June 19, 1998

http://www.cato.org

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Welcome to the latest issue of the Cato Online Update, your guide to

what's happening on the Cato Web site. For instructions on how to

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In this issue:

- Cato Conference

- The Myth of the 2.2 Percent Solution

- Theater Missile Defense

- Internet Gambling: Prohibition v. Legalization

- Cato launches Spanish-language Internet Web site

- Endowed Chair in Constitutional Studies

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CATO HOLDS CONFERENCE ON THE ECONOMIC COST OF U.S. FOREIGN POLICY

Scholars, government officials and business leaders to discuss

collateral damage

A conference on "Collateral Damage: The Economic Cost of U.S. Foreign

Policy" will be held at the Cato Institute on Tuesday, June 23, 1998.

This all-day conference will bring together experts to explore the

current and potential conflicts between U.S. foreign policy and the

liberty and economic well-being of American citizens. The conference

will focus on the ways that U.S. foreign policy infringes on the freedom

of Americans to trade, invest and communicate with the rest of the

world.

Dan Griswold, associate director of Cato's Center for Trade Policy

Studies, noted that "Americans are paying a heavy price for the growing

use of export controls and sanctions as tools of U.S. foreign policy.

The collateral damage conference will provide timely comment and

information about the ongoing controversies over curbs on high-tech

exports to China and the imposition of sanctions against India and

Pakistan. The conference will offer cutting-edge analysis of the

collision between economic freedom and foreign policy politics."

Conference participants will examine issues ranging from "Export

Controls" to "Controlling the Flow of Capital" to "Unilateral Economic

Sanctions." Dick Cheney, CEO of Halliburton Co. and former secretary of

defense will give the keynote luncheon address, "Defending Liberty in a

Global Economy."

Other speakers at the conference will be Clayton Yeutter, former

agriculture secretary and U.S. trade representative; Gary Hufbauer,

Council on Foreign Relations and Institute for International Economics;

Kenneth C. Bass, Venable, Baetjer, Howard & Civiletti; William H. Lash

III, George Mason University; Brink Lindsey, Center for Trade Policy

Studies, Cato Institute; Ted Galen Carpenter, Cato Institute; William

Reinsch, Department of Commerce; James B. Burnham, Duquesne University;

R. Ian Butterfield, Westinghouse; Carl Ellison, CyberCash; Eric Hughes,

Simple Access; Richard Rahn, Novecon; Stephen Kroll, Treasury

Department; Richard N. Haass, Brookings Institution; William C. Lane,

Caterpillar, Inc.; and Dan Griswold, Center for Trade Policy Studies,

Cato Institute.

The day-long conference will be held at the Cato Institute in

Washington.

For registration information, go to

http://www.cato.org/events/collateral_damage.html

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2.2% TAX HIKE IS NO "SOLUTION" TO SOCIAL SECURITY'S DEMOGRAPHIC BULES

Annual tax hikes would be required to keep funds in balance, Concord

Coalition economists find

Partisans of the current Social Security system sometimes argue that

raising the payroll tax by a "mere" 2.2 percent would be all it would

take to solve its financial problems. But a new study from the Cato

Institute concludes that this "2.2 percent solution" would not only

exact a huge cost -- $75 billion in higher taxes in the first year alone

-- but would still require an additional tax hike every year to keep the

trust funds in balance.

In "The Myth of the 2.2 Percent Solution," economists Neil Howe and

Richard Jackson point out that the proposal is designed to deal with one

particular measure used to determine Social Security's fiscal health:

actuarial balance. Computations of actuarial balance count surpluses in

the program's trust funds as genuine savings, "but the trust funds

contain nothing but a stack of Treasury IOUs that will require

additional taxes or borrowing from the public to redeem. The more

accurate measure of Social Security's health is the program's operating

balance -- that is, its earmarked annual tax revenues minus its annual

outlays," according to Howe and Jackson. That balance will go in the

red in 2013, just 15 years from now; in 2031, the annual deficit will be

roughly $734 billion.

Howe and Jackson also point out other serious problems with the idea:

* The 2.2 percent figure "is based on the [Social Security] trustees'

'intermediate' scenario, [which] assumes faster productivity growth and

slower longevity gains than America has actually experienced over the

past quarter century. If we accept the trustees' 'high-cost' scenario,

whose key economic and demographic assumptions more closely reflect

historical experience, Social Security's 2.2 percent of payroll

actuarial deficit instantly becomes a 5.4 percent of payroll deficit."

