Saturday, October 30, 2010

Get rid of the corporate income tax:
The corporate income tax encourages firms to use debt finance, rather than equity. Debt finance makes companies riskier. But because payments on debt are tax deductible, and dividends are not, companies have a strong incentive to use debt rather than equity finance. The deductibility of debt payments also lowers the required rate of return for new projects, possibly encouraging companies to invest in marginal ideas that aren't really worth it. Without the corporate income tax giving them a 35% reduction on their interest payments, they might think twice.

The corporate income tax encourages firms to waste resources on tax avoidance. In general, taxes are most efficient when they fall on those who have the most difficulty avoiding them. Big corporations can and do spend an enormous amount of money and human effort transforming their income into more tax-preferred forms--deferring it, moving it, swapping it with entities that have different tax rules, and so forth. We spend an enormous amount of energy trying to make rules to stop them. It would be a lot easier to get rid of the thing entirely and focus on getting the money from people, who can't afford quite such large squads of tax attorneys. This would also correct an obvious flaw in the corporate tax code: it's easier for big companies to afford pricey tax lawyers--and pricey lobbyists to get them special tax breaks. Moreover, as I hinted above, the rules governing corporations are complicated for a reason--what constitutes an expense is as much art as science, and varies from industry to industry.

Without the corporate income tax, a lot of the incentive for lobbying would go away. Not all of it, by any means--I am not trying to paint some halcyon future here. But an enormous amount of effort goes into lobbying for tax laws, and politicians often reward favored constituent businesses with little sweetheart fillips to the tax code. Conversely, apparently neutral changes to the tax code often turn out to be excellent ways to hamstring your competition, particularly small businesses who cannot afford a huge tax department.

With equity, financiers share in the risk, and the moral element of the shift from equity to debt financing is widely under-appreciated. Similarly, the mere presence of government, in taxation or regulation, provides opportunities for regulatory capture and outright corruption. Removing the opportunity for corruption is a far more effective means of draining the swamp than any enforcement could hope to be.

Friday, October 29, 2010

TARP: Government bailouts lead to corruption.

Thursday, October 28, 2010

Michael Totten and Michael Kramer on Iran:
Martin Kramer: I do think a nuclear Iran creates a dynamic where Israel, from a strategic point of view, is compelled to keep a tight grip on Jerusalem and a large swath of the West Bank for the simple reason that it creates a deterrent to an Iranian attack. If all our strategic assets are concentrated on the coastal plain around Tel Aviv, we’re vulnerable. An Iranian ayatollah, Rafsanjani, has already noted that Israel is vulnerable to one strike. So how to we change that calculation?

A big country like the United States disperses its assets across a vast continent when facing nuclear adversaries. A small state can’t do that. But within this small state is a prime Muslim holy place, the liberation of which is championed by the Iranians, and it’s in Jerusalem...

MJT: It sounds, though, like this would make resolving the conflict with the Palestinians much more difficult.

Martin Kramer: Yes.

Linkage is a big issue, but there’s a debate over which way linkage runs. Some say a resolution to the Israeli-Palestinian conflict would make it much easier for the United States to deal with Iran. But I think the absence of a solution to the Iranian nuclear dilemma places a high premium on Israel holding if not the totality of the occupied territories, at least a sizable bit of real estate around Jerusalem as a strategic reserve.

I’d like to know more about how this is supposed to affect Iran’s calculations. I don’t think it will. I think they decided long ago that they want to have a hegemonic role enhanced by nuclear capability. A resolution of the conflict here wouldn’t deter them or persuade them from that ambition. On the contrary, they would believe that Israel would grow stronger and would be even more of a threat than it is today. They’re going to pursue this track no matter what.

He has some intriguing prescriptions:
Martin Kramer: The regions used to be separate. During the British time, the Levant was run from London and the Persian Gulf from India. The Levant was called the Near East, and the Gulf was called the Middle East. These were two distinct zones. We’ve conflated them in the meantime, and it’s in the interest of the United States to disaggregate them again and to keep them disaggregated. Any attempt to project power from one into the other undermines the position of the regional hegemon. And it compels others to do the same. If Israel acts over the head of the United States against Iran, it will be just the latest example. It’s something the United States can’t afford.

MJT: How can the United States drive a wedge between the two regions?

Martin Kramer: That’s easy. The U.S. just has to say that it supports its Israeli ally to keep order in its arena, and the U.S. will take responsibility for keeping order in its arena. Just effectively divide responsibility. If the U.S. flags in its resolve to do that, it will be under pressure from those who are tempted to act outside their arena.

