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T H E H O O V E R I N S T I T U T I O N • S TA N F O R D U N I V E R S I T Y
HOOVER DIGESTRESEARCH + OPINION ON PUBLIC POL ICY
WINTER 2016 NO. 1
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The Hoover Institution on War, Revolution and Peace was established at Stanford Univer-
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T H E H O O V E R I N S T I T U T I O N
S TA N F O R D U N I V E R S I T Y
HOOVER DIGESTRESEARCH + OPINION ON PUBLIC POLICY
WINTER 2016 • HOOVERDIGEST.ORG
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The Hoover Digest explores politics, economics, and history, guided by the
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ON THE COVER
A British poster from World War I highlights
a young woman working in a munitions
factory. Munitions work was indeed highly
dependent on women’s labor, as were many
other civilian jobs in the warring nations.Such jobs gave women a salary, a sense of
purpose—and in some cases chronic health
problems. Some of the so-called “munitio-
nettes” or “canary girls,” so named because
the chemicals in shells turned their skin
orange-yellow, also died in explosions in huge
arms factories. See story, page 196.
HOOVER DIGESTRESEARCH + OPINION ON PUBLIC POLICYWINTER 2016 • HOOVERDIGEST.ORG
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Winter 2016 HOOVER DIGESTTHE ECONOMY
9 Avoiding Greece’s Mistakes—While We Still CanThe United States can avoid the errors that savaged the Greek
economy, but only if Washington makes a concerted effort todo so. By John B. Taylor
13 Too Strong to FailDodd-Frank’s selective scrutiny won’t prevent the next
meltdown. What would? Insisting that financial institutions
hold more capital. By Edward Paul Lazear
16 Where’s the Productivity?Despite predictions, there’s little sign that automation is
making economies more productive. How come? By Michael
Spence
20 A Few Trillion Short
Public employee pensions are in a deeper financial hole thanstates admit—a much, much deeper hole. By Joshua D. Rauh
POLITICS
25 Myths of RedistributionDecrying the “income gap” may make for stirring political
rhetoric, but we don’t need rhetoric. We need growth. By
Allan H. Meltzer
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29 Here’s Mud in Your EyePolitics in democracies have always been rough and tumble,
and we’re better off because of it. By Bruce S. Thornton
REFUGEES
37 The American Way of RefugeOffering sanctuary to Syrian exiles is both compassionate and
wise—and just might give the United States a chance for a
regional “reset.” By Kori N. Schake
HEALTH CARE
41 Rescuing ObamaCareThe best cure? High-deductible plans and health savings
accounts. By Scott W. Atlas and John F. Cogan
INTELLIGENCE AND SECURITY
44 China as an Ally in Cyberspace?How Washington and Beijing could make common cause
toward a secure online world. By Herbert Lin
49 The Future of ViolenceComing to grips with dizzying change and vanishing borders.
By Benjamin Wittes and Gabriella Blum
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55 Foiling the Dirty BombHow to head off the threat of a radiological weapon before it’s
too late. By Sam Nunn and Andrew Bieniawski
EDUCATION
58 Whose Standards?Parents of schoolchildren certainly support standardized
tests; the Common Core, not so much. Highlights of the
latest Education Next poll. By Michael B. Henderson, Paul E.
Peterson, and Martin R. West
70 Fight for the BrightOur highest-achieving students have needs, too—and we’re
failing to meet them. By Chester E. Finn Jr. and Brandon L.
Wright
78 Bad News Is Good News
Low test scores may be unwelcome, but they’re entirelynecessary. Parents shouldn’t shoot the messenger. By Michael
J. Petrilli and Robert Pondiscio
RUSSIA
82 Red Tide Ebbing
Although he may appear to have outmaneuvered Washington, Vladimir Putin has made missteps—and given the United
States a chance to press for a democratic, responsible Russia.
By Michael A. McFaul
GREECE
86 Poorer, Yes. But Wiser?Political regimes in Greece used to be nasty, brutish, and
short-lived. Has the country grown up at last? By Niall
Ferguson
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ISRAEL
89 A Rare Win-WinBy improving the lives of Palestinians, Israelis could improve
their own. By Stephen D. Krasner
IRAN
97 A Chance for Iranian ReformThe Obama administration’s nuclear deal, many Iranians
believe, could encourage changes in Iran itself. By Abbas
Milani and Michael A. McFaul
106 And Now, the FalloutRegardless of what Iran gets out of the nuclear deal, its proxy
Hezbollah clearly gains—and Israel clearly loses. By Peter
Berkowitz
RELIGIOUS FREEDOM111 The Tyranny of Secular Faith
Progressivism marches relentlessly toward its destination: the
one true secular kingdom. By Peter Berkowitz
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CONSCRIPTION
115 Don’t Bring Back the Draft Abolishing military conscription was a great victory for
freedom. Here’s why the volunteer military should remain justthat. By David R. Henderson
CALIFORNIA
120 Beating the Drought, Aussie StyleThe lesson California should learn from Australia: create a
robust market to swap water. By Carson Bruno
INTERVIEW
126 The Exceptional Rupert MurdochThe media mogul reflects on luck, and on making one’s own
luck. By Peter Robinson
IN MEMORIAM: ROBERT CONQUEST
134 The Man Who Was RightThe late Hoover fellow Robert Conquest detailed communist
horrors when nobody believed them, or wanted to believe. By
John B. Dunlop and Norman M. Naimark
144 This Be His Verse As a poet, Robert Conquest could be subtle, blunt, or blue—orall three at once. A brief testament to a great talent. By John
O’Sullivan
HEROISM
151 The Heroic HeartHeroes still walk among us, but no longer must they kill to
win glory. Instead the hero for our time is a healer. By Tod
Lindberg
HOOVER DIGEST • WINTER 2016 7
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161 Heroes and VillainsIf we start pulling down heroes who are imperfect, we should
pull them all down. History is tragedy, and the players always
human. By Victor Davis Hanson
THE COLD WAR
164 “Long Telegram,” Long ShadowSeventy years have passed since diplomat George Kennan
offered his penetrating advice. The story of one of the most
important documents in American history. By Bertrand M.
Patenaude
HISTORY AND CULTURE
181 Sakharov and the Moral Imperative“The truth is never simple,” said the celebrated Soviet
dissident. His was indeed a complex life in complicated times.
By Serge Schmemann
HOOVER ARCHIVES
189 War Is . . . Soccer?Historic posters show how World War I combatants wove
the beautiful game into images, and memories, of a far-from-
beautiful war. By Jean McElwee Cannon
196 On the Cover
8 HOOVER DIGEST • WINTER 2016
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THE ECONOMY
Avoiding Greece’s Mistakes—While
We Still CanThe United States can avoid the errors thatsavaged the Greek economy, but only if
Washington makes a concerted effort to do so.
By John B. Taylor
Last summer I addressed the Senate Foreign Relations Subcom-
mittee on Europe and Regional Security Cooperation about the
lessons the United States can learn from the Greek financial
crisis. One obvious lesson is that the United States needs to take
actions to prevent its own federal debt from exploding, as is forecast by the
Congressional Budget Office in its alternative fiscal scenario. But I chose to
emphasize a broader set of economic policy issues.
First, note that while the Greek economy has been performing terribly
recently (real GDP has declined by an average of 5 percent per year for
the past five years), over the longer term economic growth has also been
poor. Real GDP growth averaged only 0.9 percent per year and productivity
growth (on a total factor basis) averaged only 0.1 percent per year since 1981.
