Hoosiers Show the Way

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A nice piece recently published in the venerable Economist reports some good news out of the state of Indiana. The Hoosier state, under the enlightened leadership of Governor Mitch Daniels, has enacted a series of school reforms — reforms that are paying off handsomely for the children of the state.

The reforms crafted by Daniels and his superintendent of schools are interesting, among other reasons, because they are so wide-ranging. They include:

  • creating a voucher program for poor students;
  • encouraging and empowering more charter schools;
  • enhancing the autonomy of school principals to fire the obvious deadwood and respond to parents’ legitimate pressures;
  • requiring that teacher evaluations incorporate data on actual student performance.

Naturally, the rentseeking teachers unions hotly oppose these reforms (as they oppose almost all reforms, of any kind). Their position is: how dare these miserable, ungrateful, unwashed parents of kids in failing public schools insist on their right to send their kids elsewhere — or gain the right to see pertinent facts about the performance of the public schools?

The piteous cry is, “What is this country coming to?”

Of course, the deepest of the Indiana reforms is the establishment of a voucher program — which may well become the biggest in the country. Despite the unions’ vicious (and also morally vile) jihad against school reform in general and school choice in particular, there are now 32 voucher programs spread over 16 states. These programs educate only a small portion (210,000 students in total) of all America’s K-12 students, but they represent a growing threat to the dysfunctional status quo.

The anti-voucher forces trot out the usual lies: vouchers drain resources from public schools; they violate the separation of church and state. The replies are obvious. For every student who leaves a public school to attend a private one, yes, the district loses money, but it also saves the money it would have spent on that selfsame student. Apparently, unionized teachers can’t do simple arithmetic. Big surprise.

Further, the Supreme Court has already ruled that vouchers given directly to parents (who can decide to use them at religious, or atheist, private schools) do not violate the separation of church and state — no more than Pell Grants and the GI Bill of Rights, the benefits of which have always been usable at religious colleges. Apparently, unionized teachers don’t know history, either.

In fact, the voucher amount is usually much smaller, per student, than what is spent by public school districts. The Economist draws the obvious conclusion: vouchers save taxpayers’ money.

But I regard that as the least important advantage of vouchers. The most important, the crucial, advantage is that voucher programs (and other forms of school choice) rescue kids from stultified lives of needless underachievement.




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Civil Noncompliance

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As a piano technician I come across many unusual requests, but none so bizarre as one I received some time ago from a man whom I’ll call Mr. Green. Could I, he asked, strip the ivory from the keys of a Steinway grand piano?

I was appalled. Applying ivory to piano keys is a fine art. The ivory on each key is two separate pieces that have been color matched, cut, and glued together so carefully that there is no visible seam, then clamped exactly over a special wafer of cloth impregnated with white pigment that gives the translucent ivory a white, lustrous hue. To ask me to undo this fine craftsmanship was preposterous. It would be like asking me to slash the Mona Lisa or blow up Buddhist statues in Afghanistan. I asked Mr. Green why he wanted me to perform this sacrilege.

His answer was the law demanded it. After searching all over North America, Green had found precisely the right piano for his concert pianist wife. It was located in Canada’s province of British Columbia. As he made arrangements to have it shipped to his home in Connecticut, he learned that the piano would not be allowed into the United States because the ivory of its keys is prohibited by a law that bans the importation of ivory. Hence the need to remove the ivory from the keys.

“That’s ridiculous,” I said. “The piano was made in 1970, twenty years before the ban came into effect. Surely there is an exception for things made before the ban was adopted?”

“I can’t find out about that, it’s really crazy,” he sputtered. “I’ve called and called. I’m going out of my mind, I’m not getting any sleep. It’s a nightmare.”

Unable to get any straight or useful answer from U.S. Customs, he had retained a customs broker, who wasn’t able to find a way around the problem, either. The seller of the piano had, for his part, contacted the U.S. Fish and Wildlife Service, which supposedly administers the ban, and had received only a vague and equivocal response. If there was a way of applying for an exception, it was buried so deep in the bowels of bureaucracy as to be inaccessible to human beings. At his wit’s end, Green decided to have the ivory stripped off the keys, ship the piano to Connecticut, and then have the keys recovered with plastic.

The Death of Common Sense

The problem Mr. Green faced is familiar. The accumulated weight of regulation today is so great that we bump into its inane and counterproductive demands all the time. Author Phillip Howard focused on this problem in his 1995 book, The Death of Common Sense: How Law is Suffocating America. “Modern law,” he says, “has not protected us from stupidity and caprice, but has made stupidity and caprice dominant features of our society.” His book surveys the mountain of regulations that “crushes our goals and deadens our spirits.”

To ask me to undo this fine craftsmanship was preposterous, like asking someone to slash the Mona Lisa or blow up Buddhist statues in Afghanistan.

