivate hands, the government has a lim-ited ability to ensure its security by fiat.Larry Clinton of the Internet Security Alliancecountered that government could createpositive incentives through tax credits forgood security procedures. But we should-n’t expect the Internet to be perfectly secure,argued VeriSign’s Ben Golub. Crews warnedthat government funding could be a mixedblessing, as government largesse inevitablycomes with strings attached.

◆ March 29: A flawed review process hasallowed the publication of papers that arenot scientifically credible, argued Pat Michaelsat a Cato Hill Briefing, “Extinctions ofLogic: Is There a Link between Human-Caused Global Warming and Mass Extinc-tion?” Many studies purporting to showthat global warming contributes to speciesextinction fail to ask basic questions, such

At a February 4 BookForum, Randy Barnettexplains how a string ofbad Supreme Court deci-sions have undermined thesystem of enumerated pow-ers and limited governmentcrafted by the Founders.

Kenyan activist JuneArunga blasts Africa’skleptocratic leadersfor destroying hopeand opportunity onthe continent. Shespoke at a March 30policy forum featuringher new BBC docu-mentary, “The Devil’sFootpath: A YoungPerson’s Journeythrough Africa.”

as whether the temperature in the area beingstudied had actually risen.

◆ March 30: Cato’s Roger Pilon and theAmerican Enterprise Institute’s John Calfeefaced off at a Cato Debate, “Resolved: Con-gress Should Remove the Ban on DrugReimportation.” Pilon argued that the issueis a simple matter of free trade: althoughforeign price controls are troubling, theydon’t justify restricting the freedom of Amer-ican consumers to purchase drugs at thebest price available. Calfee warned thatreimportation would increase foreign pres-sure for worldwide price controls, anddomestic pressure from consumers demand-ing “antidiscrimination” provisions to pre-vent drug companies from charging Amer-icans more than foreigners.

◆ March 30: The creative energy of Africa’speople is being stifled by the greed of itsleaders, charged Kenyan activist June Arun-ga at a Cato Policy Forum. Arunga pre-sented clips from her recent BBC docu-mentary, “The Devil’s Footpath: A YoungPerson’s Journey through Africa.” GeorgeAyittey of American University stressed theimportance of supporting the African peo-ple while strongly condemning their lead-ers when they behave unjustly. ■

In October 2002, Dan Griswold, associ-ate director of Cato’s Center for Trade Pol-icy Studies, published Willing Workers:Fixing the Problem of Illegal Mexican

Migration to the United States, a Policy Analy-sis advocating the creation of a temporaryworker visa that would give foreign workersthe opportunity to work legally in the Unit-ed States. Rep. Jeff Flake (R-AZ) wrote guestworker legislation that drew heavily on Gris-wold’s paper, and President Bush unveiled aproposal based on the Flake bill in early 2004.Cato held two events on the subject. At thefirst, a January 16 Policy Forum entitled “Pres-ident Bush’s Immigration Proposal: Too Much,Too Little, or About Right?” Margaret Spellings,assistant to the president for domestic poli-cy, described and defended the president’splan. Frank Sharry of the National Immi-gration Forum and Steven Camarota of theCenter for Immigration Studies provided com-mentary on the proposal. The second eventwas a January 28 Cato Hill Briefing featur-ing Griswold and Representative Flake.Excerpts from their remarks follow.

Margaret Spellings: I think it’s important tolay out a few facts about the state of theworld. First, we in the administration believethere are about 8 million people here ille-gally. Millions of them are working. Rough-ly 70 percent of them are Mexican. Second,there is currently no legal way for peopleto come to this country and work in manylow-skill sectors. Third, U.S. employers wantand need workers to grow their businesses.Fourteen percent of our workforce is foreignborn. Fourth, in our day of heightened home-land security concerns, it’s critically impor-tant that we know who is here, why they’rehere, and how long they’re going to be here.We are a nation of laws, and we need toknow who is here if we’re going to be effec-tive at securing our borders.

The president has called for the enact-ment of a temporary worker program thatwould be non–sector specific and wouldmatch a willing worker with a willingemployer when no American is availableto fill a job. It could include nurses, teach-ers, hotel workers, agriculture workers,and even students. The program would beopen to new foreign workers who currentlyreside abroad and who wish to come to the

United States, provided that an Americancannot be found to fill those jobs, and tothe millions of undocumented men andwomen who are here working today.

We believe this program will serve theeconomy by matching willing workers andwilling employers. We believe that it willpromote compassion by affording to theseundocumented workers who would join thetemporary worker program the same pro-tections that American workers enjoy, suchas minimum wage, workplace safety, and thelike. We believe it will protect the right oflegal entrants, those people who are currentlyin the green card queue, by not giving thesetemporary workers the advantage over themas previous amnesty programs have done.

Frank Sharry: The president’s analysis ofwhat immigration means to America andhow the current system needs to be fixedwas right on point. However, the diagno-sis of the problem was better than his pre-scription. Let me point out a few of ourdifferences. The president emphasized cir-cularity—the idea of people coming andthen going back. And certainly for a num-ber of immigrants, particularly migrantsfrom Mexico and Central America, that isthe desire. But as we have seen throughoutour history, there is also a strong desire for

some to settle here and become citizensand full Americans.

If this is going to be a realistic approachthat’s going to draw people into the legalchannels, you have to promote not onlycircularity but citizenship. The Americanimmigration success story is built on peo-ple coming, settling, pledging allegiance, andbecoming full Americans. The path to citi-zenship and permanence in the president’splan needs to be fleshed out. The president’splan for those undocumented workers hereis likely to draw into the program those whohave been here just a few years, who aren’tparticularly stable here and have their fam-ilies back home. The folks who have beenhere 10 years, whose kids are going to school,who are paying off credit card debt, are unlike-ly to sign up for a three-year work permitwith an uncertain prospect of renewal.

We think there needs to be a betterapproach to make sure that U.S. workersare given first shot at jobs. In particular,we are going to need to have at least pre-vailing wage protections. You cannot havea $10-an-hour worker suddenly replacedby a $6-an-hour worker under a legal tem-porary worker program. It’s not going tobe politically sustainable and it is not eco-nomically smart. And I don’t think thatis what the responsible employer commu-nity wants. They want to make sure theycan fill jobs as our demographics createmore and more opportunities and thereare fewer and fewer Americans to fill them.

I also think it needs to be a bit morenarrowly tailored to the objective of replac-ing the current illegal flow with a legal flow.If we swing the door too far open, we mightend up having an illegal flow plus a new legalflow. And that’s not the objective. The objec-tive is to bring this under the rule of law.

Finally, the president talked about theneed for enforcement, and this is goingto be critical. If we are going to legalizemore of the flow and make legality the pre-vailing norm and we set limits that aremore realistic and more market sensitive,as we should, then we are going to haveto make sure that the public has confidencethat those limits are being enforced.

Now, it will be a lot easier when morepeople have incentives to come here legal-ly. But there is going to be a need not for

Policy Forum

Immigration: President Bush’s Proposal


Margaret Spellings: “The president has called forthe enactment of a temporary worker program thatwould match a willing worker with a willing employ-er when no American is available to fill a job.”

truck in that attack. He applied for thesame amnesty as his friend Mahmud, buthe didn’t get it. That’s good news, right?Unfortunately, there is no administrativesystem to force people who are denied res-idence to leave the country. So he simplystayed in the United States, living and work-ing illegally, until the day he helped blowup the Trade Center. Hundreds of thou-sands of other people have had their dayin court and been ordered to leave, but wedon’t know if they’ve gone.