John B. Taylor is the George P. Shultz Senior Fellow in Economics at the Hoover
Institution, the chair of Hoover’s Working Group on Economic Policy and a mem-
ber of Hoover’s Shultz-Stephenson Task Force on Energy Policy, and the Mary and
Robert Raymond Professor of Economics at Stanford University.
HOOVER DIGEST • WINTER 2016 9
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Note also that Greece’s economic policies—regulatory, rule of law, bud-
get, taxes—have also been very poor, according to many outside observers.
According to the Heritage Foundation’s Index of Economic Freedom, Greece
ranks 130 among the countries of the world, the worst policy performance
in Europe and on a
par with many poor
sub-Saharan African
countries. According
to the World Bank’s
Doing Business indicator, Greece ranks 61, which is well below Portugal, Italy,
Spain, and Ireland; and on two important pro-growth measures in the Doing
Business indicator it ranks 155 on enforcing contracts and 116 on registering
property. And, according to yet another measure, the Fraser Institute’s Index
of Economic Freedom, Greece ranks 84 in the world.
These factors alone explain much of Greece’s poor economic performance,
and for this reason in its recent report on Greece the IMF concludes that
“to achieve [productivity] growth that is similar to what has been achieved
in other euro area countries, implementation of structural [supply side]
[Taylor Jones—for the Hoover Digest ]
The United States has been slipping on
measures of good economic policy.
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reforms is therefore critical.” No quantitative measure is perfect and there
are exceptions, but there is a general association between these economic
policy measures and economic performance.
Of course, US economic policy scores higher according to these quantita-
tive measures, and one must be careful in drawing analogies and lessons.
Nevertheless there is a problem: the United States has been declining in
recent years on all of these
measures of good economic
policy. On the Fraser index,
the United States ranked
2 in the year 2000 and
it ranks 14 today. On the
Heritage index it ranked 5 in
2008 and it ranks 12 today. On the World Bank’s Doing Business indicator it
ranked 3 in 2008 and it ranks 7 today.
I have also noticed such a deviation from good economic policy in the
United States in recent years and I wrote about it in my book First Principles.
I find a connection between the recent US problem of low economic growth
I find a connection between the
recent US problem of low economic
growth and this deviation from
sound policy.
HOOVER DIGEST • WINTER 2016 11
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and this deviation from sound policy principles. In the United States, adher-
ence to the principles of good economic policy has ebbed and flowed over the
years, creating waves of bad economic times and good economic times.
Of course, there are implications for Greece: the best policy for Greece would be to radically change economic policy in a pro-growth direction. This
would move Greece up in the economic policy indexes and, more important,
start productivity and economic growth.
For the United States, the policy implications are similar, though their
purpose is to accelerate the slow upward pace of the economy—say from a 2
percent growth rate to 4 percent—and avoid another economic crisis, rather
than to stop a precipitous downward drop in the economy and stop an ongo-
ing crisis, as in the case of Greece.
Reprinted from John B. Taylor’s blog Economics One (http://economicsone.
com).
New from the Hoover Institution Press is Puzzles,
Paradoxes, Controversies, and the Global Economy ,
by Charles Wolf Jr. To order, call (800) 888-4741 or visitwww.hooverpress.org.
12 HOOVER DIGEST • WINTER 2016
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THE ECONOMY
Too Strong to FailDodd-Frank’s selective scrutiny won’t prevent
the next meltdown. What would? Insisting that
financial institutions hold more capital.
By Edward Paul Lazear
R
ecently large market declines and increased volatility have
prompted concerns that we may be headed again toward finan-
cial chaos. The 2010 Dodd-Frank law was supposed to prevent
that from happening, but as Milton Friedman cautioned, “the
government solution to a problem is usually as bad as the problem and very
often makes the problem worse.”
Case in point: Dodd-Frank’s Financial Stability Oversight Council has
subjected several US banks and nonbank financial institutions to special
regulatory scrutiny based on the idea that their failure could lead to another
crisis. But the theory behind so-called systemically important financial
institutions, or SIFIs, is fundamentally flawed. Financial crises are patholo-
gies of an entire system, not of a few key firms. Reducing the likelihood of
another panic requires treating the system as a whole, which will provide
greater safety than having the government micromanage a number of private
companies.
The risks to a system are most pronounced when financial institutions bor-
row heavily to finance investments. If the value of the assets falls or becomes
Edward Paul Lazear is the Morris Arnold and Nona Jean Cox Senior Fellow at
the Hoover Institution, co-chair of Hoover’s Conte Initiative on Immigration Re-
form, and the Jack Steele Parker Professor of Human Resources Management and
Economics at Stanford University’s Graduate School of Business.
HOOVER DIGEST • WINTER 2016 13
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highly uncertain, creditors—who include depositors—will rush to pull out
their money. The institution fails when it is unable to find a new source of
funds to meet these obligations.
The collapse of Bear Stearns and the Lehman Brothers bankruptcy are
prime examples. Before the 2008 crisis, some firms had leverage ratios of 25
to 1 or higher, meaning that
for every $26 of investment,
the firm needed to borrow
$25. This required banks
to obtain large amounts
daily to pay off previous creditors. But when the value of their investments
fell—which in the last crisis included a large share of mortgage and other
asset-backed securities—the banks could not borrow and had to raise money
quickly by selling their assets, sometimes at fire-sale prices. This turned
seemingly solvent firms into insolvent ones.
A bank’s inability to pay off its creditors can be transmitted to others. The
mechanism can be direct: the debtor bank defaults, and its creditors cannot
repay their creditors, etc. But the mechanism can be indirect. The suspicion
that similar assets held by other institutions are subject to the same down-
ward pressure can start a run at even an unrelated financial institution.However, this domino effect has less to do with the so-called interconnect-
edness of the financial institutions than with weaknesses in the system itself.
To understand why, consider the contrast between the 2008 financial crisis
and the dot-com crash in the late 1990s and early 2000s.
The bursting of the dot-com bubble and subsequent failure of many
Internet-based companies had serious repercussions for investors, but not
for the financial sector. That’s because the failed firms were financed primar-
ily through equity, not borrowed money. Investors took big losses when the value of tech companies fell precipitously. But there were no runs.
Mutual funds are similar. Many are large and hold assets that may be risky,
but they don’t fail when the value of their assets falls. The liabilities move
one-for-one with the value of the assets because the fund does not promise to
pay off any fixed amount to its investors. There is no reason for a run: getting
money out first serves no purpose to investors nor does withdrawal of funds
cause significant distress. The fund simply sells the assets at the market
price and returns that amount to investors.
These factors suggest that instead of trying to divine which firms are
systemically important, banks should be required to get a larger share of the
funds they invest by selling stock. Bank investment funded by equity avoids
Financial crises are pathologies of an
entire system, not a few key firms.
14 HOOVER DIGEST • WINTER 2016
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the danger of a run: if the value of a bank’s assets falls, so too does the value
of its liabilities. There is no advantage in getting to the bank before others do.
Using higher equity requirements to reduce systemic risk has been sug-
gested by Hoover distinguished visiting fellow Allan Meltzer, and in The
Bankers’ New Clothes: What’s Wrong with Banking and What to Do About It ,
a recent book by Anat Admati and Martin Hellwig that has received much
attention.
This reasoning also implies that deposits—the checking and saving
accounts that are bank liabilities—should be invested only in short-maturity
secure assets, like Treasury bills. A bank’s long-term investments, in mort-
gages or stocks, can then experience big losses or even fail. Bad for the bank
and its investors, but not for the financial system or for depositors, whose
deposits are backed by vir-
tually risk-free assets.
