Reducing Systemic Risk in the Financial Sector. By Alice M. Rivlin, Senior Fellow, Economic Studies. Testimony: House Committee on Financial Services & Senate Committee on Banking, Housing and Urban Affairs
July 21, 2009 —
Mr. Chairman and members of the Committee: I am happy to be back before this Committee to give my views on reducing systemic risk in financial services. I will focus on changes in our regulatory structure that might prevent another catastrophic financial meltdown and what role the Federal Reserve should play in a new financial regulatory system.
It is hard to overstate the importance of the task facing this Committee. Market capitalism is a powerful system for enhancing human economic wellbeing and allocating savings to their most productive uses. But markets cannot be counted on to police themselves. Irrational herd behavior periodically produces rapid increases in asset values, lax lending and over-borrowing, excessive risk taking, and out-sized profits followed by crashing asset values, rapid deleveraging, risk aversion, and huge loses. Such a crash can dry up normal credit flows and undermine confidence, triggering deep recession and massive unemployment. When the financial system fails on the scale we have experienced recently the losers are not just the wealthy investors and executives of financial firms who took excessive risks. They are average people here and around the world whose jobs, livelihoods, and life savings are destroyed and whose futures are ruined by the effect of financial collapse on the world economy. We owe it to them to ferret out the flaws in the financial system and the failures of regulatory response that allowed this unnecessary crisis to happen and to mend the system so to reduce the chances that financial meltdowns imperil the world’s economic wellbeing.
Approaches to Reducing Systemic Risk
The crisis was a financial “perfect storm” with multiple causes. Different explanations of why the system failed—each with some validity—point to at least three different approaches to reducing systemic risk in the future.
The highly interconnected system failed because no one was in charge of spotting the risks that could bring it down. This explanation suggests creating a Macro System Stabilizer with broad responsibility for the whole financial system charged with spotting perverse incentives, regulatory gaps and market pressures that might destabilize the system and taking steps to fix them. The Obama Administration would create a Financial Services Oversight Council (an interagency group with its own staff) to perform this function. I think this responsibility should be lodged at the Fed and supported by a Council.
The system failed because expansive monetary policy and excessive leverage fueled a housing price bubble and an explosion of risky investments in asset backed securities. While low interest rates contributed to the bubble, monetary policy has multiple objectives. It is often impossible to stabilize the economy and fight asset price bubbles with a single instrument. Hence, this explanation suggests stricter regulation of leverage throughout the financial system. Since monetary policy is an ineffective tool for controlling asset price bubbles, it should be supplemented by the power to change leverage ratios when there is evidence of an asset price bubble whose bursting that could destabilize the financial sector. Giving the Fed control of leverage would enhance the effectiveness of monetary policy. The tool should be exercised in consultation with a Financial Services Oversight Council.
The system crashed because large inter-connected financial firms failed as a result of taking excessive risks, and their failure affected other firms and markets. This explanation might lead to policies to restrain the growth of large interconnected financial firms—or even break them up—and to expedited resolution authority for large financial firms (including non-banks) to lessen the impact of their failure on the rest of the system. Some have argued for the creation of a single consolidated regulator with responsibility for all systemically important financial institutions. The Obama Administration proposes making the Fed the consolidated regulator of all Tier One Financial Institutions. I believe it would be a mistake to identify specific institutions as too big to fail and an even greater mistake to give this responsibility to the Fed. Making the Fed the consolidated prudential regulator of big interconnected institutions would weaken its focus on monetary policy and the overall stability of the financial system and could threaten its independence.
The Case for a Macro System Stabilizer
One reason that regulators failed to head off the recent crisis is that no one was explicitly charged with spotting the regulatory gaps and perverse incentives that had crept into our rapidly changing financial structure in recent decades. In recent years, anti-regulatory ideology kept the United States from modernizing the rules of the capitalist game in a period of intense financial innovation and perverse incentives to creep in.
Perverse incentives. Lax lending standards created the bad mortgages that were securitized into the toxic assets now weighting down the books of financial institutions. Lax lending standards by mortgage originators should have been spotted as a threat to stability by a Macro System Stabilizer—the Fed should have played this role and failed to do so—and corrected by tightening the rules (minimum down payments, documentation, proof that the borrow understands the terms of the loan and other no-brainers). Even more important, a Macro System Stabilizer should have focused on why the lenders had such irresistible incentives to push mortgages on people unlikely to repay. Perverse incentives were inherent in the originate-to-distribute model which left the originator with no incentive to examine the credit worthiness of the borrower. The problem was magnified as mortgage-backed securities were re-securitized into more complex instruments and sold again and again. The Administration proposes fixing that system design flaw by requiring loan originators and securitizers to retain five percent of the risk of default. This seems to me too low, especially in a market boom, but it is the right idea.
The Macro System Stabilizer should also seek other reasons why securitization of asset-backed loans—long thought to be a benign way to spread the risk of individual loans—became a monster that brought the world financial system to its knees. Was it partly because the immediate fees earned by creating and selling more and more complex collateralized debt instruments were so tempting that this market would have exploded even if the originators retained a significant portion of the risk? If so, we need to change the reward structure for this activity so that fees are paid over a long enough period to reflect actual experience with the securities being created.
Other examples, of perverse incentives that contributed to the violence of the recent perfect financial storm include Structured Investment Vehicles (SIV’s) that hid risks off balance sheets and had to be either jettisoned or brought back on balance sheet at great cost; incentives of rating agencies to produce excessively high ratings; and compensation structures of corporate executives that incented focus on short-term earnings at the expense the longer run profitability of the company.
The case for creating a new role of Macro System Stabilizer is that gaps in regulation and perverse incentives cannot be permanently corrected. Whatever new rules are adopted will become obsolete as financial innovation progresses and market participants find ways around the rules in the pursuit of profit. The Macro System Stabilizer should be constantly searching for gaps, weak links and perverse incentives serious enough to threaten the system. It should make its views public and work with other regulators and Congress to mitigate the problem.
The Treasury makes the case for a regulator with a broad mandate to collect information from all financial institutions and “identify emerging risks.” It proposes putting that responsibility in a Financial Services Oversight Council, chaired by the Treasury, with its own permanent expert staff. The Council seems to me likely to be cumbersome. Interagency councils are usually rife with turf battles and rarely get much done. I think the Fed should have the clear responsibility for spotting emerging risks and trying to head them off before it has to pump trillions into the system to avert disaster. The Fed should make a periodic report to the Congress on the stability of the financial system and possible threats to it. The Fed should consult regularly with the Treasury and other regulators (perhaps in a Financial Services Oversight Council), but should have the lead responsibility. Spotting emerging risks would fit naturally with the Fed’s efforts to monitor the state of the economy and the health of the financial sector in order to set and implement monetary policy. Having explicit responsibility for monitoring systemic risk—and more information on which to base judgments would enhance its effectiveness as a central bank.
Controlling Leverage. The biggest challenge to restructuring the incentives is: How to avoid excessive leverage that magnified the upswing and turned the downswing into a rout? The aspect of the recent financial extravaganza that made it truly lethal was the over-leveraged superstructure of complex derivatives erected on the shaky foundation of America’s housing prices. By itself, the housing boom and bust would have created distress in the residential construction, real estate, and mortgage lending sectors, as well as consumer durables and other housing related markets, but would not have tanked the economy. What did us in was the credit crunch that followed the collapse of the highly leveraged financial superstructure that pumped money into the housing sector and became a bloated monster.
One approach to controlling serious asset–price bubbles fueled by leverage would be to give the Fed the responsibility for creating a bubble Threat Warning System that would trigger changes in permissible leverage ratios across financial institutions. The warnings would be public like hurricane or terrorist threat warnings. When the threat was high—as demonstrated by rapid price increases in an important class of assets, such as land, housing, equities, and other securities without an underlying economic justification--the Fed would raise the threat level from, say, Three to Four or Yellow to Orange. Investors and financial institutions would be required to put in more of their own money or sell assets to meet the requirements. As the threat moderated, the Fed would reduce the warning level.
The Fed already has the power to set margin requirements—the percentage of his own money that an investor is required to put up to buy a stock if he is borrowing the rest from his broker. Policy makers in the 1930s, seeking to avoid repetition of the stock price bubble that preceded the 1929 crash, perceived that much of the stock market bubble of the late 1920s had been financed with money borrowed on margin from broker dealers and that the Fed needed a tool distinct from monetary policy to control such borrowing in the future.
During the stock market bubble of the late 1990s, when I was Vice Chair of the Fed’s Board of Governors, we talked briefly about raising the margin requirement, but realized that the whole financial system had changed dramatically since the 1920s. Stock market investors in the 1990s had many sources of funds other than borrowing on margin. While raising the margin requirements would have been primarily symbolic, I believe with hindsight that we should have done it anyway in hopes of showing that we were worried about the bubble.
The 1930’s legislators were correct: monetary policy is a poor instrument for counteracting asset price bubbles; controlling leverage is likely to be more effective. The Fed has been criticized for not raising interest rates in 1998 and the first half of 1999 to discourage the accelerating tech stock bubble. But it would have had to raise rates dramatically to slow the market’s upward momentum—a move that conditions in the general economy did not justify. Productivity growth was increasing, inflation was benign and responding to the Asian financial crisis argued for lowering rates, not raising them. Similarly, the Fed might have raised rates from their extremely low levels in 2003 or raised them earlier and more steeply in 2004-5 to discourage the nascent housing price bubble. But such action would have been regarded as a bizarre attempt to abort the economy’s still slow recovery. At the time there was little understanding of the extent to which the highly leveraged financial superstructure was building on the collective delusion that U.S. housing prices could not fall. Even with hindsight, controlling leverage (along with stricter regulation of mortgage lending standards) would have been a more effective response to the housing bubble than raising interest rates. But regulators lacked the tools to control excessive leverage across the financial system.
In the wake of the current crisis, financial system reformers have approached the leverage control problem in pieces, which is appropriate since financial institutions play diverse roles. However the Federal Reserve—as Macro System Stabilizer—could be given the power to tie the system together so that various kinds of leverage ratios move in the same direction simultaneously as the threat changes.
With respect to large commercial banks and other systemically important financial institutions, for example, there is emerging consensus that higher capital ratios would have helped them weather the recent crisis, that capital requirements should be higher for larger, more interconnected institutions than for smaller, less interconnected ones, and that these requirements should rise as the systemic threat level (often associated with asset price bubbles) goes up.
With respect to hedge funds and other private investment funds, there is also emerging consensus that they should be more transparent and that financial derivatives should be traded on regulated exchanges or at least cleared on clearinghouses. But such funds might also be subject to leverage limitations that would move with the perceived threat level and could disappear if the threat were low.
One could also tie asset securitization into this system. The percent of risk that the originator or securitizer was required to retain could vary with the perceived threat of an asset price bubble. This percentage could be low most of the time, but rise automatically if Macro System Stabilizer deemed the threat of a major asset price bubble was high. One might even apply the system to rating agencies. In addition to requiring rating agencies to be more transparent about their methods and assumptions, they might be subjected to extra scrutiny or requirements when the bubble threat level was high.
Designing and coordinating such a leverage control system would not be an easy thing to do. It would require create thinking and care not to introduce new loopholes and perverse incentives. Nevertheless, it holds hope for avoiding the run away asset price exuberance that leads to financial disaster.
Systemically Important Institutions
The Obama Administration has proposed that there should be a consolidated prudential regulator of large interconnected financial institutions (Tier One Financial Holding Companies) and that this responsibility be given to the Federal Reserve. I think this is the wrong way to go.
It is certainly important to reduce the risk that large interconnected institutions fail as a result of engaging in highly risky behavior and that the contagion of their failure brings down others. However, there are at least three reasons for questioning the wisdom of identifying a specific list of such institutions and giving them their own consolidated regulator and set of regulations. First, as the current crisis has amply illustrated, it is very difficult to identify in advance institutions that pose systemic risk. The regulatory system that failed us was based on the premise that commercial banks and thrift institutions that take deposits and make loans should be subject to prudential regulation because their deposits are insured by the federal government and they can borrow from the Federal Reserve if they get into trouble. But in this crisis, not only did the regulators fail to prevent excessive risk-taking by depository institutions, especially thrifts, but systemic threats came from other quarters. Bear Stearns and Lehman Brothers had no insured deposits and no claim on the resources of the Federal Reserve. Yet when they made stupid decisions and were on the edge of failure the authorities realized they were just as much a threat to the system as commercial banks and thrifts. So was the insurance giant, AIG, and, in an earlier decade, the large hedge fund, LTCM. It is hard to identify a systemically important institution until it is on the point of bringing the system down and then it may be too late.