Many Americans are hoping that the Israelis will do our dirty work for us when it comes to destroying Iran's nascent nuclear capability, but this suggests it is in our interest to take ownership of the problem.

Wednesday, October 27, 2010

The case for calling them nitwits:
Nowhere is the gap between sinister stereotype and ridiculous reality more apparent than in Afghanistan, where it’s fair to say that the Taliban employ the world’s worst suicide bombers: one in two manages to kill only himself. And this success rate hasn’t improved at all in the five years they’ve been using suicide bombers, despite the experience of hundreds of attacks—or attempted attacks. In Afghanistan, as in many cultures, a manly embrace is a time-honored tradition for warriors before they go off to face death. Thus, many suicide bombers never even make it out of their training camp or safe house, as the pressure from these group hugs triggers the explosives in suicide vests. According to several sources at the United Nations, as many as six would-be suicide bombers died last July after one such embrace in Paktika.

Many Taliban operatives are just as clumsy when suicide is not part of the plan. In November 2009, several Talibs transporting an improvised explosive device were killed when it went off unexpectedly. The blast also took out the insurgents’ shadow governor in the province of Balkh.

More and more, as we work to disrupt training efforts, the jihadists we face are likely to be poorly prepared, and while that won’t always ensure a bungled attack, it suggests that terrorists are likely to select targets that are undefended and easy to hit. The United States has spent billions on port security since 9/11, even though terrorists have shown little interest in ports as targets and even less ability to actually strike them. In contrast, even small investments in training for police and airport-security personnel can make a big difference, as these are the people most likely to encounter—and have a chance to disrupt—an unskilled attacker.

Sunday, October 24, 2010

I have talked before about fundamental misunderstandings about what counter-insurgency doctrine entails. Max Boot sets us straight again:
A number of commentators such as Fred Kaplan, David Ignatius, and Joe Klein have claimed that General Petraeus is abandoning counterinsurgency doctrine in Afghanistan in favor of a more kinetic counterterrorism approach designed to generate faster results. As evidence, they can point to an increase in air strike and Special Operations raids. This represents a fundamental misreading of counterinsurgency doctrine, which hardly eschews killing the enemy; rather, a proper counterinsurgency strategy has to be about more than simply killing the enemy — it has to have political, economic, diplomatic, legal, communications, and other elements to be successful. But that doesn’t mean you can ignore the imperative to kill or lock up insurgents — and Petraeus hasn’t, in either Iraq or Afghanistan.

Max points to an excellent note by Paula Broadwell on Tom Rick's blog at Foreign Policy:
One of the big ideas Petraeus embraced when he moved to Afghanistan last summer was "the need to change the COIN math, to figure out how to increase the numbers of ISAF/ANSF and to reduce the numbers" of fighters. The kill/capture roll-up rate mentioned above is one side of that ledger, and the other side is the now-complete surge of ISAF troops and the increase in ANSF troops. Though questions remain regarding their quality, the military and police training program is, in fact, ahead of October 2010 goals...

Petraeus has also placed increased emphasis on reconciliation and reintegration efforts in his first four months. "Reconciliation" focuses on senior Afghan leaders, most of who are hiding in Pakistan leading by cell phone. News of recent negotiations with senior Taliban this week indicates that small reconciliation efforts may be underway. "Reintegration" is conducted with those who are on the ground in Afghanistan -- mid-level leaders including district shadow governors and below. The objective, Petraeus said in a recent interview, "is to take away as many of the rank and file, take them off the battlefield again turn them from bad guys to good guys" or at least prevent them from "trying to kill our troopers and our Afghan partners and civilians." Intel chatter interdicted via low-level voice intercepts has shown that some senior-level insurgents feel coalition force pressure across their networks. Some reports indicate they may be willing to "cut a deal," as the recent negotiations between the Afghan government and Taliban portend.

Saturday, October 23, 2010

Daniel Drezner:
Based on the indictment, however, it appears that the Russian spies gathered nothing from the decade-long enterprise that a well-trained analyst couldn’t have picked up by trolling the internet. The problem is that Russia’s intelligence services believed that a secret cabal runs American foreign policy.

Similarly, the current Iranian leadership seems to have very little understanding of how the American government works. Hossein Shariatmadari, a key adviser to Iran’s Supreme Leader Ali Khamenei, recently told a reporter for the New Yorker that the green movement was a US-led conspiracy organised by, among others, the neoconservative think-tanker Michael Ledeen, Richard Haass, president of the Council on Foreign Relations, and the billionaire George Soros. These three individuals agree on very little. They are more likely to form a new hip-hop group than successfully organise the Iranian reform movement...