Another concern deals with the fiscalcosts. Large numbers of unskilled workersnecessarily impose huge costs on taxpay-ers, because the modern American econ-omy offers very limited opportunities to

workers with little education. There is anabsolute consensus on the effect of unskilledimmigrants on public coffers. The Nation-al Academy of Sciences estimated that immi-grants without a high school educationimposed a net fiscal drain of $89,000 ontaxpayers during the course of their life-time. For those with only a high schooleducation, the net fiscal drain was $31,000.Put simply, there is a very high cost to cheaplabor. But, of course, employers don’t seethese costs. They hire someone at a lowwage and the costs are borne by everyone.

Now, how would we enforce the law?

I think we could do it very easily. We policethe border. We go after the employers. Wedeny the documents to the illegal aliens.We don’t give them drivers licenses. Wedon’t give them in-state college tuition. Andwe make sure that everyone knows that theimmigration law is back in business.

Once we did that, then we could comeback and talk about an amnesty. Until thenwe’re putting the cart miles before the horse.

Rep. Jeff Flake: I grew up on a farm innorthern Arizona, where we employed alot of illegal aliens to work on the farm andon the ranch. At that point, it wasn’t ille-gal to hire them. There was a circular migra-tion of people, who would come up andwork on the farm and then return homefor the year, or return home after a coupleof months. The border was easy to crossat that point, so you had a circular patternof migration.

We don’t have a circular pattern any-more. The border still leaks like a sieve,but it only leaks one way. People are com-ing, they just aren’t going home. And migrantsare far more likely to bring their familiesalong now than they used to be. The WallStreet Journal a few months ago interviewedillegals in Stockton, California. They allsaid basically the same thing: “If we couldgo home, we would. If we could come herejust to work and return home to our fam-ilies, we would. But we can’t. And so webring our families once.”

It’s simply not feasible to seal the bor-der. If you go into Yuma, Arizona, early inthe morning, you’ll see thousands of migrantscome through the legal entry points fromSan Luis into Yuma to work in the lettucefields and other areas and then return homethat night. They’re either U.S. citizens orhave green cards to work here, but it’scheaper to live there. In addition, even ifwe could seal the border, at least 40 per-cent of those who are here illegally firstentered the country legally. So we have todeal with those who are here illegally atpresent.

Our bill is based on the notion that youmatch willing employers with willing work-ers. The president has taken that same posi-tion. He has said consistently during his


the disappearance of the Border Patrol butfor a Border Patrol that can really targetthe smuggling rings that have popped upin the last decade and become so lucrative.It is going to require that the United Statesdemand more of the sending countries withrespect to cooperation on enforcement.

Steven Camarota: This proposal funda-mentally mocks the law abiding. By givinglegal status to illegal aliens, we say to thosewho wait their turn that they are dupes fortaking our own laws seriously and playingby the rules. That is a horrible message tosend to people here or to those thinkingabout coming.

I also don’t believe the president’s pro-posal addresses the administrative capac-ity question at all. A recent GAO reportshowed that the backlog of unresolvedapplications for citizenship and green cardsand change of status has grown from 3.9million to 6.2 million in two years, a 59percent increase. There is no way for themto handle millions more applications thatwould result from this proposal unless weare prepared to spend a lot of money andwait the several years it would take to trainpersonnel and set up new computer sys-tems so that each applicant can be care-fully vetted. The only way to process mil-lions of applicants under the current sys-tem would be to rubber stamp them asquickly as possible. In that environment,we are guaranteed to give one of these guestworker amnesties to a terrorist.

We’ve done it before. In 1986, we gaveout 2.7 million green cards to illegal aliensas part of the last big amnesty. One of thepeople who got amnesty was MahmudAbouhalima, a leader of the 1993 attackon the World Trade Center. He was legal-ized as a seasonal agricultural worker—even though he drove a cab in New YorkCity—because the system was so over-whelmed that no attempt was made to ver-ify his story. As a result, once he got hislegal status, he traveled abroad toAfghanistan, where he received the terroristtraining that he then came back and usedin the 1993 attack.

Let me touch on another issue aboutadministrative capacity. Consider the caseof Mohammad Salameh, who rented the Continued on page 10

Jeff Flake: “Right now we have a law that isdivorced from reality. And so we need to enforcethe law. But first we need a law that we canenforce.”

❝ Unfortunately, there is no administrative system to force people whoare denied residence to leave the country.❞

campaign and since then that he wants aplan that matches willing employers withwilling workers. And I think our bill match-es what he wants most closely.

Now some will say, “Hey, we have morethan 10 million unemployed in the U.S.and 10 million illegals. Just switch them.”That suggests that it is the role of the fed-eral government to take an unemployedschoolteacher in Maine and say, “Hey,you’re going to go roof houses in Arizona,whether you like it or not.” That’s a muchgreater role for the federal government thanI’m comfortable with. The Soviet Uniontried that for years. Cuba is still trying it,and it hasn’t worked very well. Neither isan example that we want to emulate.

A lot of people are asking: “How canwe enforce a new law when we can’t enforcethe laws that we already have? Let’s enforcethe law that we already have before wehave a guest worker program.” I wouldsuggest that those who are saying thatshould come along with me and the INSand the Department of Justice to any resortin Phoenix or to any roofing contractor,drywall hanger, or landscaping company,and arrest the employer and put the employ-er in jail or assess a fine of $10,000 peroccurrence, as the law requires.

If anybody actually wants to do that,and would feel good about it, then I wouldagree and say, “Hey, let’s enforce the lawas it is.” The truth is we have a law todaythat simply isn’t going to be enforced. Wedon’t have the political will. Right now wehave a law that is divorced from reality.And so we need to enforce the law. Butfirst, we need a law that we can enforce.

Daniel Griswold: President Bush and Rep-resentative Flake deserve an enormousamount of credit for taking on this issue,which is a political risk. Their approach iscompassionate conservatism at its best.It would help the economy by making worklegal, allowing willing workers and will-ing employers to get together in the mar-ketplace voluntarily. It would allow thegovernment to devote more of its resourcesto its constitutional duties of protectingthe homeland. And it would help the least

among us, the illegal workers who are toil-ing in the shadows, and bring them underthe protection of the law.

Our dysfunctional immigration systemis colliding with a couple of very powerfuleconomic and demographic trends. Oureconomy continues to produce opportuni-ties for low-skilled workers, but the pool ofAmericans willing to take those jobs con-tinues to shrink. We’re getting older and bet-ter educated. By the end of this decade, theaverage age of an American in the workforce is going to be over 40 years. In 1960,a majority of American workers lacked ahigh school degree; today, it’s below 10 per-cent, and falling. The result is a mismatch

between the jobs available and the pool ofAmericans willing to take those jobs. Yetour immigration system has virtually nolegal channel for low-skilled workers.

We have tried enforcing the existing law,and it has failed. The 1986 ImmigrationAct imposed sanctions on U.S. employersfor the first time. In the last decade, we’vequintupled spending on border enforce-ment. We’ve built walls at the border andraided workplaces. The only result has beena deadly diversion of migration, from thetraditional urban crossing points out intothe desert. The result has been headachesfor landowners in Arizona, but it has beendownright deadly for thousands of people.