The Federal Reserve
seems to be wising up, and
may require higher equity
capital for the SIFIs and place less emphasis on regulation. Fed Chair Janet
Yellen told the Senate Banking Committee last July that she was open to
raising the threshold on the asset level warranting SIFI status and scrutiny. Additionally, the international Financial Stability Board announced last
summer that it would set aside work on designating funds or asset manag-
ers as systemically important to focus instead on whether their activities or
products were systemically important.
Dodd-Frank’s method of protecting the financial system is based on a
misdiagnosis of what led to the 2008 financial crisis. A more rules-based
approach that focuses primarily on equity and leverage would provide better
certainty and a higher cost-benefit ratio than designating firms as SIFIs.
Reprinted by permission of the Wall Street Journal. © 2015 Dow Jones &
Co. All rights reserved.
Available from the Hoover Institution Press is NAFTA
at 20: The North American Free Trade Agreement’s
Achievements and Challenges , edited by Michael J.
Boskin. To order, call (800) 888-4741 or visit www. hooverpress.org.
Bank investment funded by equity
avoids the danger of a run.
HOOVER DIGEST • WINTER 2016 15
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THE ECONOMY
Where’s the Productivity?
Despite predictions, there’s little sign that
automation is making economies moreproductive. How come?
By Michael Spence
It seems obvious that if a business invests in automation, its work-
force—though possibly reduced—will be more productive. So why do
the statistics tell a different story?
In advanced economies, where plenty of sectors have both the money
and the will to invest in automation, growth in productivity (measured by value
added per employee or hours worked) has been low for at least fifteen years.
And, in the years since the 2008 global financial crisis, these countries’ overall
economic growth has been meager, too—just 4 percent or less on average.
One explanation is that the advanced economies had taken on too much
debt and needed to deleverage, contributing to a pattern of public sector
underinvestment and depressing consumption and private investment as
well. But deleveraging is a temporary process, not one that limits growth
indefinitely. In the long term, overall economic growth depends on growth in
the labor force and its productivity.
Michael Spence is a senior fellow at the Hoover Institution, a professor of eco-nomics at New York University’s Stern School of Business, and the Philip H.
Knight Professor Emeritus of Management in the Graduate School of Business at
Stanford University. He was awarded the Nobel Memorial Prize in Economic Sci-
ences in 2001.
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Hence the question on the minds of politicians and economists alike: is the
productivity slowdown a permanent condition and constraint on growth, or
is it a transitional phenomenon?
There is no easy answer, not least because of the wide range of factors
contributing to the trend. Beyond public sector underinvestment, there is
monetary policy, which, whatever its benefits and costs, has shifted corpo-
rate use of cash toward stock buybacks, while real investment has remained
subdued.
Meanwhile, information technology and digital networks have automated
a range of white- and blue-collar jobs. One might have expected this transi-
tion, which reached its pivotal year in the United States in 2000, to cause
unemployment (at least until the economy adjusted), accompanied by a rise
in productivity. But in the years leading up to the 2008 crisis, US data show
that productivity trended downward; and, until the crisis, unemployment did
not rise significantly.
One explanation is that employment in the years before the crisis was
being propped up by credit-fueled demand. Only when the credit bubble
burst—triggering an abrupt
adjustment, rather than the
gradual adaptation of skillsand human capital that would
have occurred in more normal
times—did millions of workers
suddenly find themselves unemployed. The implication is that the economic
logic equating automation with increased productivity has not been invali-
dated; its proof has merely been delayed.
But there is more to the productivity conundrum than the 2008 crisis. In
the two decades that preceded the crisis, the sector of the US economy thatproduces internationally tradable goods and services—one-third of overall
output—failed to generate any increase in jobs, even though it was growing
faster than the nontradable sector in terms of value added.
Most of the job losses in the tradable sector were in manufacturing indus-
tries, especially after the year 2000. Although some of the losses may have
resulted from productivity gains from information technology and digitiza-
tion, many occurred when companies shifted segments of their supply chains
to other parts of the global economy, particularly China.
By contrast, the US nontradable sector—two-thirds of the economy—
recorded large increases in employment in the years before 2008. However,
these jobs, often in domestic services, usually generated lower value added
The pressing question: is the pro-
ductivity slowdown permanent or
transitional?
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than the manufacturing jobs that had disappeared. This is partly because the
tradable sector was shifting toward employees with high levels of skill and
education. In that sense, productivity rose in the tradable sector, although
structural shifts in the global economy were surely as important as employ-
ees becoming more efficient at doing the same things.
Unfortunately for advanced economies, the gains in per capita valueadded in the tradable sector were not large enough to overcome the effect of
moving labor from manufacturing jobs to nontradable service jobs (many of
which existed only because of credit-fueled domestic demand in the halcyon
days before 2008). Hence the muted overall productivity gains.
Meanwhile, as developing economies become richer, they, too, will invest in
technology to cope with rising labor costs, a trend already evident in China.
As a result, the high-water mark for global productivity and GDP growth
may have been reached.
The organizing principle of global supply chains for most of the postwar
period has been to move production toward low-cost pools of labor, because
labor was and is the least mobile of economic factors (labor, capital, and
WORKING SMARTER: People watch an industrial robot at a manufacturingexpo in Weifang, China. As developing economies become richer, they will
invest in technology to cope with rising labor costs, a trend already evident inChina. [Guo Xulei—Xinhua]
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knowledge). That will remain true for high-value-added services that defy
automation. But for capital-intensive digital technologies, the organizing
principle will change: production will move toward final markets, which will
increasingly be found
not just in advanced
countries but also in
emerging economies
as their middle classes
expand.
Martin Baily and James Manyika recently pointed out that we have seen
this movie before. In the 1980s, Robert Solow and Stephen Roach separately
argued that IT investment was showing no impact on productivity. Then the
Internet became generally available, businesses reorganized themselves and
their global supply chains, and productivity accelerated.
The dot-com bubble of the late 1990s was a misestimate of the timing, not
the magnitude, of the digital revolution. Likewise, Manyika and Baily argue
that the much-discussed “Internet of things” is probably some years away
from showing up in aggregate productivity data.
Organizations, businesses, and people all have to adapt to the technologi-
cally driven shifts in our economies’ structure. These transitions will belengthy, rewarding some and forcing difficult adjustments on others, and
their productivity effects will not appear in aggregate data for some time.
But those who move first are likely to benefit the most.
Reprinted by permission of Project Syndicate (www.project-syndicate.
org). © 2015 Project Syndicate Inc. All rights reserved.
The dot-com bubble of the late 1990s
was a misestimate of the timing, not the
magnitude, of the digital revolution.
New from the Hoover Institution Press is Inequality and
Economic Policy: Essays in Memory of Gary Becker,
edited by Tom Church, Chris Miller, and John B. Taylor.
To order, call (800) 888-4741 or visit www.hooverpress.
org.
HOOVER DIGEST • WINTER 2016 19
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THE ECONOMY
A Few Trillion Short
Public employee pensions are in a deeper
financial hole than states admit—a much, muchdeeper hole.
By Joshua D. Rauh
There’s a huge financial hole in state-sponsored retirement plans
for public employees, a hole that states will eventually have to fill
with tax increases and spending cuts.
How big is this government debt owed to public employees? In
July 2015, the Pew Charitable Trusts released its latest issue brief, reporting
that as of 2013, the nation’s state-run retirement systems had a $968 billion
funding gap, not far from the “trillion dollar gap” Pew reported in 2010.