Social scientists have also noticed the issue. Their research into the many ways that laws go awry has prompted them to formulate the “Law of Unintended Consequences.” This generalization, first popularized by sociologist Robert Merton in 1936, ranks along with death and taxes as one of the few certainties of social life. It holds that every government effort to improve life has unexpected and harmful side effects. In many cases, these harmful effects are so severe as to defeat the original purpose of the law.

The ban on ivory is a good illustration of this dysfunctional pattern. From a distance, the problem seemed simple. Poachers kill elephants for their tusks, thus reducing the numbers of elephants — and, in certain areas, possibly driving them to extinction. The theory was that a law against the importation of ivory would deprive poachers of their market, and the killing of elephants would stop.

Alas, the world is always more complicated than it seems to those who make laws. Now, poaching and overhunting of elephants still takes place, but thanks to scarcity the practice is more lucrative than ever. Before the ban, ivory was selling for $200 a kilo; now the black market price is over $2,000.

But this is only part of the problem. Some African countries have too many elephants. These beasts overgraze and destroy the habitat in wildlife preserves, threatening plant and animal species with extinction. In these cases, wildlife experts recommend culling elephants to reduce their numbers. In other places where elephant population is too high, these animals destroy crops of poor farmers. This problem is managed by cooperative arrangements that cull some elephants, and reimburse farmers for crop losses with money gained from selling tusks of the culled animals. A ban on ivory undercuts these arrangements and thus encourages farmers to kill them secretly.

Before the ban, ivory was selling for $200 a kilo; now the black market price is over $2,000.

Another point that the ban does not take into account is that ivory has positive, non-substitutable human uses. Piano and organ keys are a case in point. Plastic piano key tops do not give the same feel as ivory. When dry, they are too “sticky,” not allowing the fingertips to slide from note to note. When wet with perspiration, plastic key tops become too slippery. A total ban on ivory, then, means that musical performances at the highest level are compromised.

These are just a few of the complexities that the law against the importation of ivory overlooks. Distant publics and shallow-minded legislators suppose that such a law is like a meat axe, and that one swing will fix, simply and finally, the problem they have in mind. But in its actual operation, it is more like a grenade, doing damage in many different directions that no one could predict when it is first put into effect. That the ivory ban would require the sacrilege of stripping ivory from the keys of a Steinway grand piano illustrates the kind of unanticipated, harmful side effects that come with every law.

Democratic Dead End

How do we fix this problem of laws that make a mockery of common sense? One answer might be to use the democratic process. That’s what the civics books recommend: if you don’t like a law, then you write a letter to the editor, or to your congressman. This advice might have made sense in an age of small government and few laws, but it is painfully unrealistic today. The mass of regulations now in place represents the accumulation of many decades of lobbying, coalition-building, administrative interpretation, and judicial precedent. The idea that an individual could even be noticed in this quagmire, let alone clear it up, is fanciful.

Furthermore, the democratic process gave us these laws. Politicians promised them as the solutions to problems. Sure, they ignored the harmful side effects, but this is the way the system works. The modern politician’s goal is not to make things better. It is to display good intentions, to gather kudos from a shallow media and curry favor with single-minded pressure groups. Politics has become theatre, where the politician-actor struts upon the stage playing the hero, and the audience applauds his performance.

The modern politician’s goal is not to make things better. It is to display good intentions, and to curry favor with single-minded pressure groups.

Thus, within democratic politics, there is no way of stemming the tide of shortsighted laws. If you go to the legislators and point out that a certain law has backfired, they are not going to repeal it. Lawmakers passed the ban on ivory in order to look good. They are hardly going to agree to offend the environmental pressure groups by reversing themselves (Headline: “Senator Endorses Slaying of Elephants”). If the politicians do anything, they will pass additional laws to try to fix the problems they caused with the first law — giving rise, of course, to more unintended consequences.

In the Tradition of Thoreau, Gandhi, and King

Is there nothing that we can do to counteract foolish and destructive laws?

In 1849, Henry David Thoreau elaborated the principle of civil disobedience, the idea that it is right for an individual to disobey an unjust law. Though a familiar concept for abolitionists and others who objected to government power on religious grounds, Thoreau's work proved revolutionary in separating civil disobedience from specific religious traditions, allowing men to appeal not to any higher power, but to the reason of his fellow man. Following in Thoreau’s footsteps, Mohandas Gandhi developed civil disobedience into a method of political reform. With his mass protests in South Africa and India, Gandhi showed the world that law need not be treated as a god. When laws contradict our sense of morality and decency, it is right to disobey them. Later, Martin Luther King, another of Thoreau’s disciples, grounded the American civil rights movement on the same principle.

Civil disobedience points the way to a tactics of reform, but it will not itself address the problem of overregulation. Civil disobedience is a tactic of mass protest. It assumes a single, objectionable law so prominent that large numbers of people can be marshaled to demonstrate in the streets against it.