Second, if we visibly cordon off the systemically important institutions and set stricter rules for them than for other financial institutions, we will drive risky behavior outside the strictly regulated cordon. The next systemic crisis will then likely come from outside the ring, as it came this time from outside the cordon of commercial banks.
Third, identifying systemically important institutions and giving them their own consolidated regulator tends to institutionalize ‘Too Big to Fail’ and create a new set of GSE-like institutions. There is a risk that the consolidated regulator will see its job as not allowing any of its charges to go down the tubes and is prepared to put taxpayer money at risk to prevent such failures.
Higher capital requirements and stricter regulations for large interconnected institutions make sense, but I would favor a continuum rather than a defined list of institutions with its own special regulator. Since there is no obvious place to put such a responsibility, I think we should seriously consider creating a new financial regulator. This new institution could be similar to the UK’s FSA, but structured to be more effective than the FSA proved in the current crisis. In the US one might start by creating a new consolidated regulator of all financial holding companies. It should be an independent agency but might report to a board composed of other regulators, similar to the Treasury proposal for a Council for Financial Oversight. As the system evolves the consolidated regulator might also subsume the functional regulation of nationally chartered banks, the prudential regulation of broker-dealers and nationally chartered insurance companies.
I don’t pretend to have a definitive answer to how the regulatory boxes should best be arranged, but it seems to me a mistake to give the Federal Reserve responsibility for consolidated prudential regulation of Tier One Financial Holding Companies, as proposed by the Obama Administration. I believe the skills needed by an effective central bank are quite different from those needed to be an effective financial institution regulator. Moreover, the regulatory responsibility would likely grow with time, distract the Fed from its central banking functions, and invite political interference that would eventually threaten the independence of monetary policy.
Especially in recent decades, the Federal Reserve has been a successful and widely respected central bank. It has been led by a series of strong macro economists—Paul Volcker, Alan Greenspan, Ben Bernanke—who have been skillful at reading the ups and downs of the economy and steering a monetary policy course that contained inflation and fostered sustainable economic growth. It has played its role as banker to the banks and lender of last resort—including aggressive action with little used tools in the crisis of 2008-9. It has kept the payments system functioning even in crises such as 9/11, and worked effectively with other central banks to coordinate responses to credit crunches, especially the current one. Populist resentment of the Fed’s control of monetary policy has faded as understanding of the importance of having an independent institution to contain inflation has grown—and the Fed has been more transparent about its objectives. Although respect for the Fed’s monetary policy has grown in recent years, its regulatory role has diminished. As regulator of Bank Holding Companies, it did not distinguish itself in the run up to the current crisis (nor did other regulators). It missed the threat posed by the deterioration of mortgage lending standards and the growth of complex derivatives.
If the Fed were to take on the role of consolidated prudential regulator of Tier One Financial Holding Companies, it would need strong, committed leadership with regulatory skills—lawyers, not economists. This is not a job for which you would look to a Volcker, Greenspan or Bernanke. Moreover, the regulatory responsibility would likely grow as it became clear that the number and type of systemically important institutions was increasing. My fear is that a bifurcated Fed would be less effective and less respected in monetary policy. Moreover, the concentration of that much power in an institution would rightly make the Congress nervous unless it exercised more oversight and accountability. The Congress would understandably seek to appropriate the Fed’s budget and require more reporting and accounting. This is not necessarily bad, but it could result in more Congressional interference with monetary policy, which could threaten the Fed’s effectiveness and credibility in containing inflation.
In summary, Mr. Chairman: I believe that we need an agency with specific responsibility for spotting regulatory gaps, perverse incentives, and building market pressures that could pose serious threats to the stability of the financial system. I would give the Federal Reserve clear responsibility for Macro System Stability, reporting periodically to Congress and coordinating with a Financial System Oversight Council. I would also give the Fed new powers to control leverage across the system—again in coordination with the Council. I would not create a special regulator for Tier One Financial Holding Companies, and I would certainly not give that responsibility to the Fed, lest it become a less effective and less independent central bank.
Thank you, Mr. Chairman and members of the Committee.
Tuesday, August 4, 2009
Why Revive the Cold War? - Russia and the U.S. were reducing their nuclear arsenals without ‘arms control’
Why Revive the Cold War? By DOUGLAS J. FEITH AND ABRAM N. SHULSKY
Russia and the U.S. were reducing their nuclear arsenals without ‘arms control.’
WSJ, Aug 04, 2009
The Cold War ended nearly 20 years ago. Isn’t it time we abandoned policies specifically designed to deal with it? Arms-control talks are a case in point. Why should U.S. officials act as if only a Cold War-style treaty can save the United States and Russia from a destabilizing nuclear arms race?
Despite President Barack Obama’s strange, pre-Moscow summit remark last month in a New York Times interview that the U.S. and Russia are continuing to “grow” their nuclear stockpiles, both countries have in fact reduced their stockpiles drastically since the Soviet Union disintegrated in 1991. Those reductions resulted from unilateral decisions, not from arms-control bargaining.
Thus, on Nov. 13, 2001, President George W. Bush announced that the U.S. would unilaterally reduce its “operationally deployed strategic nuclear warheads to a level between 1,700 and 2,200 over the next decade.” This was far less than the 6,000 limit allowed under the 1991 Strategic Arms Reduction Treaty (START). Russian President Vladimir Putin promptly said in December 2001 that Russia would similarly reduce its nuclear forces.
Thus, benefiting from the happy reality that the Cold War was over, each country felt free to cut its arsenal, whether or not the other committed itself to do so. The 2002 Moscow Treaty, which simply made legally binding the reduction pledges each president had already announced, was negotiated as a friendly gesture to Russia. U.S. officials did not see it as a strategic necessity, but Mr. Putin wanted formal acknowledgment that Russia retained nuclear-arms parity with the U.S., though it could no longer be seen as America’s peer overall.
Now, with START set to expire in December, it is Mr. Obama who’s intent on signing a new treaty. He says U.S.-Russian arms reductions will help stem nuclear proliferation.
Mr. Obama here is mixing up pretext and policy. When criticized for pursuing nuclear weapons, proliferators like North Korea and Iran make diplomatic talking points out of the size of the great powers’ arsenals. They try to shift the focus away from themselves by complaining that the Americans and Russians aren’t working hard enough to reach disarmament goals envisioned in the Nuclear Non-Proliferation Treaty. But depriving proliferators of such talking points won’t affect their incentives to acquire nuclear weapons—or the world’s incentives to counter the dangers that the North Korean and Iranian nuclear programs pose to international peace.
Nor would cutting the U.S. and Russian arsenals by a few hundred weapons do anything significant to achieve Mr. Obama’s goal of a world without nuclear weapons. The roadblock is the fact of U.S. dependence on nuclear deterrence. So long as the security of the U.S. and of our allies and friends requires such dependence, a non-nuclear world will remain out of reach. Inventing a way to dispense with nuclear deterrence will require a political or technological breakthrough of major magnitude. Retaining our dependence on nuclear weapons even at somewhat lower levels is an admission by the Obama administration that the proposed reductions don’t actually bring us closer to a non-nuclear world.
With Mr. Obama openly eager for a START follow-on treaty, Russian leaders have chosen to play coy and become demanding. So what might the U.S. have to pay for it? The price is likely to be high, as suggested by the “Joint Understanding” the U.S. and Russian presidents announced last month in Moscow.
Point 5 of the Understanding specifies that the new treaty is to contain “a provision on the interrelationship of strategic offensive and strategic defensive arms.” Russia will use this language (which Bush administration officials repeatedly rejected) to try to derail U.S. plans for a Europe-based missile system designed to counter Iranian missile threats. If Russia succeeds here, the new treaty would increase the value to Iran of acquiring nuclear weapons. By making it easier for a nuclear-armed Iran to threaten all of Europe and eventually the U.S., the new treaty would promote rather than discourage nuclear proliferation.
Similarly, according to Point 6, the new treaty is to contain a provision on how non-nuclear, long-range strike weapons may affect strategic stability. Russia wants this to impede U.S. development of such weapons, probably by requiring that they be counted as if they had nuclear warheads. Hence the new treaty could shut down one of the more promising avenues for reducing U.S. dependence on nuclear arms for strategic strike.
All in all, the Obama administration’s nuclear weapons policies appear confused and self-defeating. Mr. Obama seems willing to pay for arms reductions that Russian officials have made clear will occur soon, due to aging or the planned modernization of systems, with or without a new treaty. Moreover, the Obama administration is opposing modernization measures designed to protect against the risk that the aging of U.S. weapons will compromise their safety or reliability.
There is an important connection between proliferation risks and modernization. But the Obama administration seems to have it backwards. If the U.S. fails to ensure the continuing safety and reliability of its arsenal, it could cause the collapse of the U.S. nuclear umbrella. Countries such as Japan, South Korea, Taiwan, Australia and others might decide that their security requires them to acquire their own nuclear arsenals, rather than rely indefinitely on the U.S. The world could reach a tipping point, with cascading nuclear proliferation, as the bipartisan Congressional Strategic Posture Commission warned in its May 2009 report.
The Obama administration’s nuclear weapons policies—including its treaty talks with Russia—affect the way America’s friends and potential adversaries view the integrity of the U.S. deterrent. The wrong policies can endanger the U.S. directly. They can also cause other states to lose confidence in the American nuclear umbrella and to seek security in national nuclear capabilities.
If that happens, the dangers of a nuclear war somewhere in the world would go up substantially. It would not be the first time a U.S. government helped bring about the opposite of its intended result—but it might be one of the costliest mistakes ever.
Mr. Feith, a former under secretary of defense for policy (2001-05), is the author of “War and Decision: Inside the Pentagon at the Dawn of the War on Terrorism” (HarperCollins, 2008). Mr. Shulsky is a former Defense Department official who dealt with arms control issues. Both are senior fellows at the Hudson Institute.
Russia and the U.S. were reducing their nuclear arsenals without ‘arms control.’
WSJ, Aug 04, 2009
The Cold War ended nearly 20 years ago. Isn’t it time we abandoned policies specifically designed to deal with it? Arms-control talks are a case in point. Why should U.S. officials act as if only a Cold War-style treaty can save the United States and Russia from a destabilizing nuclear arms race?
Despite President Barack Obama’s strange, pre-Moscow summit remark last month in a New York Times interview that the U.S. and Russia are continuing to “grow” their nuclear stockpiles, both countries have in fact reduced their stockpiles drastically since the Soviet Union disintegrated in 1991. Those reductions resulted from unilateral decisions, not from arms-control bargaining.
Thus, on Nov. 13, 2001, President George W. Bush announced that the U.S. would unilaterally reduce its “operationally deployed strategic nuclear warheads to a level between 1,700 and 2,200 over the next decade.” This was far less than the 6,000 limit allowed under the 1991 Strategic Arms Reduction Treaty (START). Russian President Vladimir Putin promptly said in December 2001 that Russia would similarly reduce its nuclear forces.
Thus, benefiting from the happy reality that the Cold War was over, each country felt free to cut its arsenal, whether or not the other committed itself to do so. The 2002 Moscow Treaty, which simply made legally binding the reduction pledges each president had already announced, was negotiated as a friendly gesture to Russia. U.S. officials did not see it as a strategic necessity, but Mr. Putin wanted formal acknowledgment that Russia retained nuclear-arms parity with the U.S., though it could no longer be seen as America’s peer overall.
Now, with START set to expire in December, it is Mr. Obama who’s intent on signing a new treaty. He says U.S.-Russian arms reductions will help stem nuclear proliferation.