* "Even if enacted, the 2.2 percent solution would let Social Security's

actuarial balance slip into deficit the very next year-requiring yet

another 'solution,' followed by yet another deficit, and so on."

* The tax-raising approach "focuses only on the program's solvency. But

simply raising taxes (or cutting benefits), while it may balance the

Social Security trust funds, does nothing to redress the program's other

underlying problems, most notably the declining rate of return for young

workers."

Howe and Jackson are economists and senior advisers to the Concord

Coalition.

Social Security Paper no. 11

(http://www.cato.org/pubs/ssps/ssp11es.html)

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U.S. THEATER MISSILE DEFENSE PROGRAM COST CAN BE CUT BY TWO-THIRDS

"Common-sense" approach would include two Navy systems and improved

Patriot

"Acquiring all the systems in the current theater missile defense (TMD)

program is unnecessary," according to a new study from the Cato

Institute. "The United States should purchase only those systems that

support a national security policy of sending U.S. expeditionary forces

to foreign theaters only when vital U.S. national security interests are

at stake." That would reduce the cost of the program from an estimated

$47.3 billion to $17.4 billion, the study finds.

In "Theater Missile Defense: A Limited Capability Is Needed," Charles V.

Pena argues, "It is no longer reasonable or rational for the United

States to maintain forward-deployed forces throughout the world and

provide protection for friends and allies. Thus, there is no need to

acquire all the systems in the current TMD program."

The Pentagon's Ballistic Missile Defense Organization currently has six

different systems in its TMD program. Pena says that three of them --

Navy Area Defense; Navy Theaterwide Defense; and PAC-3, an improved

version of the Patriot system that was used during the Persian Gulf War

-- are well suited to support "an ability to project military power at

places and times of our own choosing" and should be kept.

But Pena says that the other three systems should be terminated. The

Theater High Altitude Area Defense system, which costs $12.8 billion,

"is not readily deployable" and "is more ideally suited to protecting a

theater before the deployment of forces begins." The Medium Extended Air

Defense System provides a capability similar to PAC-3 but at much

greater cost ($11 billion) and provides a much smaller radius of

defense. And the Air Force's airborne laser not only faces important

technical challenges but "will require secure airfields, which may not

be available early in a conflict. To make a substantial investment ($6.1

billion) in a system that depends on availability of and access to

secure airfields would not be a wise choice."

Pena, an independent defense policy consultant, concludes, "Our military

forces should be designed to support a more selective and rigorous

national security policy. And our theater ballistic missile defense

choices must provide real military capability and be consistent with our

policies and forces."

Policy Analysis no. 309 (http://www.cato.org/pubs/pas/pa-309es.html)

NOTE: this paper will not be available until June 22, 1998.

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PROHIBITION OF INTERNET GAMBLING FUTILE, scholar says

Internet gambling inevitable for both technical and political reasons

Attempts to prohibit Internet gambling will inevitably fail because "the

nature of the Internet renders prohibition futile," according to Tom W.

Bell, director of telecommunications and technology studies at the Cato

Institute. Bell testified recently before the National Gambling Impact

Study Commission meeting in Chicago.

He told the members of the commission that, inevitably, "sooner or later

Americans will legally gamble over the Internet."

As Bell explained, "The Internet's inherent openness already hobbles law

enforcement officials, while relentless technological innovation ensures

that they will only fall further and further behind."

In addition to technical considerations, Bell noted, political forces

will frustrate attempts to prohibit Internet gambling. "The Internet

offers an instant detour around domestic prohibitions," Bell said.

"Principles of national sovereignty will prevent the United States from

forcing other countries to enforce a ban on Internet gambling, and it

takes only one safe harbor abroad to ensure that U.S. citizens can

gamble over the Internet."

Furthermore, Bell explained, "consumer demand for Internet gambling and

the states' demand for tax revenue will create enormous political

pressure for legalization."

While such developments will no doubt frustrate prohibitionists, Bell

said that legalized Internet gambling will offer considerable benefits.

"Internet gambling will drive network development; it will provide a

more wholesome environment than real-world casinos; and it will benefit

consumers by increasing competition in gambling services."