Since 1998, 2,000 people have died terri-ble deaths trying to come across the U.S.border. They have died of dehydration inthe desert. They have died in sealed box-cars and railcars. That is too high a priceto pay for trying to get a better job.

The large underground pool of laborthat we have today drags down workingconditions and wages on the lower rungsof the economic ladder. Legalization wouldlift the working conditions of people, legaland illegal, native-born and foreign-bornalike. We also know from experience thatlegalized workers are more likely to investin their language and their job skills.

And I would also disagree with the chargethat immigrants hurt American workersgenerally. They don’t drive down wages orcause unemployment. Look at our recenthistory. In the 1990s, more foreign-bornworkers—legal and illegal—came to theUnited States than at any time in a centu-ry. And yet we achieved record-low unem-ployment, large-scale job creation, and ris-ing wages up and down the income scale.

Critics ignore the fact that the demandfor low-skilled labor is increasing. Largeand important sectors of the U.S. econo-my need foreign-born workers to grow.There are five to six million of those ille-gals doing important work—harvestingfood; building homes; cleaning offices; andserving customers in restaurants, hotels,and retail stores. These sectors of our econ-omy would probably grind to a halt if theywere deprived of those workers overnight.

Immigration reform is in our nationalsecurity interest. It’s telling that the firstadministration official to broach the sub-ject in December was Tom Ridge, the Home-land Security secretary. He realizes thatlegalization along the lines of what Presi-dent Bush has called for would make hisjob easier. Immigrants would be more like-ly to cooperate with law enforcement offi-cials. We could start draining the swampof smuggling and document fraud. We couldshift more of our limited resources to catch-ing people who genuinely intend to do usharm. I am sure Secretary Ridge wouldrather have his personnel chasing downterrorists than busting janitors at Wal-Mart.

This proposal is not an amnesty. Inthe 1980s, we basically said, “If you’ve

POLICY FORUM Continued from page 9

❝ Our dysfunctional immigration system is colliding with a couple ofvery powerful economic and demographic trends. ❞

Daniel Griswold: “Legalization would lift theworking conditions of people, legal and illegal,native-born and foreign-born alike.”


❝ The financing of the transition is a one-time event that actuallyserves to reduce government’s future liabilities.❞

been here four years or more, here is yourgreen card.” That was an amnesty. But inthis case, the legalized workers would not,and should not, get automatic citizenshipor even permanent residency. They wouldreceive only a temporary visa, renewablefor a limited time. They would have to paya fine, which would not be chump changeto somebody on a low-skilled wage. Theywould have to get in line with everybodyelse to apply for permanent status underexisting law.

I think we should be careful to avoidthe mistake of previous guest worker pro-grams. It is absolutely essential that thesevisas be portable. That was the mistake ofprevious programs. They tied the workerstoo closely to the employer. It gives theemployer too much leverage. The best work-er protection is the ability to change jobsand to look for a job that has better con-ditions and better pay.

As I see it, we have three options beforeus. We can muddle through with the sta-tus quo. Nobody is happy with that. Nobodywants massive illegal immigration. Or we

SOCIAL SECURITY Continued from page 3

can redouble our efforts. We can quintu-ple spending again, seal the border, andbuild a three-tiered wall from San Diegoto Brownsville. And that will not solve theproblem.

Or we can recognize reality and createa legal channel, so that, in the words ofPresident Bush, willing workers and will-ing employers can get together to serve thesocial and economic needs of both our coun-tries.

In his farewell address in 1989, RonaldReagan said he saw the United States as ashining city on a hill, “God-blessed andteeming with people of all kinds, living inharmony and peace. A city with free portsthat hummed with commerce and cre-ativity. And if there had to be city walls,the walls had doors. And the doors wereopen to anyone with the will and the heartto get here.”

The fundamental, philosophical issue atstake is whether we will keep those doorsopen to peaceful, hardworking people withthe will and the heart to get here, or slamthe door shut, at great cost to our econo-my and our tradition as a free and opensociety. ■

workers; the unfairness of the program forminorities and working women; the impacton wealth creation; and, most important-ly, the lack of legal ownership and controlover one’s benefits.

A Proposal for Individual AccountsSocial Security’s problems have led to a

growing movement for reform, includingproposals to allow younger workers to pri-vately invest some or all of their SocialSecurity taxes through individual accounts.

Unfortunately, many of these proposalsfell short of what was needed to truly fixSocial Security. Many proposals containedonly tiny accounts, leaving the majority ofworkers’ retirement income subject to gov-ernment control. Other plans promised toomuch, pretending that every retiree couldbecome a millionaire with no cost to thetaxpayers and no tough decisions.

Therefore, it was important that Cato’s

POLICY FORUM Continued from page 10

Project on Social Security Choice developa plan of our own, a proposal that wouldsubstantially transform Social Security intoa savings and investment system while beingfiscally responsible.

After months of hard work, the advi-sory committee to Cato’s project proposedthe following:

• Current workers should be given a choice:those who wish to remain in the tradi-tional Social Security system would befree to do so, accepting a level of bene-fits payable with existing levels of rev-enue. That is to say, they would not benegatively affected by the creation of theindividual account option but would notbe paid benefits higher than what SocialSecurity can actually pay today.

Beginning in 2012, the formula usedto calculate the accrual of benefitswould be adjusted to be indexed toprice inflation rather than nationalwage growth. It is particularly impor-tant to note that this change would

have no impact on those people whohave already retired, since benefitsafter retirement are already adjustedaccording to inflation (that’s what Costof Living Adjustments or COLAs are).Nor would it reduce benefits for thosenearing retirement.

• At the same time, workers who wishedto enter the new market-based systemwould be allowed to divert their halfof the payroll tax (6.2 percentagepoints) to individually owned, pri-vately invested accounts. Those peo-ple who chose to do so would agreeto forgo all future accrual of retire-ment benefits under traditional SocialSecurity. The remaining 6.2 percent-age points of payroll taxes would con-tinue to be paid into Social Securityto pay transition costs and to fund dis-ability and survivors’ benefits.

Workers choosing the individualaccount option would no longer accruefuture benefits under traditional SocialSecurity but would get a zero–couponbond in recognition of their past con-tributions to Social Security. The amountof the bond would provide a benefitbased on accrued benefits under thecurrent Social Security system as of thedate that the individual chooses an indi-vidual account. The bonds would befully tradable on secondary markets,but all proceeds would have to befully redeposited in the worker’s indi-vidual account until the worker becameeligible to make withdrawals.

Funds deposited in individual accountswould be invested in real capital assetsunder a three-tier system: a centralized,pooled collection and holding point; alimited series of investment options,with a lifecycle fund as a default mech-anism; and a wider range of investmentoptions for individuals who accumu-late a minimum level in their accounts.

At retirement workers would be ableto choose between an annuity, a pro-grammed withdrawal option, or thecombination of an annuity and a lumpsum payment. In addition, if at anytime a worker could purchase an annu-ity equal to 120 percent of poverty, he


to engage the attention of young workers.Opponents of individual accounts areentrenched and well organized. Washing-ton politicians are fearful and reluctant totake on an issue of this magnitude. It willtake strong public support to make reformhappen. And larger accounts will generatemore enthusiasm.

Second, although risk diversification isgenerally a good thing, continued relianceon a government-provided benefit may actu-ally increase the overall risk to workers.Those making the risk argument general-ly attach greater risk to the market-basedcomponent of a reformed Social Securitysystem (individual accounts) and less oreven no risk to the portion provided by gov-ernment. In reality, this misreads both mar-ket and political risks.