The problem we face with law in the modern state is that there are tens of thousands of silly regulations, and no single one merits a high-profile campaign. To take Mr. Green’s case, imagine the difficulties we would have in trying to attract crowds, and the media, to a “piano-importing protest” at a U.S. customs check point on the Canadian border. To resist and counter the regulatory regime, we need a small-scale, convenient strategy that can be applied in thousands, even millions, of instances. I call it “civil noncompliance.” Its aim is to counter a destructive law by finding a quiet way to evade it. This was what I used to counter the unjust effect of the law on ivory importation affecting Mr. Green.

To resist and counter the regulatory regime, we need a small-scale, convenient strategy that can be applied in thousands, even millions, of instances.

My sister and I drove to Canada for a round of golf. While she played, I visited the home of the seller, took the piano apart, removed the keys and put them in a cardboard box which I put in the back of my station wagon. Then I put the piano back together, ready to be shipped to Mr. Green in the ordinary way, sans ivory. I picked up my sister at the golf course, and drove to the border.

The U.S. customs agent was friendly. What was the purpose of our visit to Canada?

“We played golf.”

“How did you do?”

I said, “Don’t ask!”

He laughed and waved us through. The next day I shipped the keys to Mr. Green, to be put back in the piano when it arrived. Travesty avoided!

The Polite Reform

By calling the tactic “civil” noncompliance, I mean to emphasize the element of social responsibility. I do not advocate disobeying laws just because one can get away with it. One must have a helpful, socially constructive purpose in mind. For example, you shouldn’t run red lights as a general practice. Even if there were no policemen to notice it, that behavior would be both rude and dangerous; that is, uncivil. But if you were driving an injured child to the emergency room late at night when no other cars were about, driving through the red light would be an act of civil noncompliance.

By using the term “noncompliance,” I mean to emphasize that this is a polite disobedience. It is not confrontational, and certainly never violent. Civil noncompliance does not presume a battle with government officials enforcing the law. The idea is to be unnoticed by them, or to receive their tacit support in avoiding a regulation’s requirements. The idea that officials may be willing to “look the other way” is an unusual point, for we are accustomed to portray bureaucrats as rigid, power-mad enforcers who enjoy making life difficult for ordinary people. There are undoubtedly some in this category, but most government employees are ordinary human beings who want to be friendly and helpful.

Government officials often see that regulations are irrational and harmful. Out of sympathy, or embarrassment, they can become allies.

I’m sure readers can cite cases of officials who helped them evade some destructive regulation. My favorite episode took place years ago in Peru when, as a student, I was applying for a residency visa. After filling out the form, I went to the cashier, who said the charge would be $1,800! Of course I couldn’t pay this astronomical fee (which had been set with oil company executives in mind). I was directed to the head of the agency. After hearing my plight, he looked at my form.

“Since you’re not 21 years old, you only have to pay the fee for a minor of age, which is $25.”

“Oh, but I’m afraid I’m over 21,” I replied. “My birthday was—”

“You don’t understand,” he said firmly. “Look here,” he tapped his finger on the form. “See, you’re not 21.”

I finally got it through my thick skull that he was trying to help me. “Oh, yes. I see. Right! Thank you!”

He called over to the cashier and told her, “Es menor de edad.”

She nodded and told me the charge was $25.

Government officials often see that regulations are irrational and harmful. Out of sympathy, or embarrassment, they can become allies in the tactics of civil noncompliance. In fact, sometimes they can be the leaders. Take the case of wolves in Idaho. The state’s environmentalists, hunters, and ranchers had worked out a modus vivendi for dealing with wolves, a system that involved compensation for ranchers who lose stock to wolves, and some hunting to cull the wolf population. This system ran afoul of the federal courts and the Fish and Wildlife Service, which in 2010 banned wolf hunting in Idaho. That decision no doubt made urban treehuggers happy, but it thoroughly disgusted Idahoans. In response, Idaho governor Butch Otter practiced civil non-compliance: he ordered state officials to stop investigating wolf kills.

A Quiet Revolution

Civil noncompliance is more than a strategy for getting by in an age of over-regulation. It affords an avenue for remaking social governance along new lines.

The political approach to addressing problems and managing social life is running out of steam. Generations ago, idealists believed that politics held the key to building a new society. Candidates, parties, and revolutionary movements — from communists to progressives, fascists to democratic socialists — were energized by the conviction that control of government would give them the power to set the country on the path to their dreamed-of Utopia.

No informed person now looks at politics in this way. Government today is more like an ineffectual goo, a spreading blob of noise and hypocrisy that can be neither directed nor reformed. Journalist Jonathan Rauch made this point in his 1994 book Demosclerosis (revised and expanded in1999 as Government’s End; Why Washington Stopped Working): “Government has become what it is and will remain: a large, incoherent, often incomprehensible mass that is solicitous of its clients, but impervious to any broad, coherent program of reform.”

