In the Wall Street Journal yesterday, Alan Reynolds pointed out some of the flaws in the data being used in the income inequality debate. Far too many policymakers, analysts, and reporters assume that the data showing rising inequality is carved in stone, but it isn’t. Some portion of the supposed change in income inequality in recent decades is a statistical artifact due to changes in marginal tax rates and other factors.

One of Alan’s points is that fluctuations in capital gains (CG) realizations by the top 1 percent of earners plays an important role in that group’s measured income share out of total American income. I constructed two charts with Alan’s data to illustrate the point. The two charts are scatter plots using data from 1979 to 2009.

Chart 1: Lower CG Tax Rates Lead to Higher CG Realizations for the Top 1%. In years when we had a higher 28 percent CG tax rate, the share of high earners’ income from CG is lower. In years when we’ve had lower 15 and 20 percent CG rates, the share is higher.

Chart 2: Higher CG Realizations Increase the Measured Share of the Top Earners’ Income. In years with lower CG tax rates, high earners realize more CG, and that inflates their measured share of total American income.

(Note for data wonks: Regressions on these two relationships were highly statistically significant, i.e. high F‑statistics).

When Senator William Proxmire (D‑WI) proposed and passed the Fair Credit Reporting Act forty years ago, he almost certainly believed that the law would fix the problems he cited in introducing it. It hasn’t. The bulk of the difficulties he saw in credit reporting still exist today, at least to hear consumer advocates tell it.

Advocates of sweeping privacy legislation and other regulation of the information economy would do well to heed the lessons offered by the FCRA. Top-down federal regulation isn’t up to the task of designing the information society. That’s the upshot of my new Policy Analysis, “Reputation under Regulation: The Fair Credit Reporting Act at 40 and Lessons for the Internet Privacy Debate.” In it, I compare Senator Proxmire’s goals for the credit reporting industry when he introduced the FCRA in 1969 against the results of the law today. Most of the problems that existed then persist today. Some problems with credit reporting have abated and some new problems have emerged.

Credit reporting is a complicated information business. Challenges come from identity issues, judgments about biography, and the many nuances of fairness. But credit reporting is simple compared to today’s expanding and shifting information environment.

“Experience with the Fair Credit Reporting Act counsels caution with respect to regulating information businesses,” I write in the paper. “The federal legislators, regulators, and consumer advocates who echo Senator Proxmire’s earnest desire to help do not necessarily know how to solve these problems any better than he did.”

Management of the information economy should be left to the people who are together building it and using it, not to government authorities. This is not because information collection, processing, and use are free of problems, but because regulation is ill-equipped to solve them.

The debate between Cato adjunct scholar Shirley Svorny and the Manhattan Institute’s Ted Frank continues today over at PointofLaw, as Svorny points out that while no system is entirely rational, a liability system offers certain benefits that the alternatives proposed do not.

This week, experts at the (neo)conservative American Enterprise Institute (AEI) released a report on how to deal with a nuclear-armed Iran.

The authors argue that because of the “rising consensus” that a preemptive attack is unappealing, and that sanctions likely will fail, they recommend “a coherent Iran containment policy.” That approach entails, among other things, that America “work toward a political transformation, if not a physical transformation, of the Tehran regime.” Leaving aside the fact that Washington has already once “physically transformed the Tehran regime” — when alongside the British it overthrew Iran’s democratically elected prime minister in 1953 and restored the Shah — there is a broader problem that comes with listening to proponents of the calamitous decision to invade Iraq.

Take, for instance, report co-author Danielle Pletka, who years ago decreed “Saddam’s entire Ba’athist government must be replaced.” Little surprise that someone who promoted a war based on a web of misleading information is now peddling the notion that Iran is less than a year from obtaining a nuclear weapon.