Given the long-term investment hori-zon envisioned for workers choosing indi-vidual accounts under this proposal, mar-ket investment is remarkably safe. Infact, over the worst 20-year period of mar-ket performance in U.S. history, whichincluded the Great Depression, the stockmarket produced a positive real return ofmore than 3 percent. At the same time, weknow that even under the best of condi-tions, Social Security will provide below-market returns. Mixing private investmentswith traditional Social Security is thereforemixing a good investment (private accounts)with a bad one. That’s not diversification;it’s bad investment policy.

Those concerned with short-term annu-al cash flows acknowledge that large accountswould save money in the long run butare also concerned with maintaining theprogram’s financial balance on an annualbasis. This concern comes both from wari-ness over the size of projected annual budg-et deficits and skepticism about the fed-eral government’s ability to use moneysaved in the future to repay debt incurredduring the transition rather than for taxcuts or new spending programs. And Con-gress’s recent spending habits have giventhose skeptics real cause for concern.

However, focusing on short-term cashflows only may be penny wise and poundfoolish. It is much like making only theminimum payment on a credit card, whileneglecting to pay off long-term debt. Large

be for Congress to cut corporate welfareand redirect the savings to Social Security.

It is also important to remember thatthe financing of the transition is a one-timeevent that actually serves to reduce gov-ernment’s future liabilities. The transitionmoves the government’s need for additionalrevenue forward in time, but depending onthe transition’s ultimate design, it wouldnot increase the amount of spending nec-essary. In effect, it is a case of “pay a lit-tle now or pay a lot later.”

Why 6.2 Percent Accounts?Some proposals for creating individ-

ual accounts as part of Social Security reformkeep most of the traditional Social Securi-ty structure in place and allow workersto privately invest just two to three per-centage points of payroll taxes.

People who support plans with smallindividual accounts generally do so for oneof three reasons:

• A political calculation that smallaccounts will avoid charges of “pri-vatizing” Social Security;

• A desire to diversify risk by splittingretirement between markets and gov-ernment, combining defined contribu-tion and defined benefit programs; or

• Concern over short-term annual cashdeficits.

Given the clear advantages of largeraccounts, however, none of those reasonsholds up.

First, small account size is unlikely toprotect proponents of individual accountsfrom political attack. The recent Medicarereform debate provides a useful example.Despite rollbacks on attempts to introducemarket competition to Medicare (the finalbill contained only a handful of “demon-stration projects,” which don’t begin until2010), the bill was still attacked as anattempt to “privatize” Medicare. Oppo-nents of individual ownership can be expect-ed to be just as vociferous in their denun-ciations of 2 percent accounts as they wouldbe of 6.2 percent accounts.

Moreover, small account proposals mayprove politically counterproductive by dis-sipating the enthusiasm of grassroots activistsand others supporting reform and failing

or she could opt out of the system alto-gether and stop paying the 6.2 percentindividual account contribution.

• Finally, the federal government wouldprovide a safety net ensuring that noworker’s retirement income would fallbelow 120 percent of the poverty lev-el. Workers whose accumulations underthe private investment option fall belowthe amount required to purchase anannuity of that level would receive asupplement sufficient to enable themto purchase that annuity.

Some Social Security reform pro-posals provide much higher benefitguarantees, pledging that no one willreceive less than payable or even prom-ised Social Security benefits. Aside fromthe obvious expense of such guaran-tees, this approach is flawed in tworespects. First, it is wrong to make tax-payers responsible for guaranteeing theinvestments of high-income workerswho do not depend on Social Securityfor their retirement income. Should afactory worker really be on the hookto guarantee Bill Gates’s investmentchoices? Second, guarantees inevitablycreate a “moral hazard” issue. Work-ers would be encouraged to speculateand make risky investment choices,knowing that they would reap the poten-tially higher gains from such invest-ments while being protected from anypossible losses.

The Social Security Administration iscurrently “scoring” our proposal andwill provide a detailed analysis of both itslong- and short-term impact on the feder-al budget. But even without that analysis,we can be fairly certain that the our planwill be substantially less expensive than thecurrent Social Security system and will savemoney in the long run, there will almostcertainly be a short-term requirement foradditional revenues.

Where will that transitional financingcome from? That is a decision for Con-gress, which must weigh the relative mer-its of debt, spending reductions, and increasedrevenues. But a good starting point would

❝ Small account proposals may prove politically counterproduc-tive by dissipating the enthusiasm of grassroots activists and

failing to engage the attention of young workers.❞


SOCIAL SECURITY Continued from page 11

❝ A 6.2 percent account is clear, concise, and easy to understand inan age of eight-second sound bites.❞

account plans do incur greater short-term costs, but they also result in greaterlong-term savings.

But Social Security reform is about morethan finances. Indeed, if system financeswere the only issue, we could simply raisetaxes or cut benefits. True Social Securityreform must also provide for increasedrates of return and higher benefits, correctthe inequities of the current system in orderto treat working women, African Ameri-cans and others more fairly, and give low-income workers a greater opportunity toown and accumulate real wealth. By thesemeasures, large accounts do a far betterjob of achieving true reform.

Finally, small accounts do little toadvance the fundamental goals of reduc-ing reliance on government and givingindividuals greater responsibility for andcontrol over their lives.

Of course, one might ask, if big accountsare better than small, why not allow work-ers to privately invest the full 12.4 percentpayroll tax, or at least the roughly 10 per-centage points used for retirement benefits?

Although there is no doubt that even big-ger accounts would provide higher benefitsthan those envisioned under our plan, accountsof 10 percent or more may actually result intoo much forced savings for many workers.

Most high- and middle-income individ-uals do not rely on Social Security for theirretirement income. In fact, the wealthiestfifth of retirees receives only 20 percent ofits income from Social Security. These work-ers have other (non–Social Security) formsof saving and investment, including IRAs,401(k) plans, and even individual equityownership and other investments. Indeed,we can assume that many of these workershave already achieved the level of retirementsavings that they desire. Forcing them to savemore through Social Security accounts maysimply result in their saving less through theirother investments. Moreover, in most cases,the non–Social Security investments takeplace in a less regulated and less constrainedenvironment than that envisioned for indi-vidual accounts under Social Security. Theend result of excessively large accounts, there-fore, might actually be a perverse decreasein investment freedom.

Finally, some observers have suggested pro-

gressive accounts, with low-income workersable to invest a higher proportion of their pay-roll taxes than those with higher incomes.There is a great deal of appeal to such anapproach. It would maximize the benefits ofindividual accounts to low-income workerswhile holding down overall transition costsand avoiding the problems of over-saving onthe part of higher-income workers.

However, there are serious practical andimplementation problems with such anapproach. In particular, progressive accountproposals would appear to shift compli-ance and administrative costs to employ-ers. The additional record-keeping couldbecome a significant burden, particularlyfor small businesses.

One last point: a 6.2 percent account isa very easy concept to explain to the aver-age worker. The worker could privatelyinvest half of his or her 12.4 percent pay-roll tax while the employer’s half would beused to finance the transition (and fundsurvivors’ and disability benefits). Of coursewe recognize that from an economic pointof view there is no difference between theemployer and employee share of the tax.The employee ultimately bears the full cost;but most workers make the distinction intheir own minds. A 6.2 percent accountproposal, then, is clear, concise, and easyto understand in an age of eight-secondsound bites.

