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Analysis and Commentary

It's about Time

by John E. Chubbvia Hoover Daily Report
Monday, May 22, 2000

What students in past generations learned will not be sufficient for today's students or the future of our country.

A Strategic Flip-Flop in the Caribbean

by William Ratliffvia Analysis
Wednesday, March 1, 2000

For almost three decades the U.S. embargo of Cuba was part of America's cold war strategy against the Soviet bloc. It should have been lifted after that ‘‘war’’ ended since Castro ceased to threaten the United States and its neighbors and adopted the standard rules of international behavior. But inertia, a powerful Cuban American lobby, and misguided politicians set new demands: democracy, improved human rights, and economic reform. When Castro demurred we tightened the sanctions in 1992 and again in 1996 with the Helms-Burton Law. The United States has never committed the resources necessary to overthrow Castro, however, and the pressures we have applied have utterly failed to advance the three objectives. Worse yet, in the post–cold war world the policy and political outlook that sustain it have become a strategic liability. They promote conflict, both within Cuba—where a crisis might draw in the U.S. military—and abroad, as occurred in 1999–2000 after the arrival in Florida of the rafter boy, Elián González. They allow pressure groups to stand in the way of the policy-making process of the U.S. government. For example, the lobby manipulated wishy-washy politicians in 1998–1999 and got the president to turn down a widely supported proposal for a bipartisan commission to conduct the first comprehensive evaluation of the policy in four decades. Finally, the imperialistic Helms-Burton Law alienates allies worldwide and will poison relations between the United States and Cuba for decades to come. Castro will benefit no matter what we do, but on balance he gains more if we maintain the sanctions because they provide a scapegoat for his own repression and economic failures even as they enable him to maintain his cherished global image as the ‘‘scourge of U.S. imperialism.’’ Castro can wage a worldwide campaign against the embargo to bolster his image knowing Washington is too inflexible to change it. Indeed, whenever Washington has lightened up, Castro has tightened up and effectively prevented further improvement. Lifting sanctions need not mean establishing friendly relations with Castro—which he would reject in any event—or supporting his efforts to get international aid without meeting standard requirements. The ultimate responsibility for maintaining this antiquated and potentially dangerous policy falls on politicians who either do not understand the need for, or for political reasons are afraid to support, a new policy to benefit both Americans and Cubans in the post–cold war world.

Political Instability as a Source of Growth

by Bruce Bueno de Mesquitavia Analysis
Wednesday, March 1, 2000

The U.S. government emphasizes the importance of stable political leadership as a necessary condition for economic growth. Contrary to this view, I show that high leadership turnover is strongly associated with high economic growth both in autocracy and in democracy. The effect of "unstable" leadership is stronger in democracies than autocracies because democratic political systems have institutions that promote competition over policy ideas rather than over the distribution of private benefits to cronies. Two institutions are shown to be particularly important in promoting such public goods as a fair legal system, transparent decision making and accounting, a strong national defense, and a healthy, growth-oriented infrastructure. These two institutions are a large selectorate (the set of people with a say in choosing leaders) and a large winning coalition (the set of people whose support keeps the incumbent in office).

Political leaders are eager to stay in office and, contrary to the neoclassical economic model, are not benign agents of the people in whose name they lead. Because autocrats depend on small groups of supporters, they emphasize the use of private benefits to their cronies as the means to gain political loyalty and stay in office. This means that they generally have little incentive to pay attention to the overall quality of their public policies.

Democrats, in contrast, require the support of a large coalition to stay in power. Because private rewards have to be spread thinly to many people, democrats find it easier to compete for office by providing public goods that benefit everyone rather than private benefits for a few cronies. This means that, in democracies, political competition is over policy ideas. Two effects follow from the fact that democratic leaders must build large coalitions: Democratic leaders provide better policies to improve their chances of surviving in office, and because competition is over policy ideas, they are more easily turned out of office in favor of a political challenger than are autocrats. Thus, autocrats have longer terms in office and produce less-efficient economic growth. The U.S. government emphasis on stable leadership as a necessary condition for growth is mistaken and can lead to global economic contraction rather than expansion.