As serious as this sounds, the true magnitude of unfunded pension prom-
ises for the systems tracked by Pew is much larger. The system of measure-
ment and budgeting for public pension promises has fallen prey to one of the
fundamental fallacies in financial economics: undervaluing a risk-free stream
of promised cash flows by assuming that the promises can be met with high,
anticipated returns on smaller pools of risky assets.
WHERE THE NUMBERS WENT WRONG
When I correct the calculations to reflect the expectation of public
employees that these promises will be honored, the market value of
Joshua D. Rauh is a senior fellow at the Hoover Institution and the Ormond
Family Professor of Finance at Stanford University’s Graduate School of Business.
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unfunded liabilities proves to be far larger: $3.28 trillion (as of 2013). More-
over, this figure excludes local government obligations such as those of US
cities and counties.
Pew collects its information from state government disclosures. Its 2013
data suggest that, across 237 state-level pension systems, there were $3.43
trillion in liabilities backed by $2.47 trillion in assets. In other words, this
implies a net gap of around $1 trillion.
These liability measures are far
too low. They are based on state
assumptions of high assumed
returns on risky asset portfolios:
the median assumed return was
7.75 percent (and the liability-
weighted average 7.66 percent).
The funding gap amounts to a mere $1 trillion only if the public plans can
achieve these high compound annualized returns over the horizon during
which these benefits must be paid. Yet governments have promised to pay
the pensions regardless of what happens to the pension investments. As
such, pension promises should be treated like the senior government debt
they are, akin to default-free government bonds.For a proper financial market valuation, the promised pensions should
first be adjusted to reflect only accrued benefits, or retirement payments
that employees would be entitled to receive under their current salary and
years worked. This is not how governments do it today, but my 2011 paper
with Robert Novy-Marx did this recomputation for most of the plans in the
Pew study.
Using the Treasury yield curve and assuming the pension payouts have an
average maturity of fourteen years, the correct fourteen-year discount rate is2.8 percent—implying a whopping
$5.77 trillion in total state pen-
sion liabilities for these accrued
benefits only.
What about the assets backing
these promises? The Pew report
relies on asset values smoothed
over a period of years. To cor-
rect for the artificial smoothing, we collected actual market values for the
majority of the Pew-included plans. The resulting numbers indicated assets
in 2013 were only about 1 percent larger than the smoothed values, still just
States assume they can meet
their promises with high, antici-
pated returns on small pools of
risky assets.
Market interest rates have con-
tinued to fall, raising the cost
of making good on pension
promises.
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under $2.50 trillion. Total unfunded state pension promises using market
values were therefore $3.28 trillion, or the difference between $5.77 trillion in
accrued liabilities versus a little less than $2.50 trillion in assets.
Moreover, state court decisions in California and recently in Illinois sug-
gest that even prospective benefits for current workers are inviolate under
the law of some states. If states cannot even slow the rate of future benefit
accruals, then the true magnitude of the liability to which states have com-
mitted is even larger that the liabilities formally accrued at present.
LACK OF PROGRESS
It’s remarkable that despite strong investment performance over the 2009–13
period, the states’ unfunded pension liabilities have hardly declined. Though
assets have grown, liabilities have continued to move steadily upward, as
plans continue to make new promises faster than they pay off their old
[Taylor Jones—for the Hoover Digest ]
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ones. Public pensions have also had to re-evaluate their assumptions about
longevity. Meanwhile, market interest rates have continued to fall, raising the
cost of making good on these promises. For all of these reasons, unfunded
liabilities on a market-value basis will likely be even larger this year when the
data become available.
The Governmental Accounting Standards Board’s Statement 67 began,
in 2014, to impose some stricter reporting requirements on systems that
project their plans’ net assets to be insufficient for meeting all benefit pay-
ments to current plan members. The trouble is that few states are recogniz-
ing that their assets will be insufficient because they expect to achieve their
high returns on invested assets.
Most systems will therefore
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continue to budget for pensions exactly as they have in the past: by hoping
that good returns on their financial assets will bail them out of trouble and
marking down the value of their liabilities as though such returns were a
certainty.
US governmental accounting standards should be replaced with a more
transparent standard, one that measures the true financial cost of public
pension promises. This would be an important step toward ending the use of
pension systems as a way for state and local governments to run off-balance-
sheet budget deficits.
Special to the Hoover Digest.
Forthcoming from the Hoover Institution Press is
Making Failure Feasible: How Bankruptcy Reform
Can End “Too Big to Fail,” edited by Kenneth E. Scott,
Thomas H. Jackson, and John B. Taylor. To order,
call (800) 888-4741 or visit www.hooverpress.org.
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POLITICS
Myths of Redistribution
Decrying the “income gap” may make for stirring
political rhetoric, but we don’t need rhetoric. Weneed growth.
By Allan H. Meltzer
No topic recurs in political discussions more often than income
distribution. It came up frequently in Alexis de Tocqueville’s
book about our republic’s early years, Democracy in America. And
it was very much in James Madison’s thoughts when he wrote
about “factions” in Federalist No. 10 at the time the Constitution was ratified.
We now refer to “interest groups” instead of Madison’s factions. Madison
believed factions were impotent. Opposing ones, he thought, would cancel
each other out in a democracy. But he was terribly wrong about the power
of interest groups: they dominate our politics. In every election, parties offer
rewards to groups of voters. The Democrats tend to offer benefits to black
voters, young women, and Hispanics. The Republicans, like President George
W. Bush, do so to religious groups.
Voters are often swayed by the benefits offered. Sometimes a majority
choose a leader who eschews redistribution and promises growth in living
standards achieved by lowering tax rates. Dwight Eisenhower and Ronald
Reagan are US examples; Margaret Thatcher is an example from Britain.
Allan H. Meltzer is a distinguished visiting fellow at the Hoover Institution,
chair of Hoover’s Regulation and the Rule of Law Initiative, and a professor of po-
litical economy at Carnegie Mellon University.
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Taking another approach, presidents Franklin Roosevelt and Lyndon John-
son won smashing election victories by offering benefits to selected interest
groups using the rhetoric of redistribution.
PERILS OF THE MINIMUM WAGERedistribution is again a major political issue as we approach the presi-
dential election. One of the most controversial forms of redistribution is a
doubling of the statutory minimum wage to about $15 an hour. Proponents
of this policy do not mention that anyone who earns only the current mini-
mum wage receives the earned-income tax credit. Instead of paying federal
income tax, low-income people who work receive payments to supplement
their earnings. For example, a married worker with three children under
nineteen who earns the current minimum wage receives $6,143 a year if he or
she works all year. That payment drops to $4,726 if the hourly minimum wage
rises to $15. Other government benefits are an additional form of assistance.
The higher minimum wage will reduce employment, especially for unskilled
youth. Although they claim to be friends of the poor, advocates of a higher
minimum wage usually knowingly adopt policies that keep young workers from
finding jobs that will train them in ways that permit them to advance along a
career path. Politicians who approve minimum-wage hikes know that the many who gain will know the source of their gain, while the many who lose will not.
The argument against the minimum wage lies in good economics and com-
mon sense. In a well-functioning market economy, a worker will receive a
wage equal to the value that he or she produces. That will be true on average
over time, but it is rarely true all of the time. Sometimes the wage will be
higher than the value of the worker’s product, sometimes lower. Employers
cannot accurately measure worker productivity. The employer learns about
the relation between wages and productivity by watching what happens to thecompany’s earnings over time. If the employer pays more than the workers
produce, profits fall and firms go out of business. Owners deploy their capital
where it earns the best return. Only then will the business thrive. Only then
will owners be able to compensate their employees well and hire new recruits.
FOREVER UNEQUAL, FOREVER UNFAIR?