Ownership and ControlAlthough more and more Americans agree

on the importance of giving younger work-ers an opportunity to invest their Social Secu-rity taxes privately, advocates of individualaccounts have been increasingly divided overhow large those accounts should be. Someproposals recommend large accounts buthave very large transition costs, diminishingtheir political viability. Other proposals areless expensive but give workers controland ownership over only a small portionof their retirement funds. The Cato plan dis-tinguishes itself by offering large accountswhile protecting future generations of work-ers and taxpayers. It would restore SocialSecurity to long-term and sustainable sol-vency and would do so at a lower costthan that of simply propping up the exist-ing program. ■


Cato University’s 2004Summer Seminar is a

weeklong intellectual feastfeaturing lectures and dis-cussions on the ideas ofLocke, Smith, Jefferson,Rand, Hayek, Friedman,and more.

Come expand your hori-zons, make new friends,renew your commitment toliberty, and hone your skillsas an advocate of freedom.

To register, call 202-789-5268

or visit www.cato-university.org

Cato Studies

Kerry, Democrats Revive HillaryCareDealing with Taiwan, Syria, and Islamic extremism


In “Mrs. Clinton Has Entered the Race:The 2004 Democratic Presidential Can-didates’ Proposals to Reform Health Insur-ance” (Policy Analysis no. 509), Michael

Cannon, Cato’s directorof health policy studies,shows that the health careplans of the Democrat-ic presidential candidatesare piecemeal clones ofthe failed Clinton healthcare plan of a decade ear-lier. Although the plansdiffer in their implemen-tation details, Cannonnotes, they share a fundamental commit-ment to increased government control overthe health care system. The CongressionalBudget Office estimates that presumptiveDemocratic nominee John F. Kerry’s planwould cost more than those of any of hisrivals, save that of long shot Dennis Kucinich.Cannon details how the government inter-ventions featured in the Clinton plan—com-pulsory insurance, mandatory benefits forinsurance plans, price controls, and highertaxes—are present in the plans of the Demo-cratic candidates. Perhaps most troubling,none of the Democratic plans mentionany market-oriented reforms, such as therecently enacted health savings accounts,which would give patients greater incentivesto be cost conscious.

◆ Replacing CongressUniversity of Oklahoma political scientistRonald Keith Gaddie considers the lead-ing proposals for dealing with the deathsof a large number of members of Congressin a terrorist attack in “Restoring the U.S.House of Representatives: A Skeptical Lookat Current Proposals” (Policy Analysis no.510). The Constitution allows governorsto appoint senators in the event of vacan-cies, but vacant House seats require spe-cial elections, which typically take fourmonths. While those elections were beingheld, the House could be without a quorumand unable to conduct business. Gaddieexamines a half-dozen proposed constitu-tional amendments that would expedite thereplacement process. Most empower stategovernors to appoint temporary represen-tatives who would serve until a special elec-

tion could be held. Although the propos-als have some merit, Gaddie argues, theunlikelihood of the threat makes it unwiseto take the drastic step of amending theConstitution, especially since Congresstends to take a back seat to the executivebranch during national emergencies likethe September 11 attacks.

◆ Personal Accounts: Size MattersThanks to the leadership of Cato’s Projecton Social Security Choice, personal accountshave moved beyond think tank drawingboards to become an important part of themainstream political debate. With momen-tum building for personal accounts in someform, Cato’s Michael Tanner takes the next

step in “The 6.2 PercentSolution: A Plan forReforming Social Secu-rity” (Social SecurityPaper no. 32) by pre-senting a specific, ambi-tious reform proposalthat would allow work-ers to divert the full 6.2percent worker share of

the Social Security tax to an individuallyowned retirement account. Under the plan,the employer share of the payroll tax wouldfinance transition costs, survivor’s and dis-ability benefits, and benefits for those whoopted to remain in the current system.Unlike some other reform proposals, Tan-ner says, the Cato plan accounts honestlyfor transition costs and acknowledges thatsome spending cuts or new debt will beneeded. But, he says, critics forget that thestatus quo’s trillions of dollars in unfund-ed liabilities are an implicit debt that willneed to be paid whether or not we acknowl-edge it now.

◆ Social Security: Stuck in the PastSocial Security in its current form is a baddeal for all workers, but it is particular-ly unfair to working women, argues LeanneAbdnor, a former Cato vice president anda member of the President’s Commis-sion to Strengthen Social Security in “SocialSecurity Choices for 21st-Century Women”(Social Security Paper no. 33). The sys-tem’s benefit structure is a relic of the1930s, rewarding single-earner house-

holds and penalizing spouses with simi-lar incomes. Furthermore, because single-earner households tendto be wealthier thandual-income households,the structure has aregressive effect. In addi-tion, the system paysnothing to homemak-ing women who divorceafter fewer than 10 yearsof marriage, and womenwho die before theyreach retirement age cannot leave theiraccrued Social Security contributions totheir heirs. A system of personal accountssolves these problems, Abdnor argues, bygiving women as well as men personal,portable, and legally protected rights tothe benefits of their accumulated contri-butions, regardless of marital status orspousal income.

◆ The Education FrontMany schools in the Islamic world are pro-ducing a steady stream of Muslim youthbent on violent attacks on the United States,argues Andrew Coulson of the Mackinac

Center for Public Poli-cy in “Education andIndoctrination in the Mus-lim World: Is There aProblem? What Can WeDo about It?” (PolicyAnalysis no. 511). Theworst of these schoolsare the madrasas, whichfocus on religious teach-

ings to the exclusion of vocational oracademic subjects. Many madrasas, sup-ported by private donations and subsidiesfrom foreign governments (particularlySaudi Arabia), preach extremist forms ofIslam that demonize the United States andIsrael and glorify violence. Governmentschools are often no better. In the 1980s,with the support of the United States, Pak-istan began using state schools to indoc-trinate Pakistani Muslims about the needto wage jihad against the Soviets inAfghanistan. With the fall of the SovietUnion, that violent and hateful curriculumhas been turned against the West. The bestschools, Coulson argues, are private, fee-

Andrew Coulson

Michael Tanner

Michael Cannon

Leanne Abdnor

era such fears have turned out to be overblown.He concludes that American policymakersshould focus on creating jobs by expand-ing opportunities for American exports, espe-cially in services, where the United States isa global leader.

◆ The Wrong Road to Damascus The recently passed Syria AccountabilityAct is likely to drive Syria away from coop-erating with the United States in anti-ter-rorism efforts. At the same time, the act doesnothing to encourage Syria to fight terror-ism more effectively on its own, chargesClaude Salhani in “The Syria Accountabil-ity Act: Taking the Wrong Road to Dam-ascus” (Policy Analysis no. 512). The law,passed despite promises by Syria’s foreignminister to meet all “logical and realistic”demands in the war on terrorism, restrictstrade between the United States and Syria,restricts the movement of Syrian officialsand aircraft in the United States, and freezesSyrian government property in the UnitedStates. Salhani notes that several regionalterrorist groups are headquartered in Dam-ascus, and the cooperation of the Syrian gov-ernment is therefore vital to keeping closetabs on their activities.