Cato Testimony (http://www.cato.org/testimony/ct-tb052198.html)

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CATO INSTITUTE LAUNCHES SPANISH-LANGUAGE WEB SITE

Institute's ideas attracting growing interest in Latin America and Spain

The Cato Institute recently launched a new Spanish-language Web site --

www.elcato.org -- featuring essays and studies produced by Cato scholars

on a wide range of issues, many of which are of particular importance to

Latin Americans, Spaniards, and Hispanics in the United States. The site

features articles on international relations, the environment, drug

policy, money and banking, economic development, fiscal policy, and

Social Security. It was developed for Cato by journalist Luis Figueroa,

an editor and economics writer at the Guatemalan newspaper Siglo

Veintiuno, who is completing a year-long program for mid-career

professionals at the University of Maryland.

"We hope this Web site will help satisfy the growing demand for

libertarian ideas among Spanish speakers around the world," explained

Ian Vasquez, director of the Project on Global Economic Liberty at the

Cato Institute. He is one of several Spanish-speaking scholars at Cato

who will be involved in operating elcato.

The Cato Web site in Spanish was launched as part of the Institute's

ongoing work relating to economic liberalization in Latin America and

elsewhere, and because of the belief that market-liberal solutions to

public policy problems are relevant not only to the United States but to

other parts of the world as well.

"The ideas of limited government, individual liberty and free markets

appeal to people throughout the region because of our long history of

bad government, cronyism, and lack of property rights -- shortcomings

that we are now trying to overcome," said Roberto Salinas-Leon, director

of policy analysis at TV Azteca in Mexico City and a Cato adjunct

scholar.

In an essay on pension reform, José Pinera, Chile's former minister of

labor and social security, describes the successful privatization of the

Chilean public pension system in 1980, and how other countries in the

region are patterning their pension reforms on that model. The site also

features essays by Enrique Ghersi, Peruvian co-author of The Other Path;

Ian Vasquez and L. Jacobo Rodriguez on the International Monetary Fund's

record in Mexico, the embargo on Cuba, and the international war on

drugs; Solveig Singleton on Internet censorship; and much more.

The site also provides links to other Spanish-language market-liberal

think tanks.

Cato en Espanol (http://www.elcato.org)

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Cato Institute establishes endowed chair in constitutional studies

Roger Pilon will be first occupant of B. Kenneth Simon Chair

The Cato Institute Board of Directors, meeting this month in Washington,

D.C., approved the establishment of the B. Kenneth Simon Chair in

Constitutional Studies, the Institute's first endowed chair. The first

scholar to hold the position will be Roger Pilon, senior fellow and

director of Cato's Center for Constitutional Studies.

Cato president Ed Crane said, "It is especially fitting that the first

endowed chair at Cato should be in constitutional studies since the

Constitution, understood as embodying the natural-rights philosophy of

the Founders, is the basis and starting point for all of Cato's policy

work. And it is fitting, too, that Roger Pilon should be named to the

chair since his work has done so much to revive the idea that the

Constitution establishes a government of limited powers designed to

secure individual liberty, free markets, and the rule of law."

The chair was established with a $2 million grant from B. Kenneth Simon

of Pittsburgh, a retired engineer and entrepreneur who has supported

Cato's work for a number of years. "I am very pleased to see this chair

established," Simon said. "I have followed the work of Cato, and of

Roger Pilon in particular, for some time. It is important work that

needs to reach the broadest possible audience. What could be more

important in this country than reviving the idea of limited,

constitutional government?"

Since joining Cato nearly a decade ago, Pilon and his staff at the

center have argued that judges should be neither "active" nor

"restrained" but instead should be responsible to the Constitution they

swear to uphold. "But to do that," Pilon said, "they must have a better

understanding of the philosophy of the Constitution, including its

natural-rights foundations, than many of them seem to have. The

Constitution does not empower judges to be social engineers. At the

same time, it does not allow them to be handmaidens to the political

branches."

"The B. Kenneth Simon Chair in Constitutional Studies will enable Cato

to better advance that vision of the Constitution and the proper role of

the judiciary under it," Crane told Cato's board. "We will also

initiate the B. Kenneth Simon Distinguished Lecture Series in

Constitutional Studies," he added, "which will bring noted

constitutional scholars to Washington to address legal issues of the

day. We are very proud to establish this chair and very pleased that

Ken Simon has enabled us to do it."

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