November 9, 1998

http://www.cato.org

---------------------------

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

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

unsubscribe from the Update, see the end of this message.

Under the description of each item you will find a URL address. To

access that document, enter the address into your web browser,

or visit the main site at http://www.cato.org and browse around.

In this issue:

- Washington vs. Silicon Valley, Annual Cato Institute/Forbes ASAP

Conference on Technology and Society

- The Moral Case for Social Security Privatization

- Dismal Science Fictions: Network Effects, Microsoft, and Antitrust

Speculation

- Term Limits and the Republican Congress: The Case Strengthens

- The Government's War on Mergers: The Fatal Conceit of Antitrust Policy

- Common Cents, Common Dreams

- A Life of One's Own: Individual Rights and the Welfare State

- The Case for a Russian Currency Board System

--------------------------------------------

November 9, 1998

Politicians are paying attention to Silicon Valley, but do they

understand it? The Cato Institute's Annual Conference on Technology and

Society brings together executives, scholars, and writers to discuss the

issues shaping our most innovative industries. Speakers this year

include Dr. Milton Friedman, Larry Ellison, Bob Metcalfe, Scott Cook,

J.B. Holston and Eric Schmidt. There is still time to register for this

important conference--join us November 19 -21 at the Fairmont Hotel in

San Jose, CA.

http://www.cato.org/events/technol2.html

--------------------------------------------

October 29, 1998

CATO INSTITUTE PAPER DESCRIBES MORAL CASE FOR SOCIAL SECURITY

PRIVATIZATION

Desirable for egalitarians, communitarians, welfare theorists and

classical liberals

"The most important arguments for Social Security privatization are

moral, not economic," according to the author of a new policy paper from

the Cato Institute. While the current national debate over the system's

future revolves around such economic issues as impact on national

savings, economic growth or transition costs, "privatization would not

be justifiable if it were economically beneficial but morally suspect."

In The Moral Case for Social Security Privatization, Daniel Shapiro

declares that "a privatized Social Security system meets moral criteria

far better than does our current, bankrupt, pay-as-you-go system." This

is true, he says, not only from the classical liberal or libertarian

perspective, "but from virtually every perspective in political

philosophy."

Shapiro notes that "a purely voluntary pension system is most compatible

with the classical liberal emphasis on liberty," since "the freedom to

decide what kind of retirement to have, when to cease working, how much

to put aside for one's retirement" and similar decisions "go to the

heart of the freedom and responsibility to shape one's life."

Egalitarians, who "value equality not merely as a means to some other

end but as an independent value," should favor privatization whether

they emphasize minimizing relative inequalities, or focus on making

absolute improvements in the lives of the worst off. Social Security has

"particularly pernicious effects among some groups that egalitarians are

likely to consider among the most disadvantaged," and "egalitarians who

are concerned with the absolute position of the poor should also favor a

private system because it will significantly raise their retirement

income."

Social Security cannot be justified under welfare rights theories

because it "is not a need-based or means-tested program." Communitarians

stress "a shared sense of the common good," and a "shared sense of

solidarity," but Social Security produces severe intergenerational

inequalities, and "no longer promotes a sense of solidarity among

citizens or between generations." In contrast, "a private pension system

avoids unfair intergenerational redistribution, keeps its promises and

still retains some sense of shared responsibility via a minimum pension

guarantee" that is part of all significant privatization proposals.

"The moral shroud that used to surround Social Security is an illusion:

there is no moral argument for Social Security," he concludes. A private

system is justified, Shapiro argues, "regardless of which political

values one thinks most important." Daniel Shapiro is associate professor

of philosophy at West Virginia University.

Social Security Paper no. 14

http://www.cato.org/pubs/ssps/ssp-14es.html

--------------------------------------------

October 28, 1998

ECONOMIC THEORIES UNDERLYING CASE AGAINST MICROSOFT ARE FUNDAMENTALLY

FLAWED

QWERTY legend turns out to be "no better than a convenient myth"

In its antitrust case against Microsoft, the Justice Department has

invoked a variety of "novel economic theories to justify new antitrust

doctrines and to revive old ones." Those theories, which invoke such

factors as "network effects," "path dependence," and "lock-in," are

"fundamentally flawed," according to a new Cato Institute study by two

economists who have written extensively on the subject.

In "Dismal Science Fictions: Network Effects, Microsoft, and Antitrust

Speculation," authors Stan Liebowitz and Stephen E. Margolis note that

"theories of path dependence and lock-in are relatively new to the

economic literature." They find little support among economists because

"there is a poor connection between theories of path dependence and the

real-world behavior of entrepreneurs and consumers. Moreover, no

connection exists between the alleged empirical support for those

theories and real events."