It is also clear that the system cannot be overthrown. At bottom, the public wants big government. Yes, most people are aware that government fails miserably time after time, and they realize that most of the politicians who make the laws are shortsighted and hypocritical (when not downright corrupt). Nevertheless, the public clings to government as an object of worship. Government fills the human longing to believe in a higher power that cares for us, a God-like force that can answer our prayers in troubled times. Government also fills the need for heroes to worship, for famous figures the public can ooh and aah over. Finally, politics provides the excitement of competition for a nation of bored, media-hungry couch potatoes. To get an idea how difficult it would be to do away with big government, imagine trying to abolish God, Santa Claus, and the Super Bowl all at once.

We will have the show of politics, then. We will have candidates promising, lawmakers denouncing, and pressure groups nagging. But as civil noncompliance is increasingly practiced, this posturing will have less effect on the real world. The end point — Utopia, if you will — would be a society where politicians provide entertainment with their posturing, passing laws that promise this and prohibit that. Meanwhile citizens quietly ignore these laws in their daily lives and do what is right and helpful.

Such sensible times may yet be far off. But as I drove away from the customs checkpoint with those ivory piano keys rattling in the back of my car, I thought, I have seen the future, and it works!




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Non-Governmental Reform

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While our attention can be temporarily redirected to more pleasant matters, it does not take long to remember that the banking and financial systems are in need of serious reform.

The most recent episode of irresponsible trading in the US was by Knight Capital Group. The Group instituted a new software system with a glitch that led to a loss of over $400 million in less than an hour of trading. The glitch was the result of the software being put into practice before it could be fully tested. The thought was, if this new software could be implemented ahead of the competition, Knight Capital would gain an edge on its competitors. The rush to beat the competition led to a premature, and thus irresponsible, implementation of its new software. There is no evidence of intentional deception or corruption as was the case with Barclay's, Enron, or MF Global; but it was irresponsible.

Nevertheless, reform does not mean government-led or government-mandated action. Government oversight and intervention are not the answer; a restructuring of how companies operate and reward their employees is. Government reform is always fighting the previous battle. Reforming the way companies operate is the only real response.

The recommendations I make are necessary but not sufficient. I make them not only in consideration of my work as a political theorist and ethicist but also as a result of my experiences as a small business owner who struggles with how to balance profit, ethics, and the law while keeping his employees focused on doing the right thing as they make money.

As long as monetary gain is the motive there will always be corruption and irresponsible behavior, simply because the acquisition of money is not the simple effect of responsible or ethical behavior. We cannot eliminate money or profit. It would be equally foolhardy to think government regulations will do the trick. Whatever restrictions are passed, someone will be waiting to figure out a way around them. But there are three organizational modifications that businesses can make that will help curb abuse and irresponsible behavior. Of course nothing will prevent this sort of behavior entirely, and modifications will always need to be made to keep up with changing times, but what I outline will avoid the false assumptions of government regulation.

First, those in charge of carrying out a company's day-to-day operations should be different from those in charge of managing profit margins. For instance, if a salesperson at a car dealership earns a commission on the cars she sells, she will have no immediate incentive to be honest or fair with the customer. Her goal will be to sell cars at the highest possible price. The same holds true for financial planners. If a planner has to choose between two investments for a client, one that will earn him a higher commission even though it's not the best option for the client, he will be inclined to do so. To say or expect otherwise is naive. Similarly, if those in charge of developing investment software for Knight Capital (not those whose salaries were tied to successful trades) were also in charge of deciding when it was fit to implement, the outcome could have been different. A software engineer making a fixed sum, whose future income will depend on the quality of the software, will have more of an incentive to get it right.

Second, there needs to be transparency. When a firm makes fundamental alterations to business practices or operating procedures, the changes must be submitted to the company's board for approval and made known to all customers and investors whom the changes may affect. Not only will this provide an opportunity for internal checks to keep bad business practices from being put into action but it will make poorly conceived or unethical plans less likely to be presented in the first place. If I know that the changes I make will be open to scrutiny I will be much less likely to act badly.

The third recommendation is delay. When delay procedures are institutionalized, time is available to evaluate any changes in policy or procedure. For instance, if Knight Capital had had a mandatory 90-day evaluation period for any software changes there is a good chance that the most recent fiasco could have been avoided, which would have saved the firm and its investors a lot of money. The SEC already recognizes the benefit of delay, which is why it stops trading whenever a stock drops too drastically in too short of a time. When people are given pause, cooler heads usually prevail.

The recommendations I outline are not a cure-all, but they tap into fundamental issues that must be addressed if any worthwhile reform is to be implemented. Current reform efforts require outside regulation that is generally too slow to adapt and is too easily circumvented. If, however, we change the way companies do business by taking into account how people make decisions, we will be off to a better start.




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Schools: What Kind of Reform?