Why are foreign policymakers — who presumably would not be able to rise to leadership status without some appreciation for their own country’s domestic politics — so awful at understanding the domestic politics of other countries? Alas, there are a surfeit of reasons. The most basic is that our standard models for understanding international relations are based on a radically simplifying assumption: that states can be treated as rational, unitary actors. Realists assume that all states act in an opportunistic manner, fearing the relative power of other countries. Liberals assume that states are self-interested utility-maximisers interested in co-operation. What these theories have in common is the assumption that states have something resembling a national interest, and that these interests are similar across states.

It’s not just the rational mind that causes policymakers to ignore the domestic politics of other countries — the emotional mind works in a similar manner. When interpreting the behaviour of other actors, individuals will often perceive allied nations differently from adversaries even if their policies are similar. If an ally does something positive, it is attributed to the country’s ‘good’ internal character. If an adversary does [the same thing], we look for evidence that the country was forced into co-operating. Psychologists refer to this phenomenon as ‘fundamental attribution error’, and it has a curious effect on how policymakers perceive the domestic politics of other countries. With allies, there is usually a greater appreciation for the nuances of domestic coalitions and institutions...

There is one final reason why policymakers are often wilfully ignorant of the domestic politics of other countries — such awareness can actually lead to a bargaining disadvantage. International relations scholars from Thomas Schelling onwards have observed that leaders can translate domestic weakness into international strength. Both Netanyahu and the Palestinian Authority president Mahmoud Abbas, for example, have not been shy in pointing out the domestic constraints on their ability to cut a deal. If the other side can comprehend the domestic political situation, it might make them willing to offer concessions.

Increasingly in international relations, it seems that all politics are local... Even in authoritarian countries like Iran and China, leaders need to play to their domestic bases. The political incentives for acting this way are understandable. The problem is that, when everyone cares only about their domestic standing, sustainable international co-operation looks more and more like a chimera.

Sunday, October 17, 2010

What makes Steve's methodology different from everyone else’s is that he always believed the most important decisions you make are not the things you do – but the things that you decide not to do.

John Sculley on Steve Jobs

Friday, October 15, 2010

The progress of the Kyoto protocol in the EU:
The left leaning Guardian newspaper in Britain let the cat out of the bag yesterday, reporting that while the EU’s emission of CO2 declined by 17% between 1990 and 2010, this apparent progress was bogus. If you add up the CO2 released by the goods and services Europeans consumed, as opposed to the CO2 thrown off by the goods and services they produced, the EU was responsible for 40% more CO2 in 2010 than in 1990. The EU, as the Guardian puts it, has been outsourcing pollution — and jobs — rather than cutting back on greenhouse gasses.

EU “progress” on greenhouse gasses in the last twenty years was a mirage. And the only reason that the EU can pretend to look green is that it was outsourcing economic growth to countries like China.

Thursday, October 14, 2010

Radley Balko:
Consider the 2000 federal law that pressured states to lower their BAC standards to 0.08 from 0.10. At the time, the average BAC in alcohol-related fatal accidents was 0.17, and two-thirds of such accidents involved drivers with BACs of 0.14 or higher. In fact, drivers with BACs between 0.01 and 0.03 were involved in more fatal accidents than drivers with BACs between 0.08 and 0.10. In 1995 the National Highway Traffic Safety Administration studied traffic data in 30 safety categories from the first five states to adopt the new DWI standard. In 21 of the 30 categories, those states were either no different from or less safe than the rest of the country.

Once the 0.08 standard took effect nationwide in 2000, a curious thing happened: Alcohol-related traffic fatalities increased, following a 20-year decline. Critics of the 0.08 standard predicted this would happen. The problem is that most people with a BAC between 0.08 and 0.10 don't drive erratically enough to be noticed by police officers in patrol cars. So police began setting up roadblocks to catch them. But every cop manning a roadblock aimed at catching motorists violating the new law is a cop not on the highways looking for more seriously impaired motorists.

Friday, October 8, 2010

Clayton Cramer has a post worth quoting in full:
If you want to understand what makes this recession continue, ask the authors of Federalist 62. First, the problem of the health care reform bill that came to 2700 pages:
It will be of little avail to the people, that the laws are made by men of their own choice, if the laws be so voluminous that they cannot be read, or so incoherent that they cannot be understood; if they be repealed or revised before they are promulgated, or undergo such incessant changes that no man, who knows what the law is to-day, can guess what it will be to-morrow. Law is defined to be a rule of action; but how can that be a rule, which is little known, and less fixed?