Proponents of the new theories commonly cite things like the

predominance of the QWERTY typewriter keyboard, VHS videotapes and

IBM-compatible computers to support their contention that markets often

settle on the "wrong" standard or failed to adopt a better system or

standard. Liebowitz and Margolis debunk frequently used examples of

market failure, including "the most commonly cited example in the

network-externality, path-dependence literature, the prosaic typewriter

keyboard."

Adherents of the path-dependence theory say that the QWERTY arrangement

of the keyboard is inferior to others, including "the 'scientifically'

designed Dvorak keyboard, which allegedly offered a 40 percent increase

in typing speed. The story is claimed to validate path dependence: no

typists learn Dvorak because too many others use QWERTY, which increases

the value of QWERTY all the more." But upon investigation, the authors

found that the story was "wrong in almost every detail." A carefully

controlled government study in the 1950s and other modern research show

little advantage to the Dvorak keyboard. A Navy study supposedly showing

its superiority turns out to have been conducted by Dvorak himself and

was "clearly fudged." But the continuing use of the story "illustrates

both the desire of the path-dependence theorists for empirical support

and their reluctance to check the facts."

In short, the authors say, "Reexamination of the empirical evidence

demonstrates that the claimed examples of lock-in are not market

failures," and "with regard to Microsoft, as elsewhere, neither theory

nor fact supports the call for antitrust enforcement measures."

Stan Liebowitz is a professor of economics at the Management School of

the University of Texas at Dallas. Stephen E. Margolis is a professor of

economics at North Carolina State University.

Policy Analysis no. 324

http://www.cato.org/pubs/pas/pa-324es.html

--------------------------------------------

October 28, 1998

STUDY OF CONGRESSIONAL VOTING CONFIRMS PUBLIC BELIEF ABOUT NEED FOR TERM

LIMITS

Longer-serving Republicans are reason for GOP's failure to honor

campaign promises

"One of the most significant reasons for the GOP's failure to tame the

budget is that senior Republicans have not lived up to the party's

campaign promises," according to a new Cato Institute study that

examined voting behavior of members of Congress on 31 of the most

significant budget, tax and regulatory issues since 1995. The findings

"suggest that if the public wants Congress to reduce the size and scope

of government, term limits may be imperative."

In "Term Limits and the Republican Congress: The Case Strengthens,"

author Aaron Steelman notes that in nearly every one of the 31 votes,

"junior Republicans (members who had served 6 years or less in the House

and 12 years or less in the Senate) favored fiscal discipline in far

greater numbers than did senior Republicans. Indeed, in some cases

junior Republicans were more than twice as likely to vote for spending

or tax cuts as were senior Republicans."

Steelman notes that "many people on the right of the political spectrum

who are skeptical about term limits have argued that, with Republicans

in control of Congress, term limits are no longer necessary." But, he

adds, "all lawmakers - Republicans, Democrats and Independents - are

subject to the same pressures." And so it is not surprising that "the

federal government, by almost every measure, is bigger today than it was

on election day in 1994."

Over time, Steelman points out, "lawmakers become more susceptible to

the pro-spending arguments they are constantly exposed to and thus

become more sympathetic to governmental activism. Typically, this shift

in a pro-tax-and-spend direction is more dramatic for Republicans than

for Democrats." Thus, "term limits may have a more profound impact on

legislative outcomes when the GOP controls Congress."

"Term limits are no panacea," the author concludes. "There always will

be big spenders in Congress. But if Congress were term limited, there

probably would be fewer big spenders -- particularly big-spending

Republicans."

Briefing Paper no. 41

http://www.cato.org/pubs/briefs/bp-041es.html

--------------------------------------------

October 22, 1998

"DARK SIDE" OF ANTITRUST POLICY: HARMING CONSUMERS, THWARTING

COMPETITION

Microsoft case one of many examples of "domestic protectionism"

"Antitrust is thought by some to be the bulwark of free enterprise," a

new study from the Cato Institute notes. But in practice, "antitrust

laws have become a weapon of convenience for special pleaders of all

stripes who are apparently willing to go to almost any length to protect

their own selfish interests by stopping mergers." The result is that

"antitrust authorities all too often succeed, not in keeping prices from

rising, but in keeping them from falling."

In "The Government's War on Mergers: The Fatal Conceit of Antitrust

Policy," William F. Shughart II argues that "antitrust has a dark side"

and that "it has been deformed in its application into a kind of

domestic equivalent of trade protectionism, operating mostly to the

benefit of less efficient firms that, unable or unwilling to struggle to

win the competitive race in the rough-and-tumble of an unforgiving

market, have turned to Washington for succor."