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Now that Governor Scott Walker has won the recall election, Wisconsin is pushing through the education reforms that were part of his 2010 legislative agenda. Like most education reform initiatives, Wisconsin’s contains some form of merit-based teacher pay and a voucher system. Indiana has proposed similar reforms, and Louisiana Governor Bobby Jindal and New Jersey Governor Chris Christie have made national headlines with education reform plans that in some ways resemble Wisconsin’s.

The proposals are pushed by Republicans who tout them as free-market solutions to the education problem in their respective states. But what they don’t say, or perhaps don’t see, about their proposals may make the system worse than the one we have.

Teachers object to having their pay tied to student performance. But this is what happens all across the private sector. If a manager’s employees are not doing what the company demands, the manager will be replaced. Likewise, if a high school coach’s team doesn’t win enough games, the coach will be replaced. Teachers must be held accountable if their students are not learning, and be rewarded if they are. It is time they were held to the same standard as everyone else.

The practical problem isn’t whether teachers should be assessed, but how they should be assessed. Yet that means there’s still a problem.

Standardized tests are the primary measure by which we judge a student’s level of achievement, and changing our measure of achievement must be among the first reforms enacted. Standardized testing prohibits experiential learning and diminishes the value of differentiated instruction. As an educator, I have found that certain topics are more attractive to students than other subjects, and those topics change from year to year and class to class. For instance, in 2001 my ninth-grade world history class we dedicated significantly more time to world religions, particularly Islam, than had originally been planned — because of what happened on 9/11. Had there been a standardized history exam I would never have been able to capitalize on the students’ interest, and we all would have missed out on a teachable moment.

So whatever measure states use to evaluate teachers must not limit their flexibility or autonomy. This goal is doubly difficult to achieve, however, when government enters the picture, even in the form of a school voucher system.

Supporters of school choice ground their argument in free-market principles. Opponents object that tax dollars will be siphoned away from already cash-strapped schools. The reply is: “If you want the money, you must earn it.” Where there is a monopoly, providers become inefficient and weak. Where there is competition, we see innovation and greater progress. A school voucher program works to break the monopoly to allow free market mechanisms to enter the education system. Ironically, however, it is the government that is seeking to instill this aspect of the free market.

We should be wary of that. If the government begins, indirectly, to fund private schools through vouchers, the schools will not have to be as competitive when trying to secure funding either from student tuition or from donors.

Any time government takes action there are unintended consequences, and there are at least two educational consequences that we can see looming on the horizon already. The first is an undermining of free market principles. The second is the opportunity for government to regulate private schools, with vouchers being construed as funded mandates. If private schools begin to depend on indirect government funding, then the government can gain leverage over what these schools teach and how they teach it.

There is no easy solution to our education problems. Problems with education have been documented for more than two millennia. No reform or policy will be the final solution, for education is a process, and improving it should be seen in the same way. Which is why, in the end, we should advocate reforms that promote the greatest amount of flexibility and accountability.




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The Metamorphosis

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When the Cuban people awoke last April 2011, they did not find themselves transformed into giant insects. That change had already occurred. Over the course of the previous 50 years, Fidel Castro had transformed the island into one giant beehive or ant colony laboring single-mindedly for his vision of a Caribbean utopia. What they did wake up to find was something entirely novel: a vibrant options market in 1950s vintage Detroit automotive classics.

In “Cuba: Change We Can Count On?” (Liberty, December 2010), I reported the passage of enabling legislation by the Cuban government to guide the Congress of the Communist Party in implementing far-reaching reforms to the economy. Though the fine print of implementation had yet to be worked out, a big change was decreed. It included the legalization of self-employment in ”dozens” of areas, the privatization of many small state-owned businesses as cooperatives, and the establishment of limited property rights in real estate and some bits of movable property such as cars, boats, and appliances, many of which can now be bought and sold.

The impetus for all this hope and change was money. Cuba’s economic and fiscal health was dire. The reforms hoped to eliminate one-fifth of the government work force (thereby cutting expenditures); incentivize former government employees into joining taxable petit-capitalist enterprises (thereby raising revenue); and — along with liberalized foreign investment reforms — stimulate the economy and improve Cuba’s fiscal prospects.

In April 2011 the details of the new legislation were announced. In a recent paper entitled “Economic Impact of New Employment, Tax and Financial Policies in Cuba,” presented at the XXI Annual Meeting of the Association for the Study of the Cuban Economy (Miami, August 2011), Luis R. Luis, former director, Latin America Department, of the Institute of International Finance and chief economist at the Organization of American States (OAS) in Washington, applied macroeconomic analysis and a crystal ball to predict the effects of the reforms.

To a populace that has never paid taxes, much less dealt with the fine points of business expense deductions and tax accounting protocols, the entireexperience must have been far from “liberalizing.”