What about certain candidates’ claims that “fairness” requires higher tax rates
for the highest earners to finance bigger transfers to the poorest? Like the efforts
to redistribute income by raising the minimum wage, that claim is wrong.
First, since the War on Poverty began fifty years ago, many billions of dol-
lars have been redistributed from taxpayers to those who receive transfers.
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There has been no evidence of reduced poverty rates. Nor has there been
evidence that people now believe the system is fairer. “Fair” is a subjective
notion based on a term that cannot be defined objectively.
Has the constant appeal to fairness worked to benefit the disadvantaged?
For the first time in the postwar years, we have young working-age people
leaving the labor force to live on the benefits they receive from the welfare
system supplemented by occasional earnings in the underground economy.
The unfortunate long-term consequence is that these workers never develop
job skills and never receive the on-the-job training that increases their
productivity and wages. They will remain unskilled and the rest of us will not
benefit from their increased productivity.
The Obama administration’s efforts to increase corporate regulation and
income redistribution have produced large negative consequences. For the
first time in the postwar years, median income fell during the recovery.
Median households earned $54,059 in 2009 but only $51,939 in 2013. (Later
years are not available.) We know that the top income earners gained income,
so the losses were borne by the rest of us.
Second, we are suf-
fering from government
policies that reducedproductivity and ignored
its costs. Instead of
helping people get better
jobs, regulation raises
business costs and discourages expansion. A massive increase in the regula-
tion of industry discourages business investment. The recovery that began
in 2009 has had the lowest rate of business investment of any recovery since
World War II. One consequence is that productivity growth has remained lowin this recovery. Low productivity growth prevents wage growth for workers.
Workers who do not produce more cannot permanently earn more. Compa-
nies cannot permanently raise wages for middle-income workers unless those
workers earn higher wages by increasing their productivity. More investment
brings new methods that require additional training. That’s a major source of
productivity growth that is largely absent in this recovery.
The clamor on the left about the widening difference between the top 1
percent or 5 percent of income earners and the rest of the population almost
always compares earnings before the incomes of the top earners are taxed
and that money transferred to the bottom earners. When these adjustments
are made, as they should always be, the difference narrows.
Billions have already been transferred
from the wealthy to the poor, but cries
of “unfair” continue. Fairness, it seems,
can’t be defined.
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HARD WORK AND INNOVATION
Another major oversight is the role of recent policy. The Federal Reserve has
held interest rates at very low levels. This has pushed up asset prices, includ-
ing prices of most common stocks and bonds, adding greatly to the income ofthe top 1 percent and 5 percent of income recipients. This increases incomes
at the top and expands the
difference between top
earners and everyone else.
Of course, the rise in stock
prices adds to the value
of worker pensions, but we do not count that as income when we compare
earned incomes.Still another omission is the threat of higher tax rates on high incomes. The
best research shows that tax increases reduce innovation, investment, and
productivity growth. A pro-growth policy of reduced regulation and lower tax
rates, if enacted, would eventually increase productivity and therefore reduce
the gap between the highest earned incomes and the rest.
Americans did not become wealthy by redistributing income. They became
wealthy by innovating, learning, and working hard. Most of the immigrants who
came to the United States were unskilled. So, too, were the workers who came
from the farms to industry. They began at the bottom, learned by doing on-the-
job training, and earned higher wages. This model seems to be breaking down.
Politicians can promise to narrow the income gap. They can pass legisla-
tion that redistributes more. But they cannot permanently reduce the spread
between the top and the rest unless they adopt policies that encourage
growth, innovation, learning, and productivity. There is no other way.
Reprinted from Defining Ideas (www.hoover.org/publications/defining-
ideas), a Hoover Institution journal. © 2015 by the Board of Trustees of
the Leland Stanford Junior University. All rights reserved.
Workers who do not produce more
cannot permanently earn more.
Available from the Hoover Institution Press is Ronald
Reagan: Decisions of Greatness , by Martin and
Annelise Anderson. To order, call (800) 888-4741 or
visit www.hooverpress.org.
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POLITICS
Here’s Mud inYour EyePolitics in democracies have always been rough
and tumble, and we’re better off because of it.
By Bruce S. Thornton
The presidential campaign started with a bang. Donald Trump
accused Mexico of sending “rapists” and other criminals to the
United States and denied that Senator John McCain is a war
hero. Senator Ted Cruz, on the floor of the Senate, accused Sen-
ate Majority Leader Mitch McConnell of telling “a simple lie” regarding legis-
lation renewing the Export-Import Bank. Mike Huckabee accused President
Obama of signing a deal with Iran that would “march [Israelis] to the door of
the oven.” And the president accused Republicans who opposed the deal with
Iran of making common cause with the Iranian “hard-liners chanting ‘death
to America.’ ”
Such comments elicited the usual condemnations of the “incivility” that
presumably degrades the political process. Washington Post pundit Dana
Milbank attributed it to “the growing polarization of both parties” and to the
“obvious reality” that the “Republican Party has gone particularly bonkers.”
Milbank’s comments, with their own uncivil name-calling and partisan
scapegoating of Republicans, remind us that the calls for civility and bipar-
tisanship, usually linked to some imagined political golden age of bipartisan
Bruce S. Thornton is a research fellow at the Hoover Institution, a member of
Hoover’s Working Group on the Role of Military History in Contemporary Conflict,
and a professor of classics and humanities at California State University, Fresno.
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comity and cooperation, are often rhetorical tactics for gaining partisan
advantage and delegitimizing opposition.
They also reflect a belief that the purpose of the federal government is
primarily what the organization No Labels, dedicated to restoring civility to
government, vaguely calls “the business of solving the problems facing the
nation,” a duty compromised by “all the petty infighting, party-first agendas,
and hyper-partisan wheel-spinning.”
Rather than reflecting some recent decline in political decorum, however,
the “incivility” these comments lament is as old as the ideological conflicts
that have defined democracy since its origins in ancient Athens. A dislike of
political rancor is at heart a dislike of democracy, and a misunderstanding of
the constitutional structure and its purpose.
CUT ’EM DOWN TO SIZE
Starting in ancient Athens, democracy has given the vote and equal par-
ticipation in policy deliberation to citizens regardless of wealth, status, or
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knowledge. Given the wide variety of conflicting interests, ideologies, and
character among the citizenry, the public deliberation at the heart of demo-
cratic policy making has always been rough, vulgar, and insulting, often at a
level far beyond what we today call the “politics of personal destruction.”
In Athens, politicians were publicly insulted and humiliated, on the comic
stage or in public speeches delivered in the assembly, the equivalent of our
Congress. As classicist K. J. Dover writes of comedy in the fifth and fourth
centuries BC, just about every Athenian politician we know of was accused
of being “ugly, diseased, prostituted perverts, the sons of whores by foreign-
ers who bribed their way into citizenship.” Political debate in the Athenian
assembly was not much better. Sordid sexual practices, disreputable parent-
age, and taking foreign bribes were standard charges.
Political debate in early America seldom reached Athenian sexual coarse-
ness but still was brutal, reflecting a similar diversity of interests and
[Taylor Jones—for the Hoover Digest ]
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religious beliefs in the thirteen colonies. Particularly when political parties
began to coalesce in the second term of George Washington, political rhetoric
was as personal and insulting as the comments we decry today. John Adams,
a Federalist suspected of scheming to concentrate power in the federal
government, was called “His Rotundity” by his antifederalist rivals, mocking
both his alleged aristocratic pretensions and his ample girth. James Madison,
calling on the class-warfare rhetoric many decry today, accused Adams’s
party of being “partial to the opulent,” seeking to rule by “the pageantry of
rank [and] the influence of money and emoluments,” and desiring power so
that the government is “narrowed into fewer hands, and approximated to an
hereditary form.”