Shughart argues that "the politicization of antitrust is not just a

matter of historical curiosity. Politics stalks many of the high-profile

cases brought by President Clinton's trustbusters, including Primestar's

planned purchase of a key satellite slot as well as the mergers proposed

between Staples and Office Depot, WorldCom and MCI and Lockheed Martin

and Northrop Grumman."

Shughart, the Frederick A. P. Barnard Distinguished Professor of

Economics and holder of the Robert M. Hearin Chair in Business

Administration at the University of Mississippi, notes that "the

textbook concept of 'monopoly'-- a single business entity producing a

product having no close substitutes -- seems to have passed quietly into

antitrust history." Instead, "antitrust authorities worry about

'unilateral competitive effects' and a host of other exotic-sounding

sources of consumer injury."

A close look at recent merger cases brought by the government shows that

"federal trustbusters frequently have trouble distinguishing competition

from monopolizing. As a result, the antitrust laws have far too often

been brought to bear in attacking innovative, risk-taking firms that

have succeeded in developing previously unknown products and in

establishing wholly new industries," Shughart contends.

"Antitrust law was wrong-headed at its conception," and "one hundred

years of antitrust enforcement in the United States has produced

precious little evidence that the laws have achieved their stated

objectives." Shughart says that "the time for modest reform of antitrust

policy processes has passed. Root-and-branch repeal of what Federal

Reserve chairman Alan Greenspan a generation ago referred to as a

'jumble of economic irrationality and ignorance' -- and what modern

scholarship has shown over and over again to be a playground of special

pleaders -- is called for."

Policy Analysis no. 323

http://www.cato.org/pubs/pas/pa-323es.html

--------------------------------------------

October 20, 1998

CATO INSTITUTE PUBLISHES MASS-MARKET PAPERBACK ON SOCIAL SECURITY REFORM

Got an hour? Here's an easy-to-read discussion of what privatization

means for you

The Cato Institute today published a short, easy-to-read mass-audience

book titled Common Cents, Common Dreams: A Layman's Guide to Social

Security Privatization by Peter J. Ferrara and Michael D. Tanner. The

50-page paperback is illustrated throughout and is written in language

that's easily understood. It is a companion book to A New Deal for

Social Security, a longer and more detailed volume by the same authors,

published in September and aimed at those in the public policy community

looking for in-depth discussion of the issues surrounding Social

Security reform.

"We call this book Common Cents, Common Dreams because it is about how

working men and women across this country can be freed to achieve the

common dream of financial independence and security," Ferrara and Tanner

declare. "Average and even low-income workers earn enough money to

achieve substantial wealth by retirement. If they took the money that

they currently pay in Social Security taxes and invested those funds in

standard diversified portfolios of stocks and bonds, average-income

families could expect to retire with accumulated savings of nearly $1

million or more. This book explains why and how that can be done."

The book focuses on the difficulty faced by low- and moderate-income

Americans today as they try to set aside retirement savings. Payroll

taxes leave them with little or no disposable income to invest in a

retirement savings plan, and thus leave them entirely dependent on a

meager Social Security check. In a series of examples in the book,

average wage earners learn how small their Social Security income will

be, compared with the returns from even a modest private retirement

savings account.

The book is filled with pictures, graphs, and short features that

explain why Social Security is often called a Ponzi scheme, show how

high Social Security taxes will have to go to keep it afloat, describe

the 1960 Supreme Court decision holding that people have no

Constitutional "right" to their Social Security benefits, show why the

Social Security Trust Fund isn't an asset at all but a liability, and

explain how a privatized system would provide significantly higher

retirement benefits.

Copies may be purchased ($4.95 paper) by calling 800-767-1241 or through

the Cato Online Store.

http://www.cato.org/pubs/pubs.html

--------------------------------------------

October 14, 1998

THE WELFARE STATE "RESTS ON A FALSE MORAL FOUNDATION," NEW BOOK DECLARES

Welfare reform legislation was a right first step, if a small one

"Welfare rights are radically different from, and incompatible with, the

classical rights to life, liberty, and property," philosopher David

Kelley writes in a new book published today by the Cato Institute. As

states work through the implementation of the Welfare Reform Act of

1996, Kelley supplies the philosophical context in which crucial policy

choices should be made.

In A Life of One's Own: Individual Rights and the Welfare State, Kelley

says that the key is understanding just what a "right" is. "The

Declaration of Independence maintained that individuals possess certain

rights, that those rights are part of a higher law to which government

must submit, and that the purpose of government is to preserve and

protect those rights." Classical rights, as defined in the declaration,

are rights to freedom of action. Welfare rights, on the other hand, are

"entitlements to have certain goods, not merely to pursue them," which

is "a more expansive view of the role of government than anything

envisioned by the classical liberals of the Enlightenment."