Mr. Obama here is mixing up pretext and policy. When criticized for pursuing nuclear weapons, proliferators like North Korea and Iran make diplomatic talking points out of the size of the great powers’ arsenals. They try to shift the focus away from themselves by complaining that the Americans and Russians aren’t working hard enough to reach disarmament goals envisioned in the Nuclear Non-Proliferation Treaty. But depriving proliferators of such talking points won’t affect their incentives to acquire nuclear weapons—or the world’s incentives to counter the dangers that the North Korean and Iranian nuclear programs pose to international peace.
Nor would cutting the U.S. and Russian arsenals by a few hundred weapons do anything significant to achieve Mr. Obama’s goal of a world without nuclear weapons. The roadblock is the fact of U.S. dependence on nuclear deterrence. So long as the security of the U.S. and of our allies and friends requires such dependence, a non-nuclear world will remain out of reach. Inventing a way to dispense with nuclear deterrence will require a political or technological breakthrough of major magnitude. Retaining our dependence on nuclear weapons even at somewhat lower levels is an admission by the Obama administration that the proposed reductions don’t actually bring us closer to a non-nuclear world.
With Mr. Obama openly eager for a START follow-on treaty, Russian leaders have chosen to play coy and become demanding. So what might the U.S. have to pay for it? The price is likely to be high, as suggested by the “Joint Understanding” the U.S. and Russian presidents announced last month in Moscow.
Point 5 of the Understanding specifies that the new treaty is to contain “a provision on the interrelationship of strategic offensive and strategic defensive arms.” Russia will use this language (which Bush administration officials repeatedly rejected) to try to derail U.S. plans for a Europe-based missile system designed to counter Iranian missile threats. If Russia succeeds here, the new treaty would increase the value to Iran of acquiring nuclear weapons. By making it easier for a nuclear-armed Iran to threaten all of Europe and eventually the U.S., the new treaty would promote rather than discourage nuclear proliferation.
Similarly, according to Point 6, the new treaty is to contain a provision on how non-nuclear, long-range strike weapons may affect strategic stability. Russia wants this to impede U.S. development of such weapons, probably by requiring that they be counted as if they had nuclear warheads. Hence the new treaty could shut down one of the more promising avenues for reducing U.S. dependence on nuclear arms for strategic strike.
All in all, the Obama administration’s nuclear weapons policies appear confused and self-defeating. Mr. Obama seems willing to pay for arms reductions that Russian officials have made clear will occur soon, due to aging or the planned modernization of systems, with or without a new treaty. Moreover, the Obama administration is opposing modernization measures designed to protect against the risk that the aging of U.S. weapons will compromise their safety or reliability.
There is an important connection between proliferation risks and modernization. But the Obama administration seems to have it backwards. If the U.S. fails to ensure the continuing safety and reliability of its arsenal, it could cause the collapse of the U.S. nuclear umbrella. Countries such as Japan, South Korea, Taiwan, Australia and others might decide that their security requires them to acquire their own nuclear arsenals, rather than rely indefinitely on the U.S. The world could reach a tipping point, with cascading nuclear proliferation, as the bipartisan Congressional Strategic Posture Commission warned in its May 2009 report.
The Obama administration’s nuclear weapons policies—including its treaty talks with Russia—affect the way America’s friends and potential adversaries view the integrity of the U.S. deterrent. The wrong policies can endanger the U.S. directly. They can also cause other states to lose confidence in the American nuclear umbrella and to seek security in national nuclear capabilities.
If that happens, the dangers of a nuclear war somewhere in the world would go up substantially. It would not be the first time a U.S. government helped bring about the opposite of its intended result—but it might be one of the costliest mistakes ever.
Mr. Feith, a former under secretary of defense for policy (2001-05), is the author of “War and Decision: Inside the Pentagon at the Dawn of the War on Terrorism” (HarperCollins, 2008). Mr. Shulsky is a former Defense Department official who dealt with arms control issues. Both are senior fellows at the Hudson Institute.
Monday, August 3, 2009
Views from India: the “haughty,” “condescending,” “arrogant,” and “patronizing” NYT editorial of last July 18, 2009
An Editorial and Its (Mal) Contents. By S. Samuel C. Rajiv
IDSA, July 25, 2009
An editorial in the New York Times on July 18, 2009 ahead of US Secretary of State Hillary Clinton’s visit to India - ‘Secretary Clinton goes to India’, has generated a lot of interest. A prominent Indian-American Democratic politician from Maryland, Kumar Barve, who is also a Majority leader in the House of Delegates, criticized the tone and tenor of the write-up as “haughty”, “condescending”, “arrogant”, and “patronizing.” Barve points out that the editorial’s first sentence, which defines India as “a longtime nuclear scofflaw,” is factually incorrect, as India had never violated any nuclear agreements it has signed.
The editorial goes on to describe India as a “major contributor to global warming,” which again can be contested very convincingly. India contributes less than 4 per cent of global emissions, and has one of the lowest per capita emissions in the world (less than 2 tonnes of CO2 per annum). The United States and China on the other hand are together responsible for 40 per cent of global emissions. In the same paragraph, it calls on India “to do a lot more to constrain its arms race with Pakistan and global proliferation.”
India and Pakistan are neither involved in any competitive arms racing nor can Pakistan afford to do so and go down the route of the Union of Soviet Socialist Republics. Indian’s defence budget as a percentage of GDP has come down from over 3 per cent in 1988-89 to under 2 per cent in 2008-09. This has to be seen against the background of defence budgets in India’s neighbourhood – nearly 5 per cent of GDP for Pakistan and 7 per cent for China. Given the lack of transparency in these figures, compounded by a whole range of internal and external security threats, arguments in favour of increasing India’s defence budget have actually more weight.
Urging India to take “more responsibility internationally,” the supporting arguments the editorial gives in favour of this ‘advice’ is the strong mandate secured by Prime Minister Manmohan Singh and the fact that the country has weathered a global recession better than others. The reasons responsible for the re-election of Dr. Singh are varied. This writer is not sure if taking on greater responsibilities overseas was a factor for the Indian electorate to choose him. To do more internationally to help the world ride out the financial storm is labouring the point. Despite the size of its economy (worth more than a trillion dollars), India still has a negligible share of world trade. Its strengths have primarily been its growing domestic demand, a high savings rate, among other factors, which have helped weather the crisis that has gripped the rest of the world.
The editorial then calls on India to help allay Pakistani fears, without defining what those fears are – a grand Indian design to break up the country may be! The editorial does make the right noises about Pakistan and the need for the US administration to keep the pressure on it so that it prosecutes those involved in the heinous Mumbai terror attacks. The K-word however does find its customary place, as it perhaps should in any discussion involving the two countries. But the editorial notes the possible difficulties in finding a solution to the issue “while Pakistan is battling the Taliban.” It can actually be argued that this is the right time for Islamabad to face the reality of the dangers from the Frankenstein monsters operating with impunity within its territory and strive for a negotiated settlement to the vexing issue rather than otherwise. The organic linkages between the demons that the Pakistan Army has taken on in certain parts of its territory and the pervasive culture of ‘jihad’ that official instruments of the state continue to employ to bleed India are ignored.
The argument about Kashmir also does not take account of the fact that it is just a symptom of the disease between the two countries and not the cause. The raison d’etre of Pakistan as a separate and distinct homeland of the major minority religion of the Indian sub-continent is too stark a reality to be ignored. The same logic is extended to imply that a functioning, stable, multi-ethnic, multi-religious and diverse India is an anathema to the very existence of Pakistan. Pakistani society is in itself a hotch-potch of mutually antagonistic ethnic and tribal groups seemingly held together by artificial hatred towards India. These tensions threaten to rip the country apart any time soon. Ignoring these factors to imply that all will be hunky-dory between the two countries if Kashmir were resolved is at once naïve and immature. The argument also resounds with similar such formulations that the Israeli-Palestinian conflict is the root cause of all that is wrong in the Middle East, ignoring such facts as the Iran-Iraq war, the cruel lack of development of economic and human resources, heavy-handed dictatorships and autocratic regimes, lack of freedom and democracy, among other factors.
On the issue of the Indo-US nuclear deal, the editorial reiterates the contention aired by the paper earlier as well as by non-proliferation ayatollahs that it frees up India to use its domestic sources of uranium solely for weapons production. It therefore urges the Obama administration to press India to cap its production of fissile material so that Pakistan can be pressured to do the same. Secretary Clinton is also urged to press India to pursue regional arms talks with Pakistan and China and sign the CTBT. This, at a time when the US has still not ratified the CTBT, a point acknowledged by Clinton in her interactions with the media on her visit here.
The agreement between Presidents Obama and Medvedev in Moscow to undertake further cuts in their weapons stockpile is held as an important negotiating point to convince India on this score. While the sequel to the START-1 treaty needs to be appreciated, as also the new administration’s right noises on disarmament, Indian concerns regarding these issues remain. Achieving comprehensive and universal nuclear disarmament is still a long way to go, despite the personal interventions of the US President who has made disarmament one of the pillars of his administration’s foreign policy. Continuing and robust nuclear force modernization programmes of nuclear weapon states are a huge stumbling block in any effort to convince New Delhi of the merits of arguments regarding FMCT and CTBT. Most reports also indicate that Pakistan has a greater stockpile of weapons material and more bombs in its arsenal than India, though it may not have as many delivery systems.
The editorial then derides India and Pakistan for not being able to define what they mean by a ‘credible, minimum’ nuclear deterrent. The US (and the then USSR) lurched alternatively from having a credible deterrent to massive retaliation to flexible response, all the time building thousands of weapons and delivery systems worth many billions of dollars without exactly seeming to know the exact numbers required to keep each other at bay. Concerns about the ‘missile gap’ (which turned out to be untrue in the first assessment carried out by the ‘whizkids’ led by the then Defence Secretary Robert McNamara) illustrate the difficulties in deciphering what the other person is up to in the nuclear realm, given the inherent nature of the nuclear weapon as not a war-fighting tool but a war-prevention ‘asset’. This is not to argue that India and Pakistan need another 50 years to figure out how not to fight a nuclear war but to keep things in perspective given the nature of the issues involved.
On Iran, acknowledging India’s “grudging” support to earlier UNSC Resolutions, it urges India to do more and hopes that India’s “arm will not be twisted this time around” in order to get this support. India has already stated that it is not in its interest to see any more nuclear weapon powers in its neighbourhood. At the same time, it has upheld Iran’s right to peacefully exploit the power of the atom. Given its strong civilisational and trade links, and Iran being Pakistan’s and Afghanistan’s neighbour – both countries of concern and vital interest to it, coupled with its energy requirements, it will be difficult to expect India to be more strident on the issue than what it has already been. Engaging and assuaging the Iranian regime’s sense of security and convincing/forcing it to give up its nuclear weapon ambitions, if any, through diplomatic and economic sanctions, seem to be the only way forward on the issue.
The editorial ends by lecturing India to “stop its pretensions to non-alignment” and calls on Clinton and Obama to encourage India to “behave” like a vital partner of the US “in building a stable world.” At the end of it, one begins to wonder if talking out loud, shooting with the mouth (or pen/keypad) and carrying a big stick (‘danda’ in Hindi) are the only characteristics of a great power. By the way, these are usually the defining hallmarks of a typical local cop in Delhi.
S. Samuel C. Rajiv is a researcher at the Institute for Defence Studies and Analyses (IDSA), New Delhi.
IDSA, July 25, 2009
An editorial in the New York Times on July 18, 2009 ahead of US Secretary of State Hillary Clinton’s visit to India - ‘Secretary Clinton goes to India’, has generated a lot of interest. A prominent Indian-American Democratic politician from Maryland, Kumar Barve, who is also a Majority leader in the House of Delegates, criticized the tone and tenor of the write-up as “haughty”, “condescending”, “arrogant”, and “patronizing.” Barve points out that the editorial’s first sentence, which defines India as “a longtime nuclear scofflaw,” is factually incorrect, as India had never violated any nuclear agreements it has signed.