The Federalists responded in kind, one edito-
rial writer calling the Democratic-Republican
clubs, incubators of Madisonian-Jeffersonian
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democracy, “that horrible sink of treason, that hateful synagogue of anarchy,
that odious conclave of tumult, that hellish school of rebellion.” Indeed, the
charge that Thomas Jefferson fathered children by his slave Sally Hemings
began as a political smear in the 1800 election.
The tumultuous decades leading up to the Civil War saw an explosion of
such invective, sparked by the intense conflict over slavery. In 1851 Represen-
tative Preston Brooks stormed the Senate floor to cane and seriously injure
Charles Sumner, who had characterized anti-abolitionist fellow senator Ste-
phen Douglas as a “noisome, squat, and nameless animal.” Later, Abraham
Lincoln was called the “missing link” and the “original gorilla.” The New York
Times’s Paris correspondent called for an embargo on portraits of Lincoln,
for “the person represented in these pictures looks so much like a man
condemned to the gallows, that large numbers of them have been imposed on
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the people here by the shopkeepers as Dumollard, the famous murderer of
servant girls, lately guillotined near Lyons.” And the Times was a supporter
of Lincoln.
Every decade of American history has been filled with political speech
of the sort we now decry. Jingles about Warren G. Harding’s illegitimate
daughter, rumors that FDR was scheming to become a dictator, caricatures
of “Tricky Dick” Nixon as a
used-car salesman, Ron-
ald Reagan mocked as an
amiable dunce, Bill Clinton
nicknamed “Slick Willy,”
George W. Bush slandered
as “Bushitler”—American
political speech has always
used insult and personal attacks in partisan disputes over power and policy.
This fierce verbal combat would not have surprised the founders. As
James Madison wrote in Federalist No. 10, citizens are motivated not by the
rational study of ideas, empirical evidence, and cool debate over the issues
but by “interests and passions,” the former comprising property, the latter
religion. Out of these arise the conflicting “factions” and “parties,” each seek-ing to protect and advance its interests, and all “inflamed . . . with mutual
animosity, and rendered . . . much more disposed to vex and oppress each
other, than to cooperate for their common good.”
Assuming that these phenomena reflected permanent flaws “sown in the
nature of man,” the architects of the Constitution sought not to eliminate
such factional struggle but to limit the excessive power of any faction by
dividing the federal govern-
ment into three powers,each checking and balanc-
ing the other, and empower-
ing the state governments
to counterbalance the
federal government. The primary aim was to protect freedom and autonomy
by keeping any ambitious factional power from growing strong enough to tyr-
annize the people. Thus “solving the problems facing the nation” was not as
important as protecting political freedom and the sovereignty of the states.
As for the tone and quality of public discourse, if the citizenry comprises
multiple factions free to seek their interests and express their passions,
one would expect political speech to be spirited, angry, and brutal, for
“That horrible sink of treason, that
hateful synagogue of anarchy, that
odious conclave of tumult, that hell-
ish school of rebellion.”
The public heart of democratic policy
making has always been rough, vul-
gar, and insulting.
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well as drawing the federal government farther from its republican origins
and closer to the direct democracy that the founders feared.
So we shouldn’t be surprised that the level of discourse in both houses
is, with some exceptions, more on a par with that of the citizens. But in the
end, that is not as important as maintaining the constitutional mechanisms
for protecting individual
freedom from the encroach-
ing power of a hypertro-
phied federal government.
In this context, trying to
moderate or police, based on
some subjective notions of
“civility” or decorum, the clashing expressions of passionate beliefs often is
an attempt to limit the freedom to express those beliefs, and a way to benefit
one faction at the expense of others.
As Craig Shirley, biographer of Ronald Reagan, said recently, “The last
thing we need in American politics is more civility.” Civility is often the cam-
ouflage for hiding challenges to the big-government faction and concealing
the collusion of bipartisan elites that has created the redistributionist entitle-
ment state. After all, the First Amendment does not protect merely decorousor genteel speech, but as the political rhetoric of American history shows, all
manner of speech no matter how rude or uncivil. That’s because our politi-
cal ancestors knew something we should never forget—that as the Athenian
Sophocles said, “free men have free tongues.”
Reprinted from Defining Ideas (www.hoover.org/publications/defining-
ideas), a Hoover Institution journal. © 2015 by the Board of Trustees of
the Leland Stanford Junior University. All rights reserved.
In the end, calls for “civility” or deco-
rum to police clashing beliefs often
try to limit the freedom to express
those beliefs.
Available from the Hoover Institution Press is The New
Deal and Modern American Conservatism: A Defining
Rivalry , by Gordon Lloyd and David Davenport. To order,
call (800) 888-4741 or visit www.hooverpress.org.
36 HOOVER DIGEST • WINTER 2016
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REFUGEES
The AmericanWay of RefugeOffering sanctuary to Syrian exiles is both
compassionate and wise—and just might give theUnited States a chance for a regional “reset.”
By Kori N. Schake
Americans are mere spectators to the drama of Syria’s refugees
teeming into Europe. We are taking no responsibility for our
part in the tragedy. Worse yet, we are missing an opportunity
to reset our relations with the peoples of the Middle East by
showcasing one of our core values, which is also one of our great domestic and
international advantages: we are a country of, and welcoming to, refugees.
Americans pride ourselves on being a sanctuary for people fleeing vio-
lence, injustice, and political and religious persecution. We have a proud
history of sheltering those who fear remaining in their homelands, and it
has strengthened our country in myriad ways—bringing us immigrants
courageous enough to start anew in a foreign land; testing and rewarding
our tolerance; reinforcing our sense of ourselves as a community devoted
to opportunity and individual liberty; infusing our culture with new influ-
ences and the malleability that comes from accommodating them; and
creating a “brand” that gives us competitive advantages in the global
competition for talent.
Kori N. Schake is a research fellow at the Hoover Institution and a member of
Hoover’s Working Group on the Role of Military History in Contemporary Conflict.
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We are so accommodating that Fidel Castro included thousands of prison
inmates among the Cuban refugees of the 1980 Mariel boatlift to spite our
harboring of people fleeing his despotism. But our history has also had sad
failures to admit the desperate. When we have averted our eyes, it is typically
either the result of overt racism (prohibitions on Asian immigrants in the late
nineteenth and early twentieth centuries), our fear of being drawn into an
ongoing war (denying Jews admission in the 1930s), our inability to distin-
guish between refugees and “economic migrants” (interdicting Haitian boats
teeming with people fleeing first the Duvalier butchery then the junta that
came after in the 1990s), or our alarm at a sudden rush of would-be immi-
grants (Central Americans fleeing murderous violence in 2014).
None of these conditions applies in the case of the Syrian refugees clawing
their way to Europe. The only remotely applicable reason for reluctance is
the notion that we might be drawn into a war, but Bashar al-Assad’s Syria is
not the great power Hitler’s Germany was. Moreover, as the past four bloody
years of Syria’s agony demonstrate, we can choose not to fight in Syria.
Which makes the dilatory response of our government to the plight of Syria’s
suffering all the more shameful.
Our policies have fueled the conflict in Syria in at least six ways: being
apologists for Assad (recall Hillary Clinton saying that he was a reformer);creating the expectation we would usher him from power (recall President
Obama saying Assad must go); fecklessly arming and training “moderate”
Syrian rebels; permitting Iran’s direct involvement to prop up Assad; draw-
ing but not enforcing the “red line” on chemical weapons use by Assad—a
practice he has
continued; and
now watching as
Russia escalates itsinvolvement. And
let’s not forget the State Department’s disgraceful “hashtag diplomacy,” a
futile social-media gesture that added insult to injury. Our government’s cal-
lousness is buying us generations of resentment.