The thinkers and activists who built the welfare state "insisted that

the social provision of goods be treated as a right possessed by all

people as citizens, rather than as an act of charity," Kelley says. "Do

we have a right to be taken care of by others, or do we not?" Kelley's

answer is clearly no. "Welfare rights as a category conflict with

liberty rights. The conflict is inevitable because any welfare right

imposes on others unchosen positive obligations that, when enforced,

deprive those others of their liberty and property."

He argues that "the welfare reform measures of 1996 were the right first

step, though a small one. Cash benefits at least, though not other

benefits, were denied entitlement status, and the states were given

authority to try different approaches to relieving poverty." But for

reasons Kelley discusses at length, "no government programs can achieve

the same degree of diversity and flexibility as private ones."

"The welfare state rests on a false moral foundation," Kelley says. The

notion of welfare rights "cannot be justified by appeal to freedom, to

benevolence, or to community. They do not expand but curtail

freedom-that of program clients as well as of taxpayers. They make

charity compulsory, undermining any genuine benevolence donors might

have toward the poor. They replace the voluntary bonds of a society of

contract with the coercive power of the state, undermining genuine

community."

David Kelley taught philosophy at Vassar College and Brandeis University

and is the author of a widely used college textbook on logic, The Art of

Reasoning, as well as other works in philosophy. He is currently

executive director of the Institute for Objectivist Studies.

A Life of One's Own: Individual Rights and the Welfare State

http://www.individualrights.org/

--------------------------------------------

October 14, 1998

HANKE: RUSSIA NEEDS A CURRENCY BOARD, BUT "THE DEVIL IS IN THE DETAILS"

Board must be ultraorthodox and protected from political control

"The devaluation of the Russian ruble this year was predictable,

especially considering Russia's poor monetary history," a new study from

the Cato Institute observes. The solution is "a competitive, parallel

currency system" and the creation of a currency board system (CBS). But

"to work in Russia, a CBS must be ultraorthodox," so that it can

"command the respect and confidence of the justifiably skeptical Russian

people."

In "The Case for a Russian Currency Board System," economist and Cato

Institute adjunct scholar Steve H. Hanke notes that "state-manipulated

money has been a Russian hallmark since the time of Peter the Great and

shows that the country's money problems are endemic and do not depend on

who controls the central bank." After a 1991 currency "reform" imposed

by the Gorbachev government, "the Russian people began to dollarize the

economy, and they have continued to do so with a vengeance." Today,

despite the fact that the Yeltsin government officially de-dollarized

Russia in 1997, Russians hold about $40 billion in dollars, which

"dwarfs the supply of rubles in circulation."

Hanke says that "instead of worrying about dollar mattress money and

threatening to confiscate it, the Yeltsin government should be jumping

for joy" and "grant the dollar legal currency status immediately, so

that the dollar can circulate and be used on an equal basis with the

ruble." Then, "to put the ruble on a sound competitive footing, the

Russian government should enact a currency board system law immediately

and announce that it will be implemented as soon as possible."

The "ultraorthodox" CBS that Hanke recommends would have its legal seat

in Switzerland and be governed by a board of five directors, two

appointed by the government of Russia and three (non-Russian citizens)

appointed by the Bank for International Settlements in Basel. It would

tie the ruble to a reserve currency (initially, the U.S. dollar) at a

one-to-one fixed exchange rate and maintain foreign reserves equal to at

least 100 percent of the notes and coins in circulation. It would not be

allowed to serve as a "lender of last resort," regulate commercial

banks, create inflation or create credit.

"The devil is always in the details, particularly in Russia," Hanke

says. "Anything less than an ultraorthodox CBS will not command the

confidence of the Russian people and will therefore doom a Russian CBS."

Steve H. Hanke is a professor of applied economics at Johns Hopkins

University in Baltimore, and coauthor of Russian Currency and Finance: A

Currency Board Approach to Reform (Routledge, 1993).

Foreign Policy Briefing no. 49

http://www.cato.org/pubs/fpbriefs/fpb-049es.html

^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^

**To Unsubscribe:

1. You can subscribe and unsubscribe yourself at any time from the Cato

Online Update. Simple forms to add or remove yourself are available at:

http://www.free-market.net/partners/c/cato.html#lists

2. If you need further assistance, please send e-mail to cato@cato.org

describing the problem you're having. Please be sure to mention the Cato

Online Update in your message.

^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^

The Cato Institute welcomes ideas and feedback. Please send us E-mail at

cato@cato.org.