Given the market sophistication of the Congress of the Cuban Communist Party — akin to that of the Creation Science Institute, sequencing the malaria genome — the reforms are still a work in progress. They aim primarily at improving state finances, but the use of price controls, size limits on firms, confiscatory tax rates, complicated monthly payment requirements, and petty regulatory activity “could result,” as Luis drily observes, “in even larger evasion than is usual in developing countries by single proprietorships and the self-employed, [and] will also result in many activities taking place wholly or partially underground, limiting tax revenue and fostering operation of undersized and inefficient activities.”

The very first modifications to the April bill were made a scant few weeks later, following a strike by cocheros (horse cart drivers) in Bayamo, Granma Province (née Oriente Province). The provincial capital is immortalized in Cuba’s national anthem as the birthplace of independence. It is a place redolent with symbolism, and a situation best handled with care. Bayamo cocheros, members of one of the newly privatized occupations, discovered that when they added their new tax liability to their clients’ bill, demand plummeted. So they went on strike.

The new self-employment taxes consist of four categories: social security tax, personal income tax, sales tax, and payroll tax. Let’s look at each.

1. The social security tax is levied at 25% of the tax base (in the US, it’s about 13% — with half paid by the employer). So far, so progressive.

2. The personal income tax gives a whole new meaning to “taxing the rich.” Marginal rates rise to 50% for annual incomes of $208! When combined with the social security levies, the personal tax nears 60%. Mindful of the reader’s attention span, I will skip all the qualifying fine print, ceilings, and permutations that complicate the base tax rate — except for business expenditures, aka deductions. These are limited to 20% or 40%, depending on the enterprise.

As Luis notes: “These rates discriminate against enterprises whose cost of inputs exceed[s] 40%, which will lead to curtailment of activity, firm creation, and widespread tax evasion.” Cocheros, for some unknown reason,were limited to a 20% business expenditures deduction.

To a populace that has never paid taxes, much less dealt with the fine points of business expense deductions and tax accounting protocols, the entireexperience must have been far from “liberalizing.” It was reminiscent of a farcical zarzuela, the Spanish version of a Gilbert and Sullivan operetta, with a dose of Monty Python thrown in for gravitas. The Congress responded by raising cocheros’ allowable deductions from 20% to 40%.

3. Sales taxes for all products are levied at 10%, except for farm products, which are taxed at 5%. Simple enough.

4. The new payroll taxes are not only complex; they (along with the other taxes) actually, as Luis observes, “pose a formidable constraint on employment.” The following summary — through no fault of Luis — is beyond this author’s ability to make intelligible, much less fun:

A new 25% payroll tax is instituted. The base of the tax is the overall wage bill except that there is a minimum taxable amount equal to a multiple of the average wage for specific workers calculated by the appropriate local labor office. The base is made progressive as the minimum taxable amount increases with the size of the payroll. Thus for firms with 1 to 9 workers, the minimum equals 1.5 times, rising to 2 times for those between 10 and 15 workers and to 3 times for those firms that have more than 15 employees.

So much for the new taxes. Will Cuba’s vision of self-employment provide the fiscal salvation the government so desperately needs, or is it just a tempest in a teapot?

If the government succeeds in shifting 250,000 government workers into self-employment, and they pay all their taxes, Luis estimates a $40 million revenue windfall for the government (not to mention all the supplies and material that would not be pilfered or stolen from state companies and offices, as supplements for employees’ meager salaries — a point important enough that Luis footnotes it in his report). But so far, no more than 50,000 state employees have taken the bait.

The eminent French art critic and father of surrealism, André Breton, visiting Cuba in the late 1920s, observed that, “Truly, Cuba is too surrealistic a country to be livable.”

Furthermore, it’s impossible to predict the tax compliance rate, which, worldwide, is low for the self-employed. “However,” Luis observes, “it is expected that the fiscal authorities will enforce the tax code with some vigor. Undoubtedly, the high tax rates will act as an incentive to evasion and to a reversion of business to the underground economy. Sizeable underreporting of revenues is to be anticipated.”

In 2011, Cuba’s population was 11 million. As of mid-May 2011, about 300,000 people were self-employed (excluding farmers); or (with slightly different numbers), never more than 3.5% of the labor force. Though the passage of the new legislation doubled the number of self-employed, a large percentage of them were people who came out of the black market closet and hope to become legal.

Luis’ analysis bears some contextual elaboration because, as Miguel Bretos, author of Matanzas: The Cuba Nobody Knows, has stated, “Those seeking to understand Cuban history in conventional ways are doomed to frustration.” He was referring to the eminent French art critic and father of surrealism, André Breton, who, visiting Cuba in the late 1920s, observed that, “Truly, Cuba is too surrealistic a country to be livable.”

What makes the details of the reforms so surreal is their schizophrenic set of objectives. When first proposed, the reforms were compared to the Chinese model: an infusion of capitalism to build wealth, with the Communist Party retaining absolute power. But, as the Chinese are discovering, when laissez faire markets infect a regime of total power, the liberty virus proves hard to cure.