More credible voices suggest otherwise. The nonprofit Arms Control Association (ACA) observed that the most-recent IAEA report suggests “[I]t remains apparent that a nuclear-armed Iran is still not imminent nor is it inevitable.” Iran was engaged in nuclear weapons development activities until it stopped in 2003, and as Cato’s Justin Logan observes, the IAEA’s own report shows there is no definitive evidence of Iran’s diversion of fissile material.

When Pletka was called out for her “less than a year” prediction, she turned up her nose and snapped:

Quibblers will suggest that there are important “ifs” in both these assessments. And yes, the key “if” is “if” Iran decides to build a bomb. So, I suppose when I said “less than a year away from having a nuclear weapon,” I should have added, “if they want one.” But… isn’t that the point? Do we want to leave this decision up to Khamenei?

Confronted with ambiguous information, and forced to infer intentions, hawks evince the very same arrogance and overconfidence that helped open the door for Iranian influence in the region in the first place by toppling Saddam Hussein’s regime (Pletka advocated repeatedly for this leading up to the 2003 invasion). Pletka and others who years ago had the gall to argue that Iraq “will end when it ends” are today worthy of being ignored on Iran.

Cross-posted from the Skeptics at the National Interest.

Cato adjunct scholar Shirley Svorny’s recent paper, “Could Mandatory Caps on Medical Malpractice Damages Harm Consumers?,” has sparked a debate with the Manhattan Institute’s Ted Frank at PointOfLaw​.com.

My new post at Huffington Post looks at a dinner of the Panetta Institute and what it says about cozy relationships among the Washington establishment:

So let’s see … an institute founded by and bearing the name of the secretary of defense, who also served 17 years in Congress, including four years as chairman of the House Budget Committee, and as director of the Office of Management and Budget, White House chief of staff, and director of the CIA, is giving an award to his immediate predecessor, who also served as CIA director, and to a quintessentially establishment Washington journalist, and to a scholar at both Georgetown University and the Brookings Institution who in addition to her time at the Federal Reserve has served as director of the Congressional Budget Office, director of OMB, co-chair of the Bipartisan Policy Center’s Task Force on Debt Reduction. That is like an entire Washington establishment at one head table.

More on what this establishment has wrought, and right and wrong ways to break up the iron triangle, at the link.

Two years ago the Washington Post reported that the Immigration and Customs Enforcement agency brought dangerous Mexican drug traffickers to the U.S. who, while continuing their criminal activities in Mexico and the U.S., also served as informants to the federal authorities in their war on drugs.

In June, Operation Fast and Furious came to light where the Bureau of Alcohol, Tobacco, Firearms and Explosives (ATF) allowed suspicious straw-purchasers of firearms to buy weapons in the U.S. and smuggle them into Mexico. The purpose was to track the guns all the way to the ultimate buyer—a Mexican drug trafficking organization. Overall, the ATF facilitated the purchase of hundreds of guns by Mexican cartels. Many were later found in crime scenes in Mexico, including one where a U.S. Border Patrol agent was assassinated.

On Sunday, the New York Times reported that the Drug Enforcement Agency has been laundering millions of dollars for Mexican cartels. The goal of the undercover mission is to follow the money all the way up to the top ranks of the criminal organizations. However, as the NYT notes, “So far there are few signs that following the money has disrupted the cartels’ operations and little evidence that Mexican drug traffickers are feeling any serious financial pain.”

So there we have it: in the name of the war on drugs, the federal government has provided safe havens to Mexican drug traffickers, facilitated their purchase of powerful firearms, and has even laundered millions of dollars for the cartels.

After spending millions of dollars toward fighting the drug war in Mexico, the United States has little to show for its efforts. It seems Washington is becoming more desperate each year to produce new leads and results. These three incidents display a stunning lack of foresight and borders on the federal government aiding the Mexican drug cartels, with little to show in return. The unintended consequences of these programs aimed at dismantling the cartels would be laughable were it not for the thousands that have died in Mexico’s drug related violence.

It is time for the United States to rethink the war on drugs and consider policies that will successfully undermine the Mexican drug cartels.