The editorial goes on to describe India as a “major contributor to global warming,” which again can be contested very convincingly. India contributes less than 4 per cent of global emissions, and has one of the lowest per capita emissions in the world (less than 2 tonnes of CO2 per annum). The United States and China on the other hand are together responsible for 40 per cent of global emissions. In the same paragraph, it calls on India “to do a lot more to constrain its arms race with Pakistan and global proliferation.”
India and Pakistan are neither involved in any competitive arms racing nor can Pakistan afford to do so and go down the route of the Union of Soviet Socialist Republics. Indian’s defence budget as a percentage of GDP has come down from over 3 per cent in 1988-89 to under 2 per cent in 2008-09. This has to be seen against the background of defence budgets in India’s neighbourhood – nearly 5 per cent of GDP for Pakistan and 7 per cent for China. Given the lack of transparency in these figures, compounded by a whole range of internal and external security threats, arguments in favour of increasing India’s defence budget have actually more weight.
Urging India to take “more responsibility internationally,” the supporting arguments the editorial gives in favour of this ‘advice’ is the strong mandate secured by Prime Minister Manmohan Singh and the fact that the country has weathered a global recession better than others. The reasons responsible for the re-election of Dr. Singh are varied. This writer is not sure if taking on greater responsibilities overseas was a factor for the Indian electorate to choose him. To do more internationally to help the world ride out the financial storm is labouring the point. Despite the size of its economy (worth more than a trillion dollars), India still has a negligible share of world trade. Its strengths have primarily been its growing domestic demand, a high savings rate, among other factors, which have helped weather the crisis that has gripped the rest of the world.
The editorial then calls on India to help allay Pakistani fears, without defining what those fears are – a grand Indian design to break up the country may be! The editorial does make the right noises about Pakistan and the need for the US administration to keep the pressure on it so that it prosecutes those involved in the heinous Mumbai terror attacks. The K-word however does find its customary place, as it perhaps should in any discussion involving the two countries. But the editorial notes the possible difficulties in finding a solution to the issue “while Pakistan is battling the Taliban.” It can actually be argued that this is the right time for Islamabad to face the reality of the dangers from the Frankenstein monsters operating with impunity within its territory and strive for a negotiated settlement to the vexing issue rather than otherwise. The organic linkages between the demons that the Pakistan Army has taken on in certain parts of its territory and the pervasive culture of ‘jihad’ that official instruments of the state continue to employ to bleed India are ignored.
The argument about Kashmir also does not take account of the fact that it is just a symptom of the disease between the two countries and not the cause. The raison d’etre of Pakistan as a separate and distinct homeland of the major minority religion of the Indian sub-continent is too stark a reality to be ignored. The same logic is extended to imply that a functioning, stable, multi-ethnic, multi-religious and diverse India is an anathema to the very existence of Pakistan. Pakistani society is in itself a hotch-potch of mutually antagonistic ethnic and tribal groups seemingly held together by artificial hatred towards India. These tensions threaten to rip the country apart any time soon. Ignoring these factors to imply that all will be hunky-dory between the two countries if Kashmir were resolved is at once naïve and immature. The argument also resounds with similar such formulations that the Israeli-Palestinian conflict is the root cause of all that is wrong in the Middle East, ignoring such facts as the Iran-Iraq war, the cruel lack of development of economic and human resources, heavy-handed dictatorships and autocratic regimes, lack of freedom and democracy, among other factors.
On the issue of the Indo-US nuclear deal, the editorial reiterates the contention aired by the paper earlier as well as by non-proliferation ayatollahs that it frees up India to use its domestic sources of uranium solely for weapons production. It therefore urges the Obama administration to press India to cap its production of fissile material so that Pakistan can be pressured to do the same. Secretary Clinton is also urged to press India to pursue regional arms talks with Pakistan and China and sign the CTBT. This, at a time when the US has still not ratified the CTBT, a point acknowledged by Clinton in her interactions with the media on her visit here.
The agreement between Presidents Obama and Medvedev in Moscow to undertake further cuts in their weapons stockpile is held as an important negotiating point to convince India on this score. While the sequel to the START-1 treaty needs to be appreciated, as also the new administration’s right noises on disarmament, Indian concerns regarding these issues remain. Achieving comprehensive and universal nuclear disarmament is still a long way to go, despite the personal interventions of the US President who has made disarmament one of the pillars of his administration’s foreign policy. Continuing and robust nuclear force modernization programmes of nuclear weapon states are a huge stumbling block in any effort to convince New Delhi of the merits of arguments regarding FMCT and CTBT. Most reports also indicate that Pakistan has a greater stockpile of weapons material and more bombs in its arsenal than India, though it may not have as many delivery systems.
The editorial then derides India and Pakistan for not being able to define what they mean by a ‘credible, minimum’ nuclear deterrent. The US (and the then USSR) lurched alternatively from having a credible deterrent to massive retaliation to flexible response, all the time building thousands of weapons and delivery systems worth many billions of dollars without exactly seeming to know the exact numbers required to keep each other at bay. Concerns about the ‘missile gap’ (which turned out to be untrue in the first assessment carried out by the ‘whizkids’ led by the then Defence Secretary Robert McNamara) illustrate the difficulties in deciphering what the other person is up to in the nuclear realm, given the inherent nature of the nuclear weapon as not a war-fighting tool but a war-prevention ‘asset’. This is not to argue that India and Pakistan need another 50 years to figure out how not to fight a nuclear war but to keep things in perspective given the nature of the issues involved.
On Iran, acknowledging India’s “grudging” support to earlier UNSC Resolutions, it urges India to do more and hopes that India’s “arm will not be twisted this time around” in order to get this support. India has already stated that it is not in its interest to see any more nuclear weapon powers in its neighbourhood. At the same time, it has upheld Iran’s right to peacefully exploit the power of the atom. Given its strong civilisational and trade links, and Iran being Pakistan’s and Afghanistan’s neighbour – both countries of concern and vital interest to it, coupled with its energy requirements, it will be difficult to expect India to be more strident on the issue than what it has already been. Engaging and assuaging the Iranian regime’s sense of security and convincing/forcing it to give up its nuclear weapon ambitions, if any, through diplomatic and economic sanctions, seem to be the only way forward on the issue.
The editorial ends by lecturing India to “stop its pretensions to non-alignment” and calls on Clinton and Obama to encourage India to “behave” like a vital partner of the US “in building a stable world.” At the end of it, one begins to wonder if talking out loud, shooting with the mouth (or pen/keypad) and carrying a big stick (‘danda’ in Hindi) are the only characteristics of a great power. By the way, these are usually the defining hallmarks of a typical local cop in Delhi.
S. Samuel C. Rajiv is a researcher at the Institute for Defence Studies and Analyses (IDSA), New Delhi.
Is the White House's Organic Garden Toxic to Kids?
Is the White House's Organic Garden Toxic to Kids? By Jeff Stier, Esq.
No, according to toxicologists. It ought to be, according to environmentalists.
Thursday, July 23, 2009
This piece first appeared on July 23, 2009 on Forbes.com:
Michelle Obama's "organic" White House garden was designed to promote a green agenda. In order to provide safe food to children in the community, the First Lady wouldn't use chemical pesticides or fertilizers. Green groups cheered. In an ironic twist, all of that has now backfired.
The garden was created using a "green" approach, based on the belief that exposure to even minute levels of synthetic chemicals and contaminants such as lead is dangerous. Indeed, when environmental activist groups lobbied for a drastic consumer product safety law known as the Consumer Product Safety Improvement Act (CPSIA), they repeated the frightening but unscientific mantra that "there is no safe level of exposure" to the synthetic chemicals and contaminants they sought to ban.
The law passed, but it won't make anyone safer; the idea that the level of exposure doesn't matter flouts every known precept of toxicology. CPSIA is putting the squeeze on already threatened small businesses, forcing them to discard products with the tiniest trace of forbidden substances -- and it turns out the White House is getting a taste of the same medicine.
Earlier this month, The New York Times reported that the National Park Service found lead in the White House garden soil. In fact, tests found somewhere between 450% and 900% of the normal amount of lead in U.S. soil. The White House did not dispute the findings but defended the lead in the garden, calling it "completely safe." They are right. Though lead at higher levels can be dangerous, the garden, like the products banned by CPSIA, is well within safety limits. But the White House's defense rings of self-serving hypocrisy. Where were the White House reassurances when environmentalists were pushing CPSIA restrictions on other fronts?
Greenpeace, the Environmental Working Group, and others who were behind CPSIA -- along with their allies in Congress and in the administration -- manipulate the fears of concerned parents by contradicting established rules of toxicology, claiming that all lead needs to be eliminated. Aside from causing needless panic, their agenda could end up taking an expensive toll on industry and driving up prices for consumers.
The consequences of environmentalist fear-mongering are already spreading quickly. Bisphenol-A (BPA) and phthalates in plastics have been thoroughly demonized by junk-science reports -- so much so that people forget these chemicals have never been shown to be harmful to humans. Likewise, the organic approach endorsed by the White House unjustly contests the proven safety of properly applied chemical pesticides and fertilizers.
Now that they've seen the light, will the White House join thousands of small businesses and consumers calling for the repeal of the CPSIA? The Bush Food and Drug Administration found BPA to be safe, but the Obama FDA called for a do-over. Will their findings be consistent with the White House's newfound appreciation for basic tenets of toxicology? Will the new regime at the EPA halt its trumped-up health claims and halt their unprecedented attack on America's producers?
If so, something truly beneficial will have grown out of the White House's "organic" garden after all.
Jeff Stier is an associate director of the American Council on Science and Health.
No, according to toxicologists. It ought to be, according to environmentalists.
Thursday, July 23, 2009
This piece first appeared on July 23, 2009 on Forbes.com:
Michelle Obama's "organic" White House garden was designed to promote a green agenda. In order to provide safe food to children in the community, the First Lady wouldn't use chemical pesticides or fertilizers. Green groups cheered. In an ironic twist, all of that has now backfired.
The garden was created using a "green" approach, based on the belief that exposure to even minute levels of synthetic chemicals and contaminants such as lead is dangerous. Indeed, when environmental activist groups lobbied for a drastic consumer product safety law known as the Consumer Product Safety Improvement Act (CPSIA), they repeated the frightening but unscientific mantra that "there is no safe level of exposure" to the synthetic chemicals and contaminants they sought to ban.
The law passed, but it won't make anyone safer; the idea that the level of exposure doesn't matter flouts every known precept of toxicology. CPSIA is putting the squeeze on already threatened small businesses, forcing them to discard products with the tiniest trace of forbidden substances -- and it turns out the White House is getting a taste of the same medicine.
Earlier this month, The New York Times reported that the National Park Service found lead in the White House garden soil. In fact, tests found somewhere between 450% and 900% of the normal amount of lead in U.S. soil. The White House did not dispute the findings but defended the lead in the garden, calling it "completely safe." They are right. Though lead at higher levels can be dangerous, the garden, like the products banned by CPSIA, is well within safety limits. But the White House's defense rings of self-serving hypocrisy. Where were the White House reassurances when environmentalists were pushing CPSIA restrictions on other fronts?
Greenpeace, the Environmental Working Group, and others who were behind CPSIA -- along with their allies in Congress and in the administration -- manipulate the fears of concerned parents by contradicting established rules of toxicology, claiming that all lead needs to be eliminated. Aside from causing needless panic, their agenda could end up taking an expensive toll on industry and driving up prices for consumers.
The consequences of environmentalist fear-mongering are already spreading quickly. Bisphenol-A (BPA) and phthalates in plastics have been thoroughly demonized by junk-science reports -- so much so that people forget these chemicals have never been shown to be harmful to humans. Likewise, the organic approach endorsed by the White House unjustly contests the proven safety of properly applied chemical pesticides and fertilizers.
Now that they've seen the light, will the White House join thousands of small businesses and consumers calling for the repeal of the CPSIA? The Bush Food and Drug Administration found BPA to be safe, but the Obama FDA called for a do-over. Will their findings be consistent with the White House's newfound appreciation for basic tenets of toxicology? Will the new regime at the EPA halt its trumped-up health claims and halt their unprecedented attack on America's producers?
If so, something truly beneficial will have grown out of the White House's "organic" garden after all.
Jeff Stier is an associate director of the American Council on Science and Health.