The following paragraph explains why people like George Soros always back Democrats:
Another effect of public instability is the unreasonable advantage it gives to the sagacious, the enterprising, and the moneyed few over the industrious and uniformed mass of the people. Every new regulation concerning commerce or revenue, or in any way affecting the value of the different species of property, presents a new harvest to those who watch the change, and can trace its consequences; a harvest, reared not by themselves, but by the toils and cares of the great body of their fellow-citizens. This is a state of things in which it may be said with some truth that laws are made for the few, not for the many.

And why employers are reluctant to hire right now:
In another point of view, great injury results from an unstable government. The want of confidence in the public councils damps every useful undertaking, the success and profit of which may depend on a continuance of existing arrangements. What prudent merchant will hazard his fortunes in any new branch of commerce when he knows not but that his plans may be rendered unlawful before they can be executed? What farmer or manufacturer will lay himself out for the encouragement given to any particular cultivation or establishment, when he can have no assurance that his preparatory labors and advances will not render him a victim to an inconstant government? In a word, no great improvement or laudable enterprise can go forward which requires the auspices of a steady system of national policy.

Thursday, October 7, 2010

"It is a mistake to think that businessmen are more immoral than politicians." - John Maynard Keynes
The Wall Street Journal:
Mr. Boehner also proposed to break spending bills into smaller bills for each federal agency or function rather than piling education with health care, for example, into a giant log-rolling exercise. The man who would be Speaker didn't say whether he'd let reformers like Mr. Flake onto the Appropriations Committee, where the spending culture is ingrained. But he ought to do so, and we'd recommend that he also impose term limits for Appropriators, so it wouldn't be a life-time pork-barrel sinecure.

Most intriguingly, Mr. Boehner suggested that "we ought to start at square one and give serious consideration to revisiting, and perhaps rewriting, the 1974 Budget Act." Now he's getting somewhere. That law, passed over the veto of a Watergate-weakened Richard Nixon, further rigged the budget process to abet spending. It killed the President's impoundment power not to spend money, and it established the annual "budget baseline" that makes spending increases automatic. Thus even a reduction in the amount of spending increase in a program becomes a budget "cut" that special interests can attack. Mr. Boehner should consult Budget ranking Member Paul Ryan and former Member Chris Cox for reform ideas.

The larger insight here is that Democrats have organized Congress and written its rules to aid and abet their policy priorities. During their last time in the majority, Republicans didn't do enough to rewrite those rules to assist their ostensible goal of limiting government power and reducing spending and taxes. They shouldn't make the same mistake again.

In addition to rewriting the Budget Act, Republicans need to assert control over the scoring conventions at the Congressional Budget Office that typically underestimate spending—see ObamaCare. Ditto for the rules at the Joint Tax Committee that underestimate the impact of tax changes on taxpayer behavior and economic growth.

If Republicans and the Tea Party are serious about limited government, especially if working under an Obama veto, they need to think structural.

Wednesday, October 6, 2010

David Henderson at Mercatus:
A federal government runs a large deficit. Deficits are so large that the ratio of federal debt to Gross Domestic Product (GDP) approaches 70 percent. A constituency of voters have gotten used to large federal spending programs. Does that sound like the United States? Well, yes. But it also describes Canada in 1993. Yet, just 16 years later, Canada’s federal debt had fallen from 67 percent to only 29 percent of GDP. Moreover, in every year between 1997 and 2008, Canada’s federal government had a budget surplus. In one fiscal year, 2000–2001, its surplus was a whopping 1.8 percent of GDP. If the U.S. government had such a surplus today, that would amount to a cool $263 billion rather than the current deficit of more than $1.5 trillion.

We often think of Canada as a more-socialist and higher-tax country than the United States, and for good reason: to some extent it’s true. For instance, Canada has a single-payer health care system, no private universities, and a five-percent federal tax on goods and services. So, what happened? How did the Canadian government do it? You might think that the Canadian government achieved the budget surplus by 2000–2001 with major increases in taxes, but it didn’t. Part of the fiscal improvement was due to high economic growth. But economic growth is, in part, a result of policy, not a policy itself.

The main policy actions that the Canadian government took to shrink its budget deficit and turn deficits into surpluses were cuts in government spending. Moreover, the Canadian government didn’t just cut the growth rate of spending, a favorite trick of U.S. politicians who want to claim the mantle of fiscal conservatism. It also cut absolute spending on many programs in dollar terms. And because the inflation rate in Canada, though low, was greater than zero over the whole time period, these cuts in dollar terms were even larger in inflation-adjusted dollars.