◆ Deadly Pesticide PoliticsDDT, long under attack from environ-mentalists, is an indispensable weapon inthe war against malaria, argue RichardTren of Africa Fighting Malaria and RogerBate of the American Enterprise Institutein “South Africa’s War against Malaria:Lessons for the Developing World” (Poli-cy Analysis no. 513). In fact, when SouthAfrica decided to phase out the use of DDTfor malaria eradication in the late 1990s,the result was the worst malaria epidemicin decades. Other insecticides simply aren’tas effective. Moreover, DDT is one of thecheapest pesticides available, a fact that’simportant for African countries with smalleradication budgets. Unfortunately, envi-ronmental extremists are seeking a globalban and have succeeded in pressuring manydeveloping countries to adopt less effectivepesticides. The South Africa example, theauthors argue, shows why these effortsmust be resisted, as hundreds of thousandsof human lives are at stake. ■


supported schools that focus on academ-ic and vocational subjects. Such schoolsare too expensive for many parents in theIslamic world. Partial subsidies to suchschools—especially from private donorswho can bypass government bureaucrats—can do enormous good in heading off freshwaves of terrorism in the coming decades.

◆ Strait ShootingThe Bush administration has pursued theworst possible combination of policies onTaiwan, opposing Tai-wanese independencewhile committing theUnited States to defend-ing the island in the eventof a war in the TaiwanStrait, warns Ted GalenCarpenter in “PresidentBush’s Muddled Policyon Taiwan” (Foreign Pol-icy Briefing no. 82). That approach failsto respect the democratic prerogatives ofthe Taiwanese people, while endangeringnational security by potentially draggingus into war with nuclear-armed China.Instead, Carpenter argues, the adminis-tration should take no position on the ques-tion of Taiwanese independence. The Unit-ed States should sell weapons to Taiwan ifthat nation is able to pay for them but makeit clear that the United States will not defendTaiwan if it chooses to declare independ-ence.

◆ Setting the Record Straight on Jobs andTradeRecent hysteria over “offshoring” and theU.S. trade deficit mistakes a cyclical down-turn for a long-term trend,argues Brink Lindsey in“Job Losses and Trade:A Reality Check” (TradeBriefing Paper no. 19).Nor are imports a signif-icant factor in recent joblosses; imports during thedownturn have been near-ly flat, while exports havedropped substantially. Indeed, concerns aboutjob losses and economic decline have accom-panied every economic downturn since theGreat Depression, Lindsey notes, and in each

Ted Galen Carpenter

Cato Calendar

Cato City SeminarNew York • Waldorf-Astoria

June 10, 2004Speakers include P. J. O’Rourke and

Adrian Wooldridge.

Cato LuncheonBoston • Harvard Club

June 16, 2004Speaker: P. J. O’Rourke

The Law and Economics of FileSharing & P2P Networks8th Annual Technology &

Society ConferenceWashington • Cato Institute

June 17, 2004Speakers include Jack Valenti.

Cato UniversitySan Diego • Rancho Bernardo Inn

July 24–30, 2004Speakers include Nathaniel Branden,

Deroy Murdock, Rob McDonald,David Schmidtz, Marcus Cole,

Richard Stroup, Jane Shaw, PiotrKaznacheev, and Estuardo Zapeta.

Constitution DayWashington • Cato Institute

September 17, 2004Speakers include Gary Lawson,

Tom Goldstein, Mark Moller, and Roger Pilon.

Competitive Markets for EducationWashington • Cato Institute

September 28, 2004Speakers include John Merrifield,Lisa Snell, John Wenders, Andrew

Coulson, Richard Vedder, andMyron Lieberman.

Arguing for Liberty: How toDefend Individual Rights and

Limited GovernmentCato University

Quebec City • Chateau FrontenacOctober 28–31, 2004

Speakers include Tom G. Palmer, DonBoudreaux, Karol Boudreaux, MonteSolberg, Gene Healy, and David Boaz.

Brink Lindsey

Friedman and Schwartz look back in the Cato Journal

A Monetary History 40 Years Later


sonalized torchbearer for classical liberal ideas,Buchanan said, providing rallying point forintellectual allies and a target for collectivistopponents.

Liggio, president of the Mont Pelerin Soci-ety that Hayek founded in 1947 to bring togeth-er the world’s leading defenders of free mar-kets, noted that Hayek focused the attentionof his ideological allies on the need for betterempirical research on the workings of marketprocesses. For example, lighthouses are oftencited by economists as an example of a pub-lic good that cannot be operated profitably byprivate entrepreneurs. Yet Ronald Coase, in agroundbreaking 1974 essay, showed that light-houses can and have been provided by privateactors. Hayek’s influence can be seen in thisgrowing body of literature from Coase andmany others, documenting the practical effec-tiveness of market processes.

Yergin, coauthor of The CommandingHeights: The Battle for the World Econo-my, presented excerpts from the BBC adap-tation of his book. The excerpts focusedon the intellectual debate between Hayekand John Maynard Keynes over the neces-sity of state intervention in the economy.

Both events can be viewed on Cato’s web-site, www.cato.org. Click the “Events” tab,and then choose “Watch or Listen to ArchivedEvents Online.” ■

Armey, Buchanan Highlight Hayek Forums

March marked the 60th anniversary ofthe publication of The Road to Serf-dom, by F. A. Hayek, the most influ-ential critique of socialism in histo-

ry. Published at a time when virtually allWestern intellectuals were socialists, it sparkeda debate over the feasibility of the socialistproject that raged until the collapse of theSoviet Union in 1991.

To celebrate The Road to Serfdom’s anniver-sary, the Cato Institute held two book forums.The first, on February 2, featured the authorsof two recent studies of Hayek’s work, BruceJ. Caldwell and Alan Ebenstein. In his book

Hayek’s Challenge: An Intellectual Biographyof F. A. Hayek, Caldwell emphasized thebreadth of Hayek’s intellectual accomplish-ments. Prior to the publication of The Roadto Serfdom, Hayek did groundbreaking workon monetary policy and the business cycle.Afterward, in 1952, he turned his attention tothe emerging science of cognitive psychologyin The Sensory Order, a groundbreaking studyof human cognition. The book forum also fea-tured former House majority leader DickArmey, who hailed Hayek’s intellectual couragein standing against the collectivist ideologi-cal currents of his era.

The second forum, held on March 10, 60years to the day after the publication of TheRoad to Serfdom, featured Cato president EdCrane, Nobel laureate James Buchanan, LeonardLiggio, and Daniel Yergin. Crane recalledHayek’s influence in the early days of the CatoInstitute. Hayek accepted the title of distin-guished senior fellow at the Institute, and Catopaid the salary of Hayek’s secretary from thefounding of the Institute in 1977 until Hayek’sdeath in 1992.

Buchanan stressed the importance of ide-alism to the success of any political movementand credited Hayek with developing an inspir-ing vision of a free society. In publishing TheRoad to Serfdom and subsequent books lay-ing out that vision, Hayek served as a per-

At a March 10 Book Forum, Nobel laureate JamesBuchanan praises F. A. Hayek for sparking andnurturing a renaisance of classical liberal ideasover the last half-century.

Forty years ago, Milton Friedman andAnna J. Schwartz penned A MonetaryHistory of the United States, 1867–1960,

a painstaking survey of United States mon-etary policy in the century prior to thebook’s publication.