The Chinese are a practical people with few Maoist ideologues left among them. No one, from the highest party apparatchik to the lowliest peasant, objects to becoming richer. Meanwhile, power is being incrementally ceded through a phenomenon usually foreign to absolutist regimes: limited but sensitive responses to popular dissatisfaction with corruption, judicial arbitrariness, environmental degradation, out-of-control eminent domain, and even — very slightly — the transfer of some political power. (For example, provincial officials in Wukan, Guangdong Province, are allowing local elections to take place.) Moreover, the Chinese are rather comfortable with duality; witness the Taoist concept of yin and yang.

It’s not quite so simple for Cubans.

The competing objectives of raising capital through economic liberalization while retaining absolute power are — in Cuba — complicated by a third factor that tips the reforms from the bipolar into the surreal: an anti-capitalist idealism so fervent that it equates private employment with involuntary servitude, profit with depravity, and self-employment with crimes against society. These attitudes not only saturate the nomenklatura — with their source and apogee in the moralist-in-chief, Fidel — but also pervade the majority of the Cuban population. Cubans are poor and unhappy; they sense that something is wrong with the system; they are starving for change. Yet they idolize St. Fidel’s idealism and venerate him as the conscience of the Revolution.

As the Chinese are discovering, when laissez faire markets infect a regime of total power, the liberty virus proves hard to cure.

National character, along with its kinfolk — ethnic, religious, cultural, and racial character — has fallen into disrepute as a way of defining a population. Whatever validity it might once have possessed has evaporated. It has been dismissed for its oversimplification, unscientific methodology, racist undertones, and complete absence of political correctness. But it retains a great deal of insight and literary utility, when considered informally. Hedrick Smith was definitely onto something when he described the Russian character as a cross between German and Mexican temperaments.

Cuba was ruled by Spain for over 400 years — longer than any of its other colonies. During the Latin American wars of independence in the 1820’s, Cuba remained staunchly Spanish. By the time it won its independence in 1902, it was considered an integral part of Spain. That date is so recent that in 1966 the last surviving Afro-Cuban general of the War for Independence, Generoso Campos Marquetti (by then living in the US, in exile from Castro’s revolution), was asked to testify before the US Congress during hearings investigating the nature of the Castro Revolution. It’s as if Nathanael Greene or Henry Knox had still been alive within our living memories, to comment on US current affairs.

The Cuban character is a diversely spiced mélange. Settled by immigrants from Galicia, Asturias, Catalonia, and the Basque Provinces in northern Spain, Cuba was infused with a strain of rigid, dour, doctrinaire, and humorless temperament. Fidel Castro is a second-generation Galician — he can’t dance, carry a tune, or tell a joke. Though he would reject the comparison (in spite of his early flirtations with Falangism and Fascism) Castro has much in common with the long-lived and long-ruling Francisco Franco and his Minister of Propaganda, José Millán-Astray — both Galicians.

General Millán-Astray was a serious parody of himself. Founder of the Spanish Foreign Legion and a decorated war hero who’d lost an arm and an eye, he personified Spanish fascism. He was obstinate and ruthless, yet impulsive; flamboyant, reckless, and self-aggrandizing. At rallies he resembled the mad Dr. Strangelove. Wearing one white glove and a black eye patch, he would exaggeratedly throw out his one arm in the Nationalist salute, while shouting his telltale mottoes, “Viva la muerte!” ("long live death") and “Death to intelligence!” ("death to the intelligentsia").

Cubans are poor and unhappy; they sense that something is wrong with the system; they are starving for change. Yet they idolize St. Fidel.

Ladino and Canary Islands immigrants added cunning, perspicacity, and some levity to the Cuban national character; Andalucians, Valencian gypsies, and West African slaves tempered the whole with rhythm and a wry sense of humor. Provincial and (in the case of the West Africans) tribal clubs, mutual aid societies, and other ethnic affiliations lasted well into the 1960s.

The Spanish component of the Cuban character alone suffices to explain the paradoxes inherent in holding multiple contradictory perspectives. Pepe Azcarraga, a 91-year-old Spaniard from a small village in Aragon (but now a retired college professor living in the US), personifies this Weltanschauung. He recounts that once, as a teenager, he accompanied a friend to the dry goods almacén to buy towels. On the way back, he helped her carry the goods, stacked on his doubled arms. As he passed by his own house, his mother, perched on the second-floor balcony, spotted him on the cobbled street below supporting the pile of towels in front of him as if they were the Blessed Sacrament and he was leading an Easter procession. She beckoned to him angrily. Puzzled, he detoured into his house.

Once inside, she asked him what the diablo he thought he was doing carrying a pile of towels for all the world to see. Before he could answer, she walloped the fear of propriety into him, moaning that “the whole town will think the Azcarraga family needs towels!”