What’s Different About the Obama Foreign Policy? The continuities with Bush are striking
What’s Different About the Obama Foreign Policy? By ELIOT COHEN
The continuities with Bush are striking. But what happens when diplomacy fails?
WSJ, Aug 03, 2009
President Barack Obama has put some miles on Air Force One. He and Secretary of State Hillary Clinton have made major foreign policy speeches. The national security team is in place. It’s time to make a preliminary judgment about Mr. Obama and the world. Just how different is this administration’s foreign policy from its predecessor? And will such departures where they exist make much difference?
Set aside the administration’s conceit of “smart power,” since only fools (read: Team Obama’s predecessors) would prefer stupid power. Continuity is the dominant note.
The Iraq drawdown moves more quickly and definitively than the Bush administration had desired, but it is not the repudiation the folks from MoveOn.org desired. The Bush-appointed Secretary of Defense Robert Gates and his Bush-promoted generals have implemented a build-up in Afghanistan that began in the last years of the previous administration. Strikes within Pakistan from unmanned aerial vehicles continue, and the administration reassuringly laces its rhetoric about al Qaeda with words like “eliminate,” “destroy” and “kill.”
Relationships with Europe have warmed. But that defrosting also began in the last years of the Bush administration, as it secured an increase in French forces in Afghanistan while easing that country’s re-entry into NATO, and backed a European-led response to the Russian invasion of Georgia.
Middle East peace process? Sure. Special envoys instead of large peace conferences, but the idea is the same.
Multinational diplomacy? Continuity there too, judging by the stacks of ineffective U.N. resolutions on North Korea and Iran.
Increased emphasis on foreign aid? We will see if the Obama administration can top the large and effective AIDS relief effort in Africa launched by President George W. Bush.
The rhetoric about the core of American foreign policy also remains consistent. Consider Mrs. Clinton’s recent speech at the Council on Foreign Relations. “The question is not whether our nation can or should lead, but how it will lead in the 21st century.” Not much bashfulness about American pre-eminence there. “We will not hesitate to defend our friends, our interests, and above all, our people vigorously and when necessary with the world’s strongest military.” Suspiciously muscular. And what animates the whole? “Liberty, democracy, justice and opportunity underlie our priorities.” Hardly Metternichean realism at work.
As for modesty about what America can do, Mrs. Clinton said this: “More than 230 years ago, Thomas Paine said, ‘We have it within our power to start the world over again.’ Today, in a new and very different era, we are called upon to use that power.” Sentiments to make an unrepentant neoconservative blush.
A few differences, however, do stand out. Mr. Obama has pledged to close Gitmo, once he figures out what to do with the enemy combatants detained there. Whereas the Bush administration only grudgingly accepted the perils of climate change, preferring the invisible hand of high energy prices and entrepreneurial innovation to combat it, the Obama administration has embraced cap and trade, with windfalls to favored clients and hidden taxes galore. It remains to be seen how Team Obama will bring the burgeoning Indian and Chinese economies, with their vast production of carbon, into a system of controls.
The Obama administration has shunned a free trade agreement with a critical democratic ally, Colombia, out of deference to its union constituencies—even as it tries to mend fences with Hugo Chávez’s Venezuela. It decided to begin its Middle East peacemaking by picking a gratuitous fight with another close ally, Israel.
It has also committed itself to the fantastic notion of abolishing nuclear weapons. It took the first step along that path to nowhere by starting an arms control process with Russia, without any evidence that doing so would produce Russian cooperation on anything at all, although it would further degrade America’s nuclear arsenal.
Mostly, though, the underlying structure of the policy remains the same. Nor should this surprise us: The United States has interests dictated by its physical location, its economy, its alliances, and above all, its values. Naive realists, a large tribe, fail to understand that ideals will inevitably guide American foreign policy, even if they do not always determine it. Moreover, because the Obama foreign and defense policy senior team consists of centrist experts from the Democratic Party, it is unlikely to make radically different judgments about the world, and about American interests in it, than its predecessors.
Differences in the execution of policy, however, make all the difference. Take, for example, outreach to Iran.
The Bush administration mulled this, and even tried it, diplomats warily meeting Iranians in various venues. But when Mr. Obama said to the leaders of Iran and other despotisms, “We will extend a hand if you are willing to unclench your fist” he did not expect to find the Supreme Leader’s paws sticky with the blood of freshly slaughtered protestors. Remarkably, rather than adjust the policy, the administration almost immediately released five Iranian “diplomats”—in truth, members of the Revolutionary Guard Corps—that we held in Iraq.
The Iranian policy shows a faith in diplomacy that might be understandable coming from process-obsessed diplomats who live for démarches, talking points, working groups, back channels, dialogues and summits.
But this policy will soon encounter the reality, a looming choice between war with Iran or acceptance of its status as a nuclear power. Is the administration prepared to act if diplomacy fails, as so often it does?
The confidence in diplomacy reflects a deeper theme here, namely, the repudiation of the Bush era. Even as stubborn facts cause the administration to claim many of the same executive privileges (e.g., a proper secrecy about some CIA activities) as its predecessor, and continue or expand the same policies, it suffers from its desire to be un-Bush.
Believing (incorrectly) that the Bush administration did not do diplomacy, it does so promiscuously, complete with such tomfoolery as a misspelled reset button given to the Russian foreign minister. Abhorring Bush’s freedom agenda, it will avoid anything of the kind until, of course, being Americans, the president, the vice president or the secretary of state blurt out their faith in universal ideals, and their indignation at the behavior of thugs, dictators and tyrants.
The biggest difference between the Obama and Bush administrations, though, is Messrs. Obama and Bush, or rather, their images at home and abroad. Mr. Obama is popular, and he dominates American foreign policy.
Brimming with confidence in his abilities and certain of the rightness of his views, he has undertaken a wildly ambitious agenda at home and abroad. He will bring peace between Arab and Israeli, wean Iran from its nuclear ambitions, restructure the international financial system, set us on the path to the abolition of nuclear weapons, reconcile Islam and Christendom, and end global warming, while introducing universal health care at home and bringing the country out of the deepest economic crisis since the Great Depression.
Lord Salisbury, British prime minister and foreign secretary in the last years of the 19th century, famously defined foreign policy as the art of drifting “lazily down a stream occasionally putting out a diplomatic boat-hook to avoid collisions.” This does not suit our times. But the patter of applause from a press whose sycophancy would embarrass a Renaissance court should not hide the dangers inherent in Mr. Obama’s style, which is characterized by an easy assumption of foreign policy omniscience and omnicompetence.
Some of his ambitions will come crashing into ruin, and surely ghastly surprises lie athwart our path. The Bush administration, many of its critics said, fell victim to hubris, the fatal arrogance punished, according to the ancients, by the goddess Nemesis. The Greeks would understand the irony if we discovered that cold-eyed lady, always hovering closer than politicians realize, turning an increasingly disapproving gaze on today’s White House.
Mr. Cohen teaches at Johns Hopkins University’s School of Advanced International Studies. He served as counselor of the State Department during the last two years of the George W. Bush administration.
The continuities with Bush are striking. But what happens when diplomacy fails?
WSJ, Aug 03, 2009
President Barack Obama has put some miles on Air Force One. He and Secretary of State Hillary Clinton have made major foreign policy speeches. The national security team is in place. It’s time to make a preliminary judgment about Mr. Obama and the world. Just how different is this administration’s foreign policy from its predecessor? And will such departures where they exist make much difference?
Set aside the administration’s conceit of “smart power,” since only fools (read: Team Obama’s predecessors) would prefer stupid power. Continuity is the dominant note.
The Iraq drawdown moves more quickly and definitively than the Bush administration had desired, but it is not the repudiation the folks from MoveOn.org desired. The Bush-appointed Secretary of Defense Robert Gates and his Bush-promoted generals have implemented a build-up in Afghanistan that began in the last years of the previous administration. Strikes within Pakistan from unmanned aerial vehicles continue, and the administration reassuringly laces its rhetoric about al Qaeda with words like “eliminate,” “destroy” and “kill.”
Relationships with Europe have warmed. But that defrosting also began in the last years of the Bush administration, as it secured an increase in French forces in Afghanistan while easing that country’s re-entry into NATO, and backed a European-led response to the Russian invasion of Georgia.
Middle East peace process? Sure. Special envoys instead of large peace conferences, but the idea is the same.
Multinational diplomacy? Continuity there too, judging by the stacks of ineffective U.N. resolutions on North Korea and Iran.
Increased emphasis on foreign aid? We will see if the Obama administration can top the large and effective AIDS relief effort in Africa launched by President George W. Bush.
The rhetoric about the core of American foreign policy also remains consistent. Consider Mrs. Clinton’s recent speech at the Council on Foreign Relations. “The question is not whether our nation can or should lead, but how it will lead in the 21st century.” Not much bashfulness about American pre-eminence there. “We will not hesitate to defend our friends, our interests, and above all, our people vigorously and when necessary with the world’s strongest military.” Suspiciously muscular. And what animates the whole? “Liberty, democracy, justice and opportunity underlie our priorities.” Hardly Metternichean realism at work.
As for modesty about what America can do, Mrs. Clinton said this: “More than 230 years ago, Thomas Paine said, ‘We have it within our power to start the world over again.’ Today, in a new and very different era, we are called upon to use that power.” Sentiments to make an unrepentant neoconservative blush.
A few differences, however, do stand out. Mr. Obama has pledged to close Gitmo, once he figures out what to do with the enemy combatants detained there. Whereas the Bush administration only grudgingly accepted the perils of climate change, preferring the invisible hand of high energy prices and entrepreneurial innovation to combat it, the Obama administration has embraced cap and trade, with windfalls to favored clients and hidden taxes galore. It remains to be seen how Team Obama will bring the burgeoning Indian and Chinese economies, with their vast production of carbon, into a system of controls.
The Obama administration has shunned a free trade agreement with a critical democratic ally, Colombia, out of deference to its union constituencies—even as it tries to mend fences with Hugo Chávez’s Venezuela. It decided to begin its Middle East peacemaking by picking a gratuitous fight with another close ally, Israel.
It has also committed itself to the fantastic notion of abolishing nuclear weapons. It took the first step along that path to nowhere by starting an arms control process with Russia, without any evidence that doing so would produce Russian cooperation on anything at all, although it would further degrade America’s nuclear arsenal.
Mostly, though, the underlying structure of the policy remains the same. Nor should this surprise us: The United States has interests dictated by its physical location, its economy, its alliances, and above all, its values. Naive realists, a large tribe, fail to understand that ideals will inevitably guide American foreign policy, even if they do not always determine it. Moreover, because the Obama foreign and defense policy senior team consists of centrist experts from the Democratic Party, it is unlikely to make radically different judgments about the world, and about American interests in it, than its predecessors.
Differences in the execution of policy, however, make all the difference. Take, for example, outreach to Iran.
The Bush administration mulled this, and even tried it, diplomats warily meeting Iranians in various venues. But when Mr. Obama said to the leaders of Iran and other despotisms, “We will extend a hand if you are willing to unclench your fist” he did not expect to find the Supreme Leader’s paws sticky with the blood of freshly slaughtered protestors. Remarkably, rather than adjust the policy, the administration almost immediately released five Iranian “diplomats”—in truth, members of the Revolutionary Guard Corps—that we held in Iraq.
The Iranian policy shows a faith in diplomacy that might be understandable coming from process-obsessed diplomats who live for démarches, talking points, working groups, back channels, dialogues and summits.
But this policy will soon encounter the reality, a looming choice between war with Iran or acceptance of its status as a nuclear power. Is the administration prepared to act if diplomacy fails, as so often it does?
The confidence in diplomacy reflects a deeper theme here, namely, the repudiation of the Bush era. Even as stubborn facts cause the administration to claim many of the same executive privileges (e.g., a proper secrecy about some CIA activities) as its predecessor, and continue or expand the same policies, it suffers from its desire to be un-Bush.
Believing (incorrectly) that the Bush administration did not do diplomacy, it does so promiscuously, complete with such tomfoolery as a misspelled reset button given to the Russian foreign minister. Abhorring Bush’s freedom agenda, it will avoid anything of the kind until, of course, being Americans, the president, the vice president or the secretary of state blurt out their faith in universal ideals, and their indignation at the behavior of thugs, dictators and tyrants.