Analysis and Commentary

The Case for Sweatshops

by David R. Hendersonvia Hoover Daily Report
Monday, February 7, 2000

Interviewed recently by a Miami Herald reporter, Ms. Lopez has a message for people in the United States and other wealthy countries who are nervous about buying goods from "sweatshops": "I wish more people would buy the clothes we make."

Analysis and Commentary

It’s the Dollar

by Alvin Rabushka, Michael S. Bernstamvia russianeconomy.org
Sunday, January 30, 2000

With the U.S. dollar as legal tender in Russia, the issue of an overvalued ruble disappears.

Analysis and Commentary

Prospects for Tax Reform

by Alvin Rabushkavia Hoover Daily Report
Monday, December 27, 1999

What are the prospects for a flat tax, a national retail sales tax, or any major overhaul of the federal income tax in the near future?

Analysis and Commentary

Making Unemployment Insurance Work

by Edward Paul Lazearvia Hoover Daily Report
Monday, December 6, 1999

The main purpose of unemployment insurance is to cushion temporary, unanticipated spells of unemployment.

US Money Ladder
Analysis and Commentary

Why Are Minimum Wages So Popular?

by Thomas E. MaCurdyvia Hoover Daily Report
Monday, November 29, 1999

As in 1996, when we last saw an increase in the federal minimum wage from $4.25 to $5.15 an hour, political pressure is once again building to raise it by another $1.

The Case against the International Monetary Fund

via Analysis
Monday, November 1, 1999

In July 1944, delegates from forty-four nations gathered in Bretton Woods, New Hampshire, to design a postwar international monetary system that would promote world trade, investment, and economic growth. The framers created the International Monetary Fund (IMF or fund) to supervise the new "Bretton Woods monetary regime" that sought to keep national currencies convertible at stable exchange rates and to provide temporary, low-cost financing of balance-of-payments deficits resulting from misaligned exchange rates.

In reality, the framers of the Bretton Woods regime created an international price-fixing arrangement enforced by the IMF. After joining the fund, each member country declared a value for its currency relative to the U.S. dollar. The U.S. Treasury, in turn, tied the dollar to gold by agreeing to buy and sell gold to other governments at $35 an ounce; the inflation of the 1960s, however, made the U.S. commitment to sell gold at that price unsustainable. To preserve U.S. gold reserves, President Richard Nixon closed the gold window in August 1971, effectively uncoupling the dollar from gold and ending the fund's original mission of supervising a system of pegged exchange rates. Looking for a new mission, the IMF quickly evolved into a financial medic for developing countries. Beginning in the early 1970s, the IMF skillfully used a series of global economic crises to increase its capital base and financing activities.

Has the expansion of IMF financing activities alleviated the balance-of-payments problems of member countries and encouraged prudent, progrowth economic policies? The evidence, much of it supplied by the IMF, demonstrates that the fund does more harm than good. Historical studies as well as recent initiatives in Mexico, East Asia, and Russia reveal that IMF financing programs, which rarely prescribe appropriate economic policies or sufficient institutional reforms, are at best ineffective and at worst incentives for imprudent investment and public policy decisions that reduce economic growth, encourage long-term IMF dependency, and create global financial chaos.

It is time to scrap the IMF and strengthen market-based alternatives that would promote an orderly and efficient international monetary system. Key reforms include floating exchange rates, internationally accepted accounting and disclosure practices, unfettered private financial markets, and fundamental legal, political, and constitutional rules that would allow free markets to emerge and countries to achieve self-sustaining economic growth and development.

Capitalism and its Discontents: The Adam Smith Address

by Michael J. Boskinvia Analysis
Thursday, July 1, 1999

A review of episodes in economic and intellectual history indicates the superiority of a limited government market economy over the alternative models of economic organization. The siren calls of pundits, politicians, and even some economists in favor of communist central planning during the Great Depression; market socialism after World War II; and, more recently, massive welfare states and/or extensive government micromanagement of markets each ran afoul of their own problems and comparisons to the limited government (based on sound criteria) capitalist model. The limited government capitalist model, once again under attack from those who would greatly expand the role of government, needs its defenders, as the alternative models have proven historically, intellectually, and practically bankrupt.

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Economic Policy Working Group

 
The Working Group on Economic Policy brings together experts on economic and financial policy to study key developments in the U.S. and global economies, examine their interactions, and develop specific policy proposals.

Milton and Rose Friedman: An Uncommon Couple