Pepe tells the story without a hint of irony, as if his failure to anticipate the finer etiquette of towel buying in a gossipy small town were an obvious sign of his stupidity. At different times, depending on the context of the conversation, he’ll call himself a socialist, a capitalist, a libertarian, or simply a man of the left. He and his immediate family sided with Franco during the Civil War — for the sake of order and stability. Yet as members of the local militia guarding the frontier against infiltration from Republican guerrillas holding out in the French Pyrenees after the war, Pepe and his friends, when off-duty, would cross over and (avoiding politics) socialize with the enemy, many of whom were friends, family, and acquaintances. They shared snacks, smokes, stories, and beer. A devout Catholic who attends Mass every Sunday, he is nonetheless skeptical of the existence of an afterlife — and he harbors a sense of unworthiness that keeps him from communion.

Pepe stands on the shoulders of giant, original, way-outside-the-box thinkers: surrealist artist Salvador Dalí, whose melting clocks epitomize the persistence of memory; philosopher Miguel de Unamuno, who introduced doubt to faith, and found that they got along just fine; writer Miguel de Cervantes, whose Don Quixote — the patron saint of hopeless causes — made tilting at windmills not only intelligible but honorable; and Grand Inquisitor Tomás de Torquemada (literally, twist and burn), whose auto da fés melted heretics in order to save them. To an Anglo-Saxon who can only shake his head in perplexity, like a mental centrifuge spinning to separate the conflicting strains, little of this intellectual anarchy makes sense.

Fidel Castro, the Cuban Communist Party, and their recent economic reforms embody this cognitive dissonance. Luis’ assessment is not sanguine: “It is evident from the multiple constraints, prohibitions, regulations and high taxes involved in the new measures the authorities are striving to maintain tight control over the liberalization process. These controls will dampen or even fully contain the output and consumption gains from market opening.”

And the controls are extensive. One-hundred-and-seventy-eight self-employment occupations have been legalized (up from 157); most require little or no capital (animal caretaker, hairdresser, locksmith, plumber, mason, mattress repairman). A few others, such as room renting (though not to foreigners, and no subletting) and transportation services (truck and taxi driving) imply greater use of property or equipment. Restaurants are now allowed 50 tables, up from 20. Capital investment is capped at $800.

Even the most touted reform, the buying and selling of real estate, is less than meets the eye. Ownership is limited to domiciles — one residence and one vacation home — and possession is limited to citizens or foreigners permanently residing in Cuba.

Additionally, the domestic portion of the reforms requires that all transactions take place in nonconvertible pesos. (Cuba has dual currencies: convertible and non-convertible pesos — one for tourists, the other for Cubans — both highly controlled.) Foreign investment in the newly allowed enterprises is forbidden; as are family and personal remittances (also subject to taxes), which must only be used for personal consumption. Wholesale activities, inter-provincial trades, and most intermediation among firms are also forbidden.

“Intermediation” — a fancy word to describe the place that banks (among other entities) hold between savers and investors: they take deposits, then lend them out to entrepreneurs. Cuba’s (official) private savings rate for the last six years is about 2% of income — not an important source of financing for new enterprises, though probably understated because of non-bank and in-kind savings. As Luis again drily notes, “Most bank loans are made to state enterprises. A vibrant self-employment sector would be helped greatly by access to credit from the banking system. This would require building-up a credit system, with an important role for micro-credits by local branches of banks with appropriate credit expertise . . . [as in] Asia.”

Fidel Castro is a second-generation Galician — he can’t dance, carry a tune, or tell a joke.

Any reforms along those lines are unlikely, because they would undermine the institutionalized apartheid system that attempts to minimize economic fraternization between Cubans and foreigners. Very few of the newly approved occupations affect the export or tourist sector, and the government monopoly on labor for joint venture and foreign enterprises has not been affected. It is surprising that the new employment and tax measures do not address Cuba’s external accounts, even though more foreign investment — under the pre-existing framework — is being attracted.

Luis boldly sums up his report with an estimate of the impact of the reforms on Cuba’s GDP. He admits he’s on shaky ground — with disclaimers, caveats, weasel words, and the assumption that many more black-market enterprises will come into the open. Despite the effects of government controls, he broadly predicts a 2% GDP increase as a low estimate, with a 6.4% GDP increase if all the hoped-for 250,000 state employees become successful entrepreneurs, make lots of money, and pay all their taxes.

The Cuban reforms are a tug-of-war among various conflicting objectives: on the practical level, increasing state revenue while maintaining total state power; on the philosophical level, allowing enough “human action” (in the Misesian sense) without diluting the “social justice” objectives of the Revolution by introducing greed, ambition, and a subversive focus on individuality.

On that last point — to paraphrase Charles Darwin, who, at the conclusion of The Origin of Species, foretold that “light will be thrown on the origin of man” — the Cuban reforms will shed much light on how far the capitalist goose that lays the eggs of prosperity can be starved, strangled, and robbed, without killing it.




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