The biggest difference between the Obama and Bush administrations, though, is Messrs. Obama and Bush, or rather, their images at home and abroad. Mr. Obama is popular, and he dominates American foreign policy.
Brimming with confidence in his abilities and certain of the rightness of his views, he has undertaken a wildly ambitious agenda at home and abroad. He will bring peace between Arab and Israeli, wean Iran from its nuclear ambitions, restructure the international financial system, set us on the path to the abolition of nuclear weapons, reconcile Islam and Christendom, and end global warming, while introducing universal health care at home and bringing the country out of the deepest economic crisis since the Great Depression.
Lord Salisbury, British prime minister and foreign secretary in the last years of the 19th century, famously defined foreign policy as the art of drifting “lazily down a stream occasionally putting out a diplomatic boat-hook to avoid collisions.” This does not suit our times. But the patter of applause from a press whose sycophancy would embarrass a Renaissance court should not hide the dangers inherent in Mr. Obama’s style, which is characterized by an easy assumption of foreign policy omniscience and omnicompetence.
Some of his ambitions will come crashing into ruin, and surely ghastly surprises lie athwart our path. The Bush administration, many of its critics said, fell victim to hubris, the fatal arrogance punished, according to the ancients, by the goddess Nemesis. The Greeks would understand the irony if we discovered that cold-eyed lady, always hovering closer than politicians realize, turning an increasingly disapproving gaze on today’s White House.
Mr. Cohen teaches at Johns Hopkins University’s School of Advanced International Studies. He served as counselor of the State Department during the last two years of the George W. Bush administration.
Sunday, August 2, 2009
Charter schools, The Ujima Village Academy, teachers' unions
Pay Your Teachers Well. WSJ Editorial
Their children’s hell will slowly go by.
The Wall Street Journal, p A10, Aug 03, 2009
The conflicting interests of teachers unions and students is an underreported education story, so we thought we’d highlight two recent stories in Baltimore and New York City that illustrate the problem.
The Ujima Village Academy is one of the best public schools in Baltimore and all of Maryland. Students at the charter middle school are primarily low-income minorities; 98% are black and 84% qualify for free or reduced-price school meals. Yet Ujima Village students regularly outperform the top-flight suburban schools on state tests. In 2006, 2007 and 2008, Ujima Village students earned the highest eighth-grade math scores in Maryland. Started in 2002, the school has met or exceeded state academic standards every year—a rarity in a city that boasts one of the lowest-performing school districts in the country.
Ujima Village is part of the KIPP network of charter schools, which now extends to 19 states and Washington, D.C. KIPP excels at raising academic achievement among disadvantaged children who often arrive two or three grade-levels behind in reading and math. KIPP educators cite longer school days and a longer school year as crucial to their success. At KIPP schools, kids start as early as 7:30 a.m., stay as late as 5 p.m., and attend school every other Saturday and three weeks in the summer.
However, Maryland’s charter law requires teachers to be part of the union. And the Baltimore Teachers Union is demanding that the charter school pay its teachers 33% more than other city teachers, an amount that the school says it can’t afford. Ujima Village teachers are already paid 18% above the union salary scale, reflecting the extra hours they work. To meet the union demands, the school recently told the Baltimore Sun that it has staggered staff starting times, shortened the school day, canceled Saturday classes and laid off staffers who worked with struggling students. For teachers unions, this outcome is a victory; how it affects the quality of public education in Baltimore is beside the point.
Meanwhile, in New York City, some public schools have raised money from parents to hire teaching assistants. Last year, the United Federation of Teachers filed a grievance about the hiring, and city education officials recently ordered an end to the practice. “It’s hurting our union members,” said a UFT spokesman, even though it’s helping kids and saving taxpayers money. The aides typically earned from $12 to $15 an hour. Their unionized equivalents cost as much as $23 an hour, plus benefits.
“School administrators said that hiring union members not only would cost more, but would also probably bring in people with less experience,” reported the New York Times. Many of the teaching assistants hired directly by schools had graduate degrees in education and state teaching licenses, while the typical unionized aide lacks a four-year degree.
The actions of the teachers unions in both Baltimore and New York make sense from their perspective. Unions exist to advance the interests of their members. The problem is that unions present themselves as student advocates while pushing education policies that work for their members even if they leave kids worse off. Until school choice puts more money and power in the hands of parents, public education will continue to put teachers ahead of students.
Their children’s hell will slowly go by.
The Wall Street Journal, p A10, Aug 03, 2009
The conflicting interests of teachers unions and students is an underreported education story, so we thought we’d highlight two recent stories in Baltimore and New York City that illustrate the problem.
The Ujima Village Academy is one of the best public schools in Baltimore and all of Maryland. Students at the charter middle school are primarily low-income minorities; 98% are black and 84% qualify for free or reduced-price school meals. Yet Ujima Village students regularly outperform the top-flight suburban schools on state tests. In 2006, 2007 and 2008, Ujima Village students earned the highest eighth-grade math scores in Maryland. Started in 2002, the school has met or exceeded state academic standards every year—a rarity in a city that boasts one of the lowest-performing school districts in the country.
Ujima Village is part of the KIPP network of charter schools, which now extends to 19 states and Washington, D.C. KIPP excels at raising academic achievement among disadvantaged children who often arrive two or three grade-levels behind in reading and math. KIPP educators cite longer school days and a longer school year as crucial to their success. At KIPP schools, kids start as early as 7:30 a.m., stay as late as 5 p.m., and attend school every other Saturday and three weeks in the summer.
However, Maryland’s charter law requires teachers to be part of the union. And the Baltimore Teachers Union is demanding that the charter school pay its teachers 33% more than other city teachers, an amount that the school says it can’t afford. Ujima Village teachers are already paid 18% above the union salary scale, reflecting the extra hours they work. To meet the union demands, the school recently told the Baltimore Sun that it has staggered staff starting times, shortened the school day, canceled Saturday classes and laid off staffers who worked with struggling students. For teachers unions, this outcome is a victory; how it affects the quality of public education in Baltimore is beside the point.
Meanwhile, in New York City, some public schools have raised money from parents to hire teaching assistants. Last year, the United Federation of Teachers filed a grievance about the hiring, and city education officials recently ordered an end to the practice. “It’s hurting our union members,” said a UFT spokesman, even though it’s helping kids and saving taxpayers money. The aides typically earned from $12 to $15 an hour. Their unionized equivalents cost as much as $23 an hour, plus benefits.
“School administrators said that hiring union members not only would cost more, but would also probably bring in people with less experience,” reported the New York Times. Many of the teaching assistants hired directly by schools had graduate degrees in education and state teaching licenses, while the typical unionized aide lacks a four-year degree.
The actions of the teachers unions in both Baltimore and New York make sense from their perspective. Unions exist to advance the interests of their members. The problem is that unions present themselves as student advocates while pushing education policies that work for their members even if they leave kids worse off. Until school choice puts more money and power in the hands of parents, public education will continue to put teachers ahead of students.
WaPo Editorial: Bribing carbuyers with trade-in cash is a dangerous path for the auto industry and the overall economy
Clunk! WaPo Editorial
Bribing carbuyers with trade-in cash is a dangerous path for the auto industry and the overall economy.
WaPo, Sunday, August 2, 2009
ABOUT A MONTH ago, we ventured a prediction about the federal government's "Cash for Clunkers" program, which offers motorists up to $4,500 to trade in their old cars for new, more fuel-efficient models: "When the program's initial round disappoints, as seems likely, pressure will mount to expand it." Sure enough, Friday, with car dealers and consumers complaining because the first $1 billion in car-buying aid was about to run out after four days, the House of Representatives approved another $2 billion. The issue may move to the Senate this week.
Admittedly, we expected the program to be undersubscribed, not oversubscribed. But the latest turn of events hardly proves the program a "success," as its proponents now claim. It merely shows that Washington could bribe more people into purchasing new cars than many thought possible. And the essential flaw of "Cash for Clunkers" has been confirmed: Once Congress starts passing out free money for cars, it's hard to stop. Will the next $2 billion be the last? Or will car dealers and their customers demand even more when it runs out? Maybe the government should just buy everyone a new car. That would certainly "stimulate demand." The washing-machine industry could use a boost, too; older models waste water and energy. So how about cash from Uncle Sam for washer upgrades?
You get the point. Stimulating the economy through more government spending and tax cuts is a much disputed idea. But at least a tax cut or an increase in unemployment benefits puts money into the hands of consumers generally and lets them decide how to spend it, rather than having the government choose which sectors of the economy will benefit. "Cash for Clunkers," by contrast, redistributes demand, as between cars and other goods, or between various models of cars. Car-repair shops, parts stores and used-car dealers suffer. People who would have bought cars next year are buying them now: What will the government do when 2010 sales are deemed impermissibly low?
As for the plan's purported fuel savings, those would have been achieved much more straightforwardly through a modest increase in gasoline taxes. To be sure, raising gas taxes would require Americans to accept some sacrifice for the public good, whereas "Cash for Clunkers" both encourages and exploits a different sort of mentality. As car shopper Alvin Lee of Burlingame, Calif., told CBS Radio: "To me, it's a big waste of taxpayer money. But if it's there, I'll take it."
Bribing carbuyers with trade-in cash is a dangerous path for the auto industry and the overall economy.
WaPo, Sunday, August 2, 2009
ABOUT A MONTH ago, we ventured a prediction about the federal government's "Cash for Clunkers" program, which offers motorists up to $4,500 to trade in their old cars for new, more fuel-efficient models: "When the program's initial round disappoints, as seems likely, pressure will mount to expand it." Sure enough, Friday, with car dealers and consumers complaining because the first $1 billion in car-buying aid was about to run out after four days, the House of Representatives approved another $2 billion. The issue may move to the Senate this week.
Admittedly, we expected the program to be undersubscribed, not oversubscribed. But the latest turn of events hardly proves the program a "success," as its proponents now claim. It merely shows that Washington could bribe more people into purchasing new cars than many thought possible. And the essential flaw of "Cash for Clunkers" has been confirmed: Once Congress starts passing out free money for cars, it's hard to stop. Will the next $2 billion be the last? Or will car dealers and their customers demand even more when it runs out? Maybe the government should just buy everyone a new car. That would certainly "stimulate demand." The washing-machine industry could use a boost, too; older models waste water and energy. So how about cash from Uncle Sam for washer upgrades?
You get the point. Stimulating the economy through more government spending and tax cuts is a much disputed idea. But at least a tax cut or an increase in unemployment benefits puts money into the hands of consumers generally and lets them decide how to spend it, rather than having the government choose which sectors of the economy will benefit. "Cash for Clunkers," by contrast, redistributes demand, as between cars and other goods, or between various models of cars. Car-repair shops, parts stores and used-car dealers suffer. People who would have bought cars next year are buying them now: What will the government do when 2010 sales are deemed impermissibly low?
As for the plan's purported fuel savings, those would have been achieved much more straightforwardly through a modest increase in gasoline taxes. To be sure, raising gas taxes would require Americans to accept some sacrifice for the public good, whereas "Cash for Clunkers" both encourages and exploits a different sort of mentality. As car shopper Alvin Lee of Burlingame, Calif., told CBS Radio: "To me, it's a big waste of taxpayer money. But if it's there, I'll take it."
The good-bad news in second-quarter GDP
Poised for a Rebound. WSJ Editorial
The good-bad news in second-quarter GDP.
The Wall Street Journal, p A10, Aug 01, 2009
The bad news in yesterday’s second-quarter GDP is that the recession was even deeper than previously thought. Or should we say that is the good-bad news. Because that pain is now largely past, the very steepness of the decline means that the economy is now poised for a sharper rebound, or at least it should be if the history of recessions is any guide.
The economy contracted by only 1% at an annual rate in the quarter, but the Bureau of Economic Analysis report was even more interesting for its growth revisions in previous quarters. Last year’s third quarter was revised downward by a remarkable 2.2-percentage points, to a negative 2.7% rate. This means the recession began in earnest in July and August, which follows the spike to $145-a-barrel oil and the collapse of Fannie Mae and Freddie Mac, and it accelerated in September with the fall of Lehman Brothers and its aftermath.