And where are the Republican hopefuls, those calling for a better Ameri-
can foreign policy? Carly Fiorina thinks America has already done its “fair
share.” Jeb Bush, who speaks so movingly about immigration in other
contexts, and Marco Rubio, whose family members are Cuban refugees, both
agreed in principle that the United States should accept some Syrians, but
couched their vague support in the context of preventing jihadis. Neither
spoke up until Donald Trump made news saying, “They’re living in hell, and
We have a proud history of sheltering those
who fear staying in their homelands.
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something has to be done.” John Kasich’s faith may drive his views on Medi-
care expansion, but Syrian refugees are evidently Europe’s problem. Mike
Huckabee and Ted Cruz, so strident in their proclamations of faith, have no
room at the inn. Conservatives need to do some soul-searching.
The United States of America is failing at the central tenet of leadership:
that of setting an example for others to follow. We have given money—$4 billion at last count—much of it to assist Turkey and Jordan, neighboring
countries that are amazingly and nobly helping the four million displaced
Syrians. But checkbook diplomacy is no substitute for solutions, as we so
often tell other countries.
Jordan’s central political dilemma since 1945 has been devising a balance
to accommodate the two million Palestinian refugees it accepted with the
creation of the state of Israel; yet it has still admitted at least 650,000 Syrian
refugees (and more likely double that, since many have been absorbed into
Jordanian cities). The fourth-largest city in the country is the Zaatari refugee
camp. Germany expected to receive 800,000 asylum-seekers in 2015, open-
ing its borders while Hungary’s government verged on xenophobia. Sweden
ON THE MOVE: Syrian refugees crowd a fence at the main rail station of Buda- pest, Hungary, last September. Tens of thousands of Syrian migrants continueto seek shelter in Europe and North America amid the ongoing violence and
chaos in their homeland. [Mstyslav Chernov—Creative Commons]
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admitted 80,000 refugees in 2014—and it is a more homogenous country than
the United States, so its difficulties will likely be greater in fostering civic
cohesion in this new mix. If the United States met the standard by population
that Sweden has set, we would admit two million Syrians. We have admitted
1,500 since the war began, and the additional 10,000 that President Obama
promised last fall to take in would be but a drop in the bucket.
Do Syrian refugees have economic reasons to emigrate? Of course they do—
their country is a bombed-out wreck. But economics are not what put families
with small children perilously to sea.
Are we at risk of jihadis slipping in
among the refugees to threaten our
societies? Of course we are, but they
are slipping into our countries even
without the cover of a torrent of refugees. In fact, we are likelier to have coop-
eration in finding and managing threats from people grateful to be resettled
here (as has proved the case with the more than 100,000 Iraqis admitted since
2003 and 20,000 Afghans since 2001).
True, countries accepting refugees from the Syrian war are creating long-
term problems for themselves: problems of assimilation, problems of employ-
ment, and problems of political backlash. But they are also gaining the tra-ditional advantages America has long benefited from, both domestically and
internationally. Most important of those advantages is the justifiable pride at
looking difficulties in the face and choosing to be a society that lifts its lantern
to the tired, the poor, and the huddled masses yearning to breathe free.
Reprinted by permission of Foreign Policy (www.foreignpolicy.com). ©
2015 Foreign Policy Group LLC. All rights reserved.
Checkbook diplomacy is no
substitute for solutions.
Available from the Hoover Institution Press is State of
Disrepair: Fixing the Culture and Practices of the State
Department , by Kori N. Schake. To order, call (800)
888-4741 or visit www.hooverpress.org.
40 HOOVER DIGEST • WINTER 2016
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HEALTH CARE
RescuingObamaCareThe best cure? High-deductible plans and health
savings accounts.
By Scott W. Atlas and John F. Cogan
With the end of the Obama administration on the horizon,
Republican presidential candidates—and members of
Congress—are proposing ways to replace or repair the
Affordable Care Act. Undoing the damage of ObamaCare
may finally become a realistic possibility.
For now, Americans are experiencing the law’s natural consequences: rising
health insurance premiums and limitations on individuals’ choice of physicians
and hospitals. Further consolidation in the insurance industry and among
providers will probably drive health care costs even higher. To reverse these
trends, any replacement for ObamaCare should include two essential elements:
high-deductible insurance coverage and health savings accounts.
Well-designed high-deductible insurance—in which the individual pays a
few thousand dollars for most health care services before the plan kicks in
to cover claims—restores the fundamental purpose of health insurance: to
reduce the financial risk of large and unanticipated medical expenses. Health
Scott W. Atlas, MD, is the David and Joan Traitel Senior Fellow at the Hoover
Institution. John F. Cogan is the Leonard and Shirley Ely Senior Fellow at the
Hoover Institution and a member of the Shultz-Stephenson Task Force on Energy
Policy and Hoover’s working group on economic policy.
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savings accounts, or HSAs, allow individuals to set aside money tax-free for
out-of-pocket expenses, including routine care. These accounts are owned by
individuals and are not dependent on their place of employment.
When consumers pay directly for their care, as they would from HSAs,
they have an incentive to choose wisely, and to demand that the prices
charged by providers become visible. A study by Carnegie Mellon Univer-
sity’s Amelia Haviland and colleagues, published in July by the National
Bureau of Economic Research, confirmed previous research by these authors
(and others) showing that
high-deductible plans signif-
icantly reduce health spend-
ing without later increases
in emergency-room visits or
hospitalizations. When these
high-deductible plans were
paired with HSAs, health
care spending reductions averaged at least 15 percent annually.
High-deductible plans and HSAs continue to grow despite the restrictions
in the Affordable Care Act. In 2014, according to Devenir Research, the num-
ber of HSAs increased 29 percent and reached a record high of 14.5 millionas of mid-2015. Nearly one-third of all employers (31 percent) now offer some
type of HSA, up from 4 percent in 2005. HSA account holders deposited $21
billion in 2014. HSA assets increased by 34 percent over one year and, as of
June 30, 2015, averaged $14,654 per account. By increasingly choosing HSAs,
American consumers are approving their value.
Consumer-empowering shifts toward high-deductible coverage and HSAs
are crucial to making health care more affordable while maintaining health
care excellence and innovation. According to a 2012 study in Health Affairs,annual health expenditures would fall by an estimated $57 billion if only half
of those Americans with employer-sponsored insurance enrolled in consum-
er-directed plans with deductibles as low as $1,000. Additional evidence from
studies of MRI and outpatient surgery show that introducing price visibility
and defined-contribution benefits—where the employer provides an amount
of money and the employee chooses how to use it—induces patients to shop.
The issue now is how to increase the number of people who would choose
to buy HSAs in combination with high-deductible plans. Some steps should
be taken immediately. For example, the maximum allowable annual contribu-
tion should be raised from $3,350 to at least equal an individual’s maximum
annual IRA contribution ($5,500 if you are under age fifty, $6,500 if you are
Well-designed high-deductible
coverage restores the fundamen-
tal purpose of health insurance: to
reduce the risk of large, unanticipat-
ed expenses.
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age fifty or older). The health care services and products that can be pur-
chased with HSAs should be expanded to include scientifically therapeutic
over-the-counter medications. Money remaining in HSAs should be allowed
to roll over to surviving family members.