In celebration of A Monetary History’s40th anniversary, the Winter 2004 issue ofCato Journal features retrospectives by theauthors and other noted economists on thebook’s impact. Milton Friedman writes thatthe Fed seems to finally be learning the les-sons of history, as it has successfully keptinflation in check since the mid-eighties usingpolicy prescriptions made by Friedmanand Schwartz in the 1960s. Schwartz notesthat A Monetary History has spawned count-less research projects that have fleshed out

cept of comparative advantage, as it doesnot assume fixed factors of production.Roberts also underestimates the potentialfor capital creation, Boudreaux argues—even if a large amount of American capitalwere to be transferred abroad, the result-ing higher rate of return on domestic capi-tal is likely to induce additional domesticsaving. Boudreaux’s article was featured ina Washington Post story on the reaction offree traders to Roberts’s criticisms.

The Cato Journal, published three timesa year, is an interdisciplinary journal ofpublic policy analysis edited by James Dorn.Issues can be purchased for $8 from theCato Institute at 800-767-1241 or onlineat www.catostore.org. One-year subscrip-tions are available for $24. ■

the claims made by the book in more detail.She gives much of the credit for the book’ssuccess to Milton Friedman’s tireless advo-cacy of its thesis. Allan Meltzer of CarnegieMellon praises the book as a model for eco-nomic historians, and William Poole, pres-ident of the Federal Reserve Bank of St. Louis,says that the insights in A Monetary Histo-ry are still relevant to policymakers today.

Also in the Winter issue is a critique byDonald Boudreaux of recent argumentsagainst free trade by Paul Craig Roberts.Roberts, in a widely read New York Timesop-ed with Sen. Chuck Schumer (D-NY),has argued that the increasing mobility oflabor and capital undermines traditionalarguments for free trade. Boudreaux respondsthat Roberts does not understand the con-


New Book Proposes Social Security ReformFriedman, Feldstein, O’Neill, Piñera among contributors

Since the publication of Social Security:The Inherent Contradiction in 1980,Cato scholars have been warning pol-icymakers and the general public that

today’s pay-as-you-go Social Security systemis unsustainable. Demographic changes andthe Ponzi-like structure of the system meanthat it can offer only steadily declining returnsand long-term insolvency. Cato scholars haveargued that the best way to restore the sys-tem to long-term solvency is by giving work-ers individual ownership of their contri-butions and the freedom to invest themin real, private-sector assets. Cato’s effortshave borne fruit: in 2000, candidate GeorgeW. Bush backed the idea of personal accounts,and several congressional candidates cam-paigned on personal accounts and wonin 2002.

In January, Cato continued to drive thedebate forward by proposing a detailed, cred-ible reform plan that would give workers own-ership of the full 6.2 percent employee shareof the Social Security payroll tax. Tanner andProject on Social Security Choice co-chairWilliam Shipman promoted the plan and edu-cated congressional staffers on Social Secu-rity’s problems at a series of Hill Briefingsdubbed “Social Security University.”

In April, Cato published the edited col-lection Social Security and Its Discontents:Perspectives on Choice. In it, Nobel laure-

ate Milton Friedman argues that concernsabout transition costsare misplaced, becausethe government haspromised trillions ofdollars in benefitsto current and futureretirees—benefitsthat will have to bepaid under the sta-tus quo or anyviable reform.Moving to a fund-ed system merelymakes this liabil-ity explicit in theform of govern-ment debt.

Harvard economist Martin Feldstein dis-cusses the dramatic financial gains made pos-sible by personal accounts. The returns ofpay-as-you-go systems are limited by the realgrowth of wages, which has historically beenabout 2.6 percent per year. Private equities,in contrast, have boasted real returns of morethan 7 percent for more than a century. Thanksto the miracle of compounding interest, ifworkers were allowed to divert even a smallportion of their payroll taxes to personalaccounts, it would make a dramatic differ-ence in their retirement income.

June O’Neill, former head of the Congres-

Cato Book

sional Budget Office, explains that the SocialSecurity Trust Fund contains only treasury

bonds, not real, economically produc-tive assets. When the Social Securitytrustees redeem those bonds, taxes willhave to be raised or spending will haveto be cut to generate the necessary rev-enue. Hence, the size of the trust fundhas no effect on the ability of the federalgovernment to meet future obligations,since taxes would have to be raised by thesame amount with or without a trust fund.

Mike Tanner, director of Cato’s Proj-ect on Social Security Choice, argues that,because black workers start work earli-er and have lower life expectancies, thecurrent Social Security system gives themlower returns than comparable white

workers. Leanne Abdnor, a member of thePresident’s Commission to Strengthen SocialSecurity, shows how Social Security has failedto keep pace with the changing role of womenin the workplace, giving generous benefitsfor nonworking spouses but relatively mea-ger returns for two-income couples. Personalaccounts would be more equitable for bothwomen and African Americans, Tanner andAbdnor conclude.

Social Security and Its Discontents is avail-able in hardcover for $29.95. It can be pur-chased in bookstores, at www.catostore.org,or by calling 800-767-1241. ■

Slivinski Joins Cato as Budget DirectorNews Notes

Stephen Slivinski has been nameddirector of budget studies at the CatoInstitute. A former fiscal policy ana-lyst at Cato, he worked most recent-

ly as a senior economist at the Tax Foun-dation in Washington, D.C. Before hisreturn to Washington, Slivinski served asdirector of tax and budget studies for theGoldwater Institute in Phoenix, Arizona.He has coauthored several editions of the“Fiscal Policy Report Card on America’s Governors” withStephen Moore. He will be part of Cato’s fiscal policy team,which also includes Chairman William A. Niskanen, direc-

tor of fiscal policy studies; Chris Edwards;and senior fellows Moore and AlanReynolds.

Radley Balko has been named a pol-icy analyst at the Cato Institute, spe-cializing in “nanny state” issues. He recent-ly published “Back Door to Prohibition:The New War on Social Drinking,” aCato Policy Analysis. He is a regularcolumnist on FoxNews.com and a fre-quent contributor to Tech Central Station. A graduate ofIndiana University, he has been the manager of Cato’s web-site for the past three years. ■

Stephen Slivinski Radley Balko


hope very much that our economic andCentral Bank specialists will take notice ofthe ideas voiced at the conference anduse them to solve certain economic prob-lems in this country.” In particular, heexpressed interest in the pension reformsin Chile. “Obviously, Russia should useeverything positive the world has amassedin this sphere to make the pension reformvery successful,” Putin said.

Cato president Edward H. Crane toldPutin that economic growth and foreigninvestment would require not just free-mar-ket reforms but “the perception and reali-

ty of the rule of law, uncorrupted courts,and protection of contracts.” He also toldPutin: “Another often overlooked aspect ofattracting foreign investment is a free press.True, a free press is first and foremost a civ-il liberties issue. But foreign investors lookto a free press in developing nations as aninstitutional protection for their invest-ments.” Investors, Crane said, are concernedthat the Putin administration has intimi-dated the media in Russia and that thatwould inhibit economic growth.

Putin wasn’t the only leader who lis-tened to experts explain the ins and outsof liberal reform during the conference,which consisted of two days of discus-sion in Moscow—cosponsored with theInstitute of Economic Analysis and theRussian Union of Industrialists and Entre-preneurs—and a day in Saint Petersburgcosponsored with the Leontief Centre. Par-ticipants from across the developing world,including Iraq, Poland, Mongolia, China,and Bulgaria, learned about which reformswork and which don’t from experts withfirst-hand experience implementing themin their own countries. In the keynoteaddress, Illarionov presented a broadoverview of the evidence that economic lib-eralization drives economic growth andthereby raises living standards. Compar-ing pairs of countries with similar geo-graphic and demographic traits but dif-ferent economic policies, he found thatthose that adopted the institutions of secureprivate property, the rule of law, and freetrade prospered, while those that main-tained closed economies and failed to pro-tect property fell behind.