To put it another way, the 2008 financial panic quickly—almost instantaneously—triggered a panic in real goods, which sent the economy tumbling down. The rapidity of that reaction is a perverse compliment to the flexibility of U.S. producers, who reacted almost on a dime to the rout in the financial system. Companies pared back production to liquidate their inventories so fast that the bottom fell out of the economy in last year’s fourth quarter and the first part of 2009.
We’ll never know for sure, but it seems probable that the recession that formally began in late 2007 would have remained far less destructive had our financial plumbers done a better job of preparing the shaky financial system for the rough weather. Last year’s commodity spike—a reaction in part to reckless monetary policy—and Washington’s failure to build financial firewalls after the fall of Bear Stearns look to be major culprits in making the recession worse than it needed to be. This is where we’d most fault Ben Bernanke’s Federal Reserve and Hank Paulson’s Treasury.
The encouraging news is that the Adam Smith washout of recent months has now set the economy up for a comeback. The need to rebuild inventories of everything from cars to furniture will by itself help to lift GDP for the rest of 2009. The housing market looks to be bottoming, which means residential construction will also make a contribution to growth. Net exports (less imports) added some 1.4-percentage points to GDP in the second quarter and should also provide a lift the rest of the year.
What didn’t seem to make much difference is the “stimulus.” Transfer payments did climb sharply by 7.4% in the quarter, reflecting the likes of jobless insurance. These payments offset declines in worker compensation, but they didn’t do much for consumer spending, which declined by 1.2% in the quarter. In any event, these transfer payments are temporary and thus do nothing to promote the investment and risk-taking that are the only way back to steady growth and prosperity.
With a recovery on the way, the real question is whether we’ve laid the groundwork for such a durable expansion. Having been down so long, the economy should be in for a nice, long ride up. Even the Great Depression was followed by a notable rebound—until the bill for its government excesses came due in the mid- and later 1930s.
In this recession, Washington has reflated the economy with record spending and monetary easing that couldn’t help but spur some recovery. The issue is what happens when the price of that reflation comes due in higher taxes and higher interest rates. Political uncertainty also continues to hang over risk-takers, and on that point it has been fascinating to see the latest Wall Street rally coincide with the political troubles of ObamaCare. If it collapses, we might see Dow 10,000.
The good-bad news in second-quarter GDP.
The Wall Street Journal, p A10, Aug 01, 2009
The bad news in yesterday’s second-quarter GDP is that the recession was even deeper than previously thought. Or should we say that is the good-bad news. Because that pain is now largely past, the very steepness of the decline means that the economy is now poised for a sharper rebound, or at least it should be if the history of recessions is any guide.
The economy contracted by only 1% at an annual rate in the quarter, but the Bureau of Economic Analysis report was even more interesting for its growth revisions in previous quarters. Last year’s third quarter was revised downward by a remarkable 2.2-percentage points, to a negative 2.7% rate. This means the recession began in earnest in July and August, which follows the spike to $145-a-barrel oil and the collapse of Fannie Mae and Freddie Mac, and it accelerated in September with the fall of Lehman Brothers and its aftermath.
To put it another way, the 2008 financial panic quickly—almost instantaneously—triggered a panic in real goods, which sent the economy tumbling down. The rapidity of that reaction is a perverse compliment to the flexibility of U.S. producers, who reacted almost on a dime to the rout in the financial system. Companies pared back production to liquidate their inventories so fast that the bottom fell out of the economy in last year’s fourth quarter and the first part of 2009.
We’ll never know for sure, but it seems probable that the recession that formally began in late 2007 would have remained far less destructive had our financial plumbers done a better job of preparing the shaky financial system for the rough weather. Last year’s commodity spike—a reaction in part to reckless monetary policy—and Washington’s failure to build financial firewalls after the fall of Bear Stearns look to be major culprits in making the recession worse than it needed to be. This is where we’d most fault Ben Bernanke’s Federal Reserve and Hank Paulson’s Treasury.
The encouraging news is that the Adam Smith washout of recent months has now set the economy up for a comeback. The need to rebuild inventories of everything from cars to furniture will by itself help to lift GDP for the rest of 2009. The housing market looks to be bottoming, which means residential construction will also make a contribution to growth. Net exports (less imports) added some 1.4-percentage points to GDP in the second quarter and should also provide a lift the rest of the year.
What didn’t seem to make much difference is the “stimulus.” Transfer payments did climb sharply by 7.4% in the quarter, reflecting the likes of jobless insurance. These payments offset declines in worker compensation, but they didn’t do much for consumer spending, which declined by 1.2% in the quarter. In any event, these transfer payments are temporary and thus do nothing to promote the investment and risk-taking that are the only way back to steady growth and prosperity.
With a recovery on the way, the real question is whether we’ve laid the groundwork for such a durable expansion. Having been down so long, the economy should be in for a nice, long ride up. Even the Great Depression was followed by a notable rebound—until the bill for its government excesses came due in the mid- and later 1930s.
In this recession, Washington has reflated the economy with record spending and monetary easing that couldn’t help but spur some recovery. The issue is what happens when the price of that reflation comes due in higher taxes and higher interest rates. Political uncertainty also continues to hang over risk-takers, and on that point it has been fascinating to see the latest Wall Street rally coincide with the political troubles of ObamaCare. If it collapses, we might see Dow 10,000.
WSJ Editorial: The ‘Shareholder Bill of Rights’ is good for union leaders but bad for business
The Schumer Proxy. By THOMAS J. DONOHUE
The ‘Shareholder Bill of Rights’ is good for union leaders but bad for business.
WSJ, Aug 01, 2009
When Congress reconvenes after Labor Day, Sen. Charles Schumer (D., N.Y.) will try to advance his “Shareholder Bill of Rights.” Among other things, this legislation, which Mr. Schumer unveiled in May with the backing of Andy Stern, president of the Service Employees International Union (SEIU), would give the Securities and Exchange Commission (SEC) the legal authority to grant shareholders access to the corporate proxy for nominations to boards of directors. Meanwhile, the SEC will close its public comment period Aug. 17 and begin to consider new regulations on shareholder access to proxy statements.
This sounds harmless enough, a way of giving shareholders a chance to have their concerns put to a vote. But in reality, Mr. Schumer’s bill would give union-backed shareholders who hold a small interest in a company—as little as 1% of the shares—enormous leverage to promote their own agendas. It would require companies to allow, and essentially pay for, unions and other activist shareholders to run a competing slate of board candidates.
Granted, there is plenty for shareholders to be upset about these days. But the answer isn’t to pit one group of agenda-driven shareholders against all others. Corporate boards are designed to hold management accountable to the interests of all shareholders. Allowing unions to rig the proxy rules for their own advantage is simply bad corporate governance.
Unions already employ shareholder activism to advance a special interest agenda, using the stock owned by their pension funds to support shareholder resolutions having little if any connection to the financial performance of the company. This includes repeated motions by the AFL-CIO to require pharmaceutical companies to disclose their drug reimportation policies and pressuring oil companies to reduce greenhouse gas emissions.
They also have used their pension funds to force employers to negotiate union contracts or agree to specific demands. Richard Trumka, secretary treasurer of the AFL-CIO, said in 2000 that the labor federation planned to use the “clout of union pension funds as major corporate stockholders to influence contract talks and organizing drives.”
Ironically, unions’ management of their own pension funds does not inspire much confidence in their ability to influence the management of public corporations. Many union funds are in a precarious financial position, without enough assets to pay out the benefits they have promised.
According to the Department of Labor (form 5500 filings), the Plumbers and Pipefitters National Pension Fund is funded at just 54%, and the Sheet Metal Workers National Pension Fund is at only 39%. Even the SEIU recently reported that one of its largest pension plans is in “critical” status because it won’t have enough money to pay promised benefits.
Still, some may ask what is wrong with union pension funds wielding their power to advance their own special interests? Plenty.
The Employee Retirement Income Security Act. ERISA requires pension assets—which include proxy votes—to be used for the “sole purpose” of benefiting plan participants and not to pursue unrelated objectives. Politically and socially motivated proxy activity may violate the fiduciary duties of union pension trustees.
In addition, union members themselves don’t want their retirement assets used for special interest crusades. A nationwide survey by Voter Consumer Research taken this spring found that 88% of union households agree that “the most important goal of union pension funds should be to manage pension funds so they’re financially secure and return the best retirement income for retirees.” Just 9% thought funds should be managed to “advance the union’s social and political goals.”
The Chamber of Commerce recently commissioned a study by the respected economics firm Navigant Consulting which found that shareholder activism by union pension funds provides no economic benefit to pension-plan participants. In fact, the study found evidence that this shareholder activism actually reduced shareholder value.
Workers should have the right to join or leave unions under fair rules, and unions have every right to represent their members on pay, benefits, and working conditions. But organized labors’ attempts to use stock holdings to advance narrow agendas not in the best interest of all shareholders is unsound, and toying with their own members’ retirement savings is indefensible.
Mr. Donohue is president and CEO of the U.S. Chamber of Commerce.
The ‘Shareholder Bill of Rights’ is good for union leaders but bad for business.
WSJ, Aug 01, 2009
When Congress reconvenes after Labor Day, Sen. Charles Schumer (D., N.Y.) will try to advance his “Shareholder Bill of Rights.” Among other things, this legislation, which Mr. Schumer unveiled in May with the backing of Andy Stern, president of the Service Employees International Union (SEIU), would give the Securities and Exchange Commission (SEC) the legal authority to grant shareholders access to the corporate proxy for nominations to boards of directors. Meanwhile, the SEC will close its public comment period Aug. 17 and begin to consider new regulations on shareholder access to proxy statements.
This sounds harmless enough, a way of giving shareholders a chance to have their concerns put to a vote. But in reality, Mr. Schumer’s bill would give union-backed shareholders who hold a small interest in a company—as little as 1% of the shares—enormous leverage to promote their own agendas. It would require companies to allow, and essentially pay for, unions and other activist shareholders to run a competing slate of board candidates.
Granted, there is plenty for shareholders to be upset about these days. But the answer isn’t to pit one group of agenda-driven shareholders against all others. Corporate boards are designed to hold management accountable to the interests of all shareholders. Allowing unions to rig the proxy rules for their own advantage is simply bad corporate governance.
Unions already employ shareholder activism to advance a special interest agenda, using the stock owned by their pension funds to support shareholder resolutions having little if any connection to the financial performance of the company. This includes repeated motions by the AFL-CIO to require pharmaceutical companies to disclose their drug reimportation policies and pressuring oil companies to reduce greenhouse gas emissions.
They also have used their pension funds to force employers to negotiate union contracts or agree to specific demands. Richard Trumka, secretary treasurer of the AFL-CIO, said in 2000 that the labor federation planned to use the “clout of union pension funds as major corporate stockholders to influence contract talks and organizing drives.”
Ironically, unions’ management of their own pension funds does not inspire much confidence in their ability to influence the management of public corporations. Many union funds are in a precarious financial position, without enough assets to pay out the benefits they have promised.
According to the Department of Labor (form 5500 filings), the Plumbers and Pipefitters National Pension Fund is funded at just 54%, and the Sheet Metal Workers National Pension Fund is at only 39%. Even the SEIU recently reported that one of its largest pension plans is in “critical” status because it won’t have enough money to pay promised benefits.
Still, some may ask what is wrong with union pension funds wielding their power to advance their own special interests? Plenty.
The Employee Retirement Income Security Act. ERISA requires pension assets—which include proxy votes—to be used for the “sole purpose” of benefiting plan participants and not to pursue unrelated objectives. Politically and socially motivated proxy activity may violate the fiduciary duties of union pension trustees.
In addition, union members themselves don’t want their retirement assets used for special interest crusades. A nationwide survey by Voter Consumer Research taken this spring found that 88% of union households agree that “the most important goal of union pension funds should be to manage pension funds so they’re financially secure and return the best retirement income for retirees.” Just 9% thought funds should be managed to “advance the union’s social and political goals.”