ObamaCare’s current legal requirement that an individual or family have
coverage with government-specified deductibles in order to open an HSA
is counterproductive. It eliminates the possibility of HSAs with other, more
tailored plans that could cover necessary care subject to a lower deductible
for particular services and medicines, especially for chronically ill people.
ObamaCare restrictions on eligibility for high-deductible plans and broad
coverage mandates should also be eliminated to allow individuals greater
flexibility to purchase high-deductible plans that best suit their needs.
Health savings accounts and well-designed high-deductible health plans
are also important reforms for Medicare and Medicaid. A Census Bureau
study notes that four million Americans reach age sixty-five every year and,
after age sixty-five, live 25 percent longer than in 1972. Today’s seniors need
to save money for decades, not years, of future health care.
Our analysis of actuarial data from HealthView Services, which indicates
a tripling of health expenses for a sixty-five-year-old by 2030, makes HSAs
even more important. The current ban on HSA participation by seniors onMedicare should be abolished. States should be encouraged to experiment
with plans that allow Medicaid enrollees to opt for HSA contributions, as
Michigan and Indiana have done, and high-deductible coverage.
Expanded health savings accounts and high-deductible plans alone are not
necessarily a panacea for the country’s health care system. But they are criti-
cally important and necessary steps.
Reprinted by permission of the Wall Street Journal. © 2015 Dow Jones &Co. All rights reserved.
Available from the Hoover Institution Press is In
Excellent Health: Setting the Record Straight on
America’s Health Care , by Scott W. Atlas. To order, call
(800) 888-4741 or visit www.hooverpress.org.
HOOVER DIGEST • WINTER 2016 43
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INTELLIGENCE AND SECURITY
China as an Ally in Cyberspace?
How Washington and Beijing could make common
cause toward a secure online world.
By Herbert Lin
Now that Presidents Xi and Obama have had their summit, it’s
fair to ask what is different now regarding the China-US rela-
tionship in cyberspace.
Perhaps the most important outcome is what did not hap-
pen—the summit did not break down in mutual recriminations regarding
cyberspace. Indeed, China’s president Xi Jinping was willing to say things,
in Chinese and for the record, that the Chinese government has never said
before. For example, Xinhua, the Chinese news agency, printed a statement
from the summit saying that “China and the United States agree that neither
country’s government will conduct or knowingly support cyber-enabled theft
of intellectual property, including trade secrets or other confidential business
information, with the intent of providing competitive advantages to com-
panies or commercial sectors.” This language perfectly mirrors the White
House formulation on its fact sheet about the summit.
Of course, these are just words, and many skeptics about Chinese behavior in
cyberspace will continue to call for a more forceful retaliation to show the Chi-
nese that the United States won’t allow cost-free hacking against its interests.
Herbert Lin is a research fellow at the Hoover Institution and a senior research
scholar for cyber policy and security at Stanford University’s Center for Interna-
tional Security and Cooperation (CISAC).
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The China-US relationship has both cooperative and confrontational
aspects. Retaliation against Chinese interests stresses the confrontational
aspects, and making such a decision requires answering three questions.
First, who should be the target of the retaliation? Second, what action does
the retaliation entail? Finally, what do we expect to be the Chinese reaction
to such an action?
WHERE, AND HOW, TO STRIKE BACK
The first question is the well-known problem of attribution in cyberspace.
Many people believe such attribution is impossible. This belief is rooted in
the idea that a careful attacker could erase all the clues that might identify
him, and any ostensible clues found by an investigator could have been delib-
erately planted by the attacker in order to mislead the investigator.
While not entirely wrong, this belief ignores a number of realities. Many
attackers are not as careful as they should be, and often they do leave behind
useful identifying clues. Also, attribution judgments are based not only on
information found on the attacked computer but also on other sources, such
as human agents, monitored phone calls, previous attacks, and so forth.
Although some of these sources are secret and thus may not be revealed
publicly, information from secret sources can be helpful for a governmentmaking attribution judgments. Taken together, information from all these
sources often adds up to sufficient and reasonable confidence in attribution
judgments.
What action should be taken to retaliate? One course would be retalia-
tion in kind. But the United States is today surely conducting cyber espio-
nage operations against China. Indeed, Director of National Intelligence
James Clapper expressed grudging admiration for the hack, revealed last
year, on the Office of Personnel Management, saying “you have to kindof salute the Chinese for
what they did” and further
acknowledged that “if we
had the opportunity to do
that, I don’t think we’d hes-
itate for a minute.” What
US policy does not do is allow espionage, cyber or otherwise, for the pur-
pose of benefiting US companies—and almost no one in Congress or the
executive branch wants to change that policy any time soon. So “responses
in kind” amount to a continuation of the US policy status quo—hardly a
way to impose further costs.
Indicting a handful of government-
employed hackers didn’t seem to
inflict any pain at all on China.
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In May 2014, the United States indicted five officers in the People’s Libera-
tion Army for industrial cyber espionage against US corporations. In retro-
spect, it is hard to see how the indictment of these individuals might haveimposed a significant cost on China. Nothing seems to indicate they were
special to China in any way. Mainland Chinese often note that “even if you are
one in a million, there are 1,500 more just like you.” So even if these individu-
als were permanently removed from the playing field, it’s pretty clear that
others would step in to take their places.
The administration is also considering imposing economic sanctions against
Chinese companies that benefit from industrial cyber espionage. Since there
are not a huge number of successful Chinese companies, sanctions on such
companies could really begin to impose serious costs on the Chinese economy.
This leads to the last question—how would China react to the imposition
of sanctions on its companies? Some supporters of sanctions dismiss the
BLURRED LINES: Retired general Keith B. Alexander, the first head of the USCyber Command and former chief of the National Security Agency, talks to
an expert audience at the International Security Conference in Beijing last September. [Li Xin—Xinhua]
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possibility that China might act against US companies seeking to do busi-
ness in China, apparently believing that Chinese discrimination against US
companies is already so great that there is not much left to lose. On this
last point, they are almost
certainly wrong—no matter
how bad things are today,
there is always a way to
make them worse tomor-
row. Punitive fees and
tariffs could be imposed
on individual US companies. Sensitive personal information made available
from other hacks, such as the Ashley Madison incident, could be used to
cause personal discomfort to officials from US companies. Those officials
also could be subject to arbitrary detention when traveling in China. China
could further devalue its currency to the detriment of the US economy. And
all such moves would lead those affected to pressure the US government to
desist from such actions.
THE PATH O F COOP ERATION
Retaliation has the best chance of working if the United States is willing togo to the mat. It would require the United States to regard the cyber issue
as more important than all other aspects of the US-China relationship and
to be willing to endure the additional pain that would inevitably follow from
a Chinese reaction, at least in the short term. But given the many important
US-Chinese interests, going to the mat is highly implausible.
That leaves two other possibilities for making progress. In the short term,
the United States may find a way to respond strongly enough—in cyberspace
or elsewhere—to imposesignificant costs on
China but not so strongly
that it leads to a painful
Chinese response. But in
the long term, placing more emphasis on the cooperative aspects of the US-
China relationship may well prove more valuable.
For example, both nations have a common interest in maintaining the
stability of the international financial system against hostile activity in
cyberspace originated by a malevolent third party. And there are many
other common interests: fighting cyber-enabled financial crime, de-esca-
lating a cyber conflict amidst hostilities, or assisting one another in the
Tracking down the originator of a cyber
attack may not be as hard as it seems.
In the long term, placing more
emphasis on the cooperative aspects
of the US-China relationship may
prove the most valuable course.
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event of a cyber disaster or a high-consequence cyber atta
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