Other speakers confirmed Illarionov’sthesis with stories of their personal expe-

Above: Daniel Yergin,coauthor of The Com-manding Heights: The Bat-tle for the World Economy,delivers a luncheonaddress on the influenceof ideas and individuals intransforming the world.

Piotr Kaznacheev, advis-er in the administrationof President Putin, givesthe case against endors-ing the Kyoto Protocol onglobal warming.

Yaroslav Romanchuk, deputy chairman of the opposition United Civil Party of Belarus, and Fred Hu ofGoldman Sachs, Hong Kong, emphasize the importance of capital freedom.

RUSSIA CONFERENCE Continued from page 1


riences implementing market-oriented poli-cies in their own countries. Laar, formerNew Zealand finance minister RuthRichardson, and Kazakhstan first deputyprime minister Grigori Marchenko alldescribed their successes in producing rap-id economic growth through aggressivereductions in the size and scope of gov-ernment and strengthening of market insti-tutions. But Leszek Balcerowicz, presidentof the national bank of Poland and for-mer Polish finance minister, emphasizedthat more than good policies are need-ed; economic reformers must also thinkabout how best to sell those policies.

Conference participants also got to seefirst-hand how market forces have trans-formed Russia. Cato senior fellow TomPalmer was struck by how much Moscowhas changed since his last visit in 1990.“I remember from the Soviet time howdrab, shabby, dirty, and utterly depress-ing Moscow was,” he said. “It’s nowablaze with advertising, signs, beautifulrestaurants, and shops full of goods.Whereas during my last visit the streetswere full of downcast and depressed peo-ple, the open gaiety and liveliness amongthose walking there today is quite remark-able. What a difference capitalism makes.”

The conference, organized by Illari-onov along with Ian Vásquez, director ofCato’s Project on Global Economic Lib-erty, was Cato’s third in Moscow. In 1990Cato held “Transition to Freedom: TheNew Soviet Challenge,” in conjunctionwith several academic institutes. Speak-ers included James Buchanan, Peter Bauer,George Gilder, and Charles Murray, alongwith such Russian leaders as the may-ors of Moscow and St. Petersburg (stillLeningrad at that time), liberal econo-mist-turned-politician Grigory Yavlinsky,and future prime minister Yevgeny Pri-makov. A follow-up conference in 1991featured Soviet émigré Vladimir Bukovsky,making his first trip back to his nativeland since his exile in the 1970s. Mem-bers of the Supreme Soviet gave speech-es extolling private property, and Yavlin-sky and Stanislav Shatalin discussed their500-Day Plan for economic reform.

Papers from the 2004 conference canbe read at www.cato.org/russiaconference.■

The Moscow conference “A Liberal Agenda for the New Century: A Global Perspective” sparked spirit-ed discussion among the participants.

Reformer Leszek Balcerow-icz, president of the National

Bank of Poland and formerfinance minister of Poland,exhorts classical liberals to

do a better job of sellingtheir ideas.

Putin’s economicadviser, Andrei Illari-onov, and Cato’s José

Piñera held a pressconference about how

to improve Russia’sincipient pension

reform.


Editorial

tined when the buildings were shut down….A limited survey of lobbyists and con-

gressional staffers provided a rough out-line of the possible loss. Because it’sfederal budget season, many of the let-ters being detained likely argue for oragainst a wide variety of federally fund-ed programs.

—Washington Post, February 8, 2004

◆ And we have the gunsIn a show of hostility toward a com-

pany promising to bring hundreds ofjobs and rock-bottom consumer prices topoor, blighted neighborhoods, the LosAngeles City Council this month may banWal-Mart from opening its popular “super-centers,” sprawling new stores that sell dis-count groceries along with many other bar-gain goods . . . .

“They’re a goliath, but we’re a goliath,too—and we want to send them a mes-sage,” said Eric Garcetti, the Los Angelescouncilman proposing the restrictionsagainst the retailer.


◆ Wisdom worthy of Lao-tzu[For opponents of gambling in Mary-

land] their only hope is a slim one: enoughpartisan bickering to produce stalemate.The people win when nothing happens.—Marc Fisher in the Washington Post,

February 1, 2004

◆ Profiles in courageRep. Ralph M. Hall, a veteran con-

servative Democrat from Texas, switchedparties last night, filing for reelection as

CATO POLICY REPORT1000 Massachusetts Ave., N.W.Washington, D.C. 20001

ADDRESS SERVICE REQUESTED

“To Be Governed...”

◆ Slashing the budget by 0.04 percentThe administration wants to shut-

ter 13 programs deemed ineffective orunable to demonstrate results. Their com-bined budgets surpass $1 billion.


◆ Republicans learn to use carrot and stickThis month, delegates voted 98 to 1

for a resolution asking Congress to exemptstates from the No Child Left Behind actif the states already have rigorous stan-dards and testing programs.

The resolution said that the law “rep-resents one of the most sweeping intru-sions into state and local control of edu-cation in the history of the United States”and will cost “literally millions of dol-lars that Virginia does not have.”

Given those concerns, one of the authorsof No Child Left Behind, Rep. John A.Boehner (R-OH), said Virginia could optout of the law—at its peril. In an op-edpiece in Thursday’s Norfolk Virginian-Pilot, Boehner said the state has every rightto ignore the more stringent testing andreporting provisions of the law, “presum-ing Virginia lawmakers are also willing tohand back the massive increase in feder-al aid the state is receiving” under the law.


◆ Actually, public choice tells us thattax consumers write far more letters thantax payers

After ricin was found in the mailroomof a Senate office building last week, haz-ard response teams searched Capitoloffices to collect mail that was quaran-

a Republican. “I’ve always said that ifbeing a Democrat hurt my district, I wouldswitch or I would resign,” Hall said.He said Republican leaders recently hadrefused to place money for his district ina spending bill, and “the only reason Iwas given was I was a Democrat.”

—Washington Post, Jan. 3, 2004

◆ Sophistry definedIn regard to the proposed cigarette tax

increase of 25 cents per pack, Herb Miller[letters, Dec. 16] asked, “Where is thefairness in targeting a specific group thatincreasingly lacks the political muscle tofight back?”

The fairness is that the average state taxon cigarettes in this country is about 60cents. With the current tax less than 3 centsin Virginia, I would argue that Virginiataxpayers are subsidizing Mr. Miller's habitto the tune of 57 cents a pack.

—Letter to the editor, Washington Post,Dec. 25, 2003

◆ Protecting consumers, uh, sellersOn Oct. 21, New York Gov. George

Pataki signed into law a bill designed tocurb predatory pricing of motor fuel. . . .

The law, as signed, will prohibit retailpricing of motor fuel below 98 percentof cost. . . .

“We are grateful for Gov. Pataki’s wis-dom and strength in signing this bill inthe face of stiff opposition from Wal-Martand the Retail Council of New York State,”said Thomas J. Peters . . . of the EmpireState Petroleum Association.

—Fuel Oil News, Dec. 2003

Nonprofit OrganizationU.S. Postage PaidWashington, D.C.Permit No. 3571

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Putin Meeting Caps Moscow Conference...at least to me, was the energy and vitality in the streets of both Moscow and St. Petersburg. It is hard to describe, but people had a bounce