There are two morals of this story. First, the Canadian experience shows us that a large budget deficit can be turned into a budget surplus with ten years of fiscal discipline, mainly with spending cuts. It can happen here in the United States. We do not have to accept the idea that we have only two grim choices: living with huge budget deficits and a federal debt that both increase as a percent of GDP, or accepting our current spending but reducing the budget deficit with major tax increases.

The second moral of the story is that the Canadian experience does not support the Keynesian view that policymakers should not cut government spending during an economic slowdown. The Canadian experience, just like the U.S. experience during the 1920–21 recession and in the first two years following World War II, shows that cutting government spending even during low-growth years can be good for long-term economic results.

Tuesday, October 5, 2010

Michael Totten on the Druze of the Golan Heights which he uses as a jumping off point for a great overview on the politics of the Druze, the Allawites, Shi'a, Sunni and Christians in Syria, Lebanon and Israel.
Israeli journalist and political analyst Jonathan Spyer noticed a similar phenomenon when he traveled from Israel to Lebanon after the war against Hezbollah in 2006. “People have an acute sense of this unseen power which is both nowhere and everywhere,” he told me...

Bashar Assad and his Alawite community have some things in common with Druze. They, too, are religious minorities who emerged long ago from Islam and became something else. They, too, have to be sensitive to the majority where they live. If Syria’s Alawite rulers made peace with Israel, they may well face a Sunni insurgency as Jumblatt suggested—and it would not be the first time.

The Alawi, or Alawite, sect is a peculiar religious community that makes up around ten percent of Syria’s population and a tiny percentage of Lebanon’s. Most Alawites live along the Mediterranean coast in Syria and Northern Lebanon, but a few live as far south as the Golan Heights area. They are descendants of the followers of Muhammad ibn Nusayr, who took them out of mainstream Twelver Shia Islam in the 10th century. Their religion has as much in common with Christianity and Gnosticism as it does with Islam, and both Sunnis and Shias have long considered them “infidels.”

The strangest thing about the Alawites is that they have made themselves rulers of Syria. It’s as unlikely as the Druze lording it over Lebanon, or the Kurds seizing control of Iraq, or Coptic Christians mounting a successful coup against Mubarak in Egypt, but it happened. As the Assad clan is Alawite, most of the elites in the Baath Party, the bureaucracy, and the military are Alawites, too.

Imam Musa Sadr, founder of the Shia movement Amal in Lebanon, struck a deal with Hafez Assad in 1974 and issued a fatwa, or religious ruling, somewhat implausibly declaring Alawites part of the Shia community.

Yet the Alawites are not Shias. They’re Alawites. The two communities need religious cover for their political alliance, however, and Sadr’s fatwa gives it to them. The relationship between Hezbollah and Damascus’ Alawite regime, though, is strictly one of convenience. The two feel little or no warmth for each other.

While Hezbollah and Amal are politically aligned with the Alawite government, the Sunnis are not, and Sunnis make up around 70 percent of Syria’s population. The fundamentalists among them have long detested Assad’s Baath Party regime, not only because it is secular and oppressive, but because its leaders are “heretics.”

So the Assad family ended up supporting terrorist groups in Syria’s war against Israel for some of the same reasons the Khomeinists do in Iran. As minorities in the region, neither can be rulers of or hegemons over Sunnis without street cred.

Sunday, October 3, 2010

Modern Sweden:
In fact, contemporary Sweden is much less socialist than many Americans realize. Since the early 1990s, when it suffered a painful financial crisis, the Scandinavian country has deregulated key industries (such as airlines, telecommunications, and electricity), lowered its overall tax burden, established universal school vouchers, partially privatized its pension system, abolished certain government monopolies, sold a number of state-owned enterprises (including the parent company of Absolut vodka), and trimmed public spending. Several years ago, it eliminated gift and inheritance taxes. The World Economic Forum now ranks Sweden as the second-most competitive economy on earth, behind only Switzerland. According to the 2010 Index of Economic Freedom (compiled by the Wall Street Journal and the Heritage Foundation), Sweden offers greater business freedom, trade freedom, monetary freedom, investment freedom, financial freedom, freedom from corruption, and property-rights protection than does the United States...

Yet certain aspects of the old Swedish model have proved stubbornly resistant to change. For example, the government-run health-care system remains plagued by long waiting times, and onerous labor regulations make it very difficult for companies to hire or fire workers. Labor-market rigidity has contributed to a yawning employment gap between natives and immigrants, which has retarded the process of integrating Swedish Muslims.
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