The Chamber of Commerce recently commissioned a study by the respected economics firm Navigant Consulting which found that shareholder activism by union pension funds provides no economic benefit to pension-plan participants. In fact, the study found evidence that this shareholder activism actually reduced shareholder value.
Workers should have the right to join or leave unions under fair rules, and unions have every right to represent their members on pay, benefits, and working conditions. But organized labors’ attempts to use stock holdings to advance narrow agendas not in the best interest of all shareholders is unsound, and toying with their own members’ retirement savings is indefensible.
Mr. Donohue is president and CEO of the U.S. Chamber of Commerce.
Friday, July 31, 2009
WaPo: Will there be any consequence for Venezuela's material support for Colombian insurgents?
Rockets for Terrorists. WaPo Editorial
Will there be any consequence for Venezuela's material support for Colombian insurgents?
WaPo, Friday, July 31, 2009
WHEN THE Colombian government last year unveiled extensive evidence that the government of Venezuela had collaborated with a Colombian rebel movement known for terrorism and drug trafficking, other Latin American governments and the United States mostly chose to look the other way. The evidence was contained on laptops captured in a controversial raid by the Colombian army on a guerrilla base in Ecuador. Venezuelan President Hugo Chávez denounced the e-mails and documents as forgeries, and the potential consequences of concluding that Venezuela was supporting a terrorist organization against a democratic government -- which could include mandatory U.S. sanctions and referral to the U.N. Security Council -- were more than the Bush administration was prepared to contemplate.
Now Colombia has made public evidence that will be even more difficult to ignore. In a raid on a camp of the Revolutionary Armed Forces of Columbia (FARC), a group officially designated a terrorist organization by the United States and the European Union, Colombian forces captured sophisticated, Swedish-produced antitank rockets. A Swedish investigation confirmed that they were originally sold to the Venezuelan army by the arms manufacturer Saab. What's more, FARC e-mails from the laptops captured in Ecuador appear to refer to the weapons; in one, a FARC operative in Caracas reports discussing delivery of the arms in a 2007 meeting with two top Venezuelan generals, including the director of military intelligence, Hugo Armando Carvajal Barrios.
Colombia privately asked Mr. Chávez's government for an explanation of the rockets several months ago; Sweden is now asking as well. But the only response has been public bluster by the Venezuelan caudillo, who on Tuesday withdrew his ambassador from Colombia and threatened to close the border to trade. If he follows through, U.S. drug authorities may well be pleased: A report released last week by the U.S. Government Accountability Office said Venezuela had created a "permissive environment" for FARC that had allowed the group to massively increase its cocaine smuggling across that border. "By allowing illegal armed groups to elude capture and by providing material support, Venezuela has extended a lifeline to Colombian illegal armed groups, and their continued existence endangers Colombian security gains achieved with U.S. assistance," the GAO reported.
This all sounds an awful lot like material support for terrorism -- which raises the question of whether the State Department will look again at whether Mr. Chávez's government or its top officials belong on its list of state sponsors of terrorism. The Bush administration's Treasury Department last year imposed sanctions on Gen. Carvajal and several other officials for supporting the FARC's drug trafficking. But that hardly covers the supply of antitank rockets to a designated terrorist organization. At the moment, the State Department is busy applying sanctions to members of Honduras's de facto government, which is guilty of deposing one of Mr. Chávez's clients and would-be emulators. Perhaps soon it can turn its attention to those in the hemisphere who have been caught trying to overturn a democratic government by supplying terrorists with advanced weapons.
Will there be any consequence for Venezuela's material support for Colombian insurgents?
WaPo, Friday, July 31, 2009
WHEN THE Colombian government last year unveiled extensive evidence that the government of Venezuela had collaborated with a Colombian rebel movement known for terrorism and drug trafficking, other Latin American governments and the United States mostly chose to look the other way. The evidence was contained on laptops captured in a controversial raid by the Colombian army on a guerrilla base in Ecuador. Venezuelan President Hugo Chávez denounced the e-mails and documents as forgeries, and the potential consequences of concluding that Venezuela was supporting a terrorist organization against a democratic government -- which could include mandatory U.S. sanctions and referral to the U.N. Security Council -- were more than the Bush administration was prepared to contemplate.
Now Colombia has made public evidence that will be even more difficult to ignore. In a raid on a camp of the Revolutionary Armed Forces of Columbia (FARC), a group officially designated a terrorist organization by the United States and the European Union, Colombian forces captured sophisticated, Swedish-produced antitank rockets. A Swedish investigation confirmed that they were originally sold to the Venezuelan army by the arms manufacturer Saab. What's more, FARC e-mails from the laptops captured in Ecuador appear to refer to the weapons; in one, a FARC operative in Caracas reports discussing delivery of the arms in a 2007 meeting with two top Venezuelan generals, including the director of military intelligence, Hugo Armando Carvajal Barrios.
Colombia privately asked Mr. Chávez's government for an explanation of the rockets several months ago; Sweden is now asking as well. But the only response has been public bluster by the Venezuelan caudillo, who on Tuesday withdrew his ambassador from Colombia and threatened to close the border to trade. If he follows through, U.S. drug authorities may well be pleased: A report released last week by the U.S. Government Accountability Office said Venezuela had created a "permissive environment" for FARC that had allowed the group to massively increase its cocaine smuggling across that border. "By allowing illegal armed groups to elude capture and by providing material support, Venezuela has extended a lifeline to Colombian illegal armed groups, and their continued existence endangers Colombian security gains achieved with U.S. assistance," the GAO reported.
This all sounds an awful lot like material support for terrorism -- which raises the question of whether the State Department will look again at whether Mr. Chávez's government or its top officials belong on its list of state sponsors of terrorism. The Bush administration's Treasury Department last year imposed sanctions on Gen. Carvajal and several other officials for supporting the FARC's drug trafficking. But that hardly covers the supply of antitank rockets to a designated terrorist organization. At the moment, the State Department is busy applying sanctions to members of Honduras's de facto government, which is guilty of deposing one of Mr. Chávez's clients and would-be emulators. Perhaps soon it can turn its attention to those in the hemisphere who have been caught trying to overturn a democratic government by supplying terrorists with advanced weapons.
Human Rights Watch and Palestians in Arab countries
Double Standards and Human Rights Watch. By NOAH POLLAK
The organization displays a strong bias against Israel.
WSJ, Jul 31, 2009
Over the past two weeks, Human Rights Watch has been embroiled in a controversy over a fund raiser it held in Riyadh, Saudi Arabia. At that gathering, Middle East director Sarah Leah Whitson pledged the group would use donations to “battle . . . pro-Israel pressure groups.”
As criticism of her remark poured in, Ms. Whitson responded by saying that the complaint against her was “fundamentally a racist one.” And Kenneth Roth, executive director of Human Rights Watch, declared that “We report on Israel. Its supporters fight back with lies and deception.”
The facts tell a different story. From 2006 to the present, Human Rights Watch’s reports on the Israeli-Arab conflict have been almost entirely devoted to condemning Israel, accusing it of human rights and international law violations, and demanding international investigations into its conduct. It has published some 87 criticisms of Israeli conduct against the Palestinians and Hezbollah, versus eight criticisms of Palestinian groups and four of Hezbollah for attacks on Israel. (It also published a small number of critiques of both Israel and Arab groups, and of intra-Palestinian fighting.)
It was during this period that more than 8,000 rockets and mortars were fired at Israeli civilians by Palestinian terrorist groups in Gaza. Human Rights Watch’s response? In November 2006 it said that the Palestinian Authority “should stop giving a wink and a nod to rocket attacks.” Two years later it urged the Hamas leadership “to speak out forcefully against such [rocket] attacks . . . and bring to justice those who are found to have participated in them.”
In response to the rocket war and Hamas’s violent takeover of Gaza in June 2007, Israel imposed a partial blockade of Gaza. Human Rights Watch then published some 28 statements and reports on the blockade, accusing Israel in highly charged language of an array of war crimes and human rights violations. One report headline declared that Israel was “choking Gaza.” Human Rights Watch has never recognized the difference between Hamas’s campaign of murder against Israeli civilians and Israel’s attempt to defend those civilians. The unwillingness to distinguish between aggression and self-defense blots out a fundamental moral fact—that Hamas’s refusal to stop its attacks makes it culpable for both Israeli and Palestinian casualties.
Meanwhile, Egypt has also maintained a blockade on Gaza, although it is not even under attack from Hamas. Human Rights Watch has never singled out Egypt for criticism over its participation in the blockade.
The organization regularly calls for arms embargoes against Israel and claims it commits war crimes for using drones, artillery and cluster bombs. Yet on Israel’s northern border sits Hezbollah, which is building an arsenal of rockets to terrorize and kill Israeli civilians, and has placed that arsenal in towns and villages in hopes that Lebanese civilians will be killed if Israel attempts to defend itself. The U.N. Security Council has passed resolutions demanding Hezbollah’s disarmament and the cessation of its arms smuggling. Yet while Human Rights Watch has criticized Israel’s weapons 15 times, it has criticized Hezbollah’s twice.
In the Middle East, Human Rights Watch does not actually function as a human-rights organization. If it did, it would draw attention to the plight of Palestinians in Arab countries. In Lebanon, hundreds of thousands of Palestinians are warehoused in impoverished refugee camps and denied citizenship, civil rights, and even the right to work. This has received zero coverage from the organization.
In 2007, the Lebanese Army laid siege to the Nahr al-Bared Palestinian refugee camp for over three months, killing hundreds. Human Rights Watch produced two anemic press releases. At this very moment, Jordan is stripping its Palestinians of citizenship without the slightest protest from the organization. Unfortunately, Human Rights Watch seems only to care about Palestinians when they can be used to convince the world that the Jewish state is actually a criminal state.
Mr. Pollak is a graduate student in international relations at Yale University.
The organization displays a strong bias against Israel.
WSJ, Jul 31, 2009
Over the past two weeks, Human Rights Watch has been embroiled in a controversy over a fund raiser it held in Riyadh, Saudi Arabia. At that gathering, Middle East director Sarah Leah Whitson pledged the group would use donations to “battle . . . pro-Israel pressure groups.”
As criticism of her remark poured in, Ms. Whitson responded by saying that the complaint against her was “fundamentally a racist one.” And Kenneth Roth, executive director of Human Rights Watch, declared that “We report on Israel. Its supporters fight back with lies and deception.”
The facts tell a different story. From 2006 to the present, Human Rights Watch’s reports on the Israeli-Arab conflict have been almost entirely devoted to condemning Israel, accusing it of human rights and international law violations, and demanding international investigations into its conduct. It has published some 87 criticisms of Israeli conduct against the Palestinians and Hezbollah, versus eight criticisms of Palestinian groups and four of Hezbollah for attacks on Israel. (It also published a small number of critiques of both Israel and Arab groups, and of intra-Palestinian fighting.)
It was during this period that more than 8,000 rockets and mortars were fired at Israeli civilians by Palestinian terrorist groups in Gaza. Human Rights Watch’s response? In November 2006 it said that the Palestinian Authority “should stop giving a wink and a nod to rocket attacks.” Two years later it urged the Hamas leadership “to speak out forcefully against such [rocket] attacks . . . and bring to justice those who are found to have participated in them.”
In response to the rocket war and Hamas’s violent takeover of Gaza in June 2007, Israel imposed a partial blockade of Gaza. Human Rights Watch then published some 28 statements and reports on the blockade, accusing Israel in highly charged language of an array of war crimes and human rights violations. One report headline declared that Israel was “choking Gaza.” Human Rights Watch has never recognized the difference between Hamas’s campaign of murder against Israeli civilians and Israel’s attempt to defend those civilians. The unwillingness to distinguish between aggression and self-defense blots out a fundamental moral fact—that Hamas’s refusal to stop its attacks makes it culpable for both Israeli and Palestinian casualties.
Meanwhile, Egypt has also maintained a blockade on Gaza, although it is not even under attack from Hamas. Human Rights Watch has never singled out Egypt for criticism over its participation in the blockade.
The organization regularly calls for arms embargoes against Israel and claims it commits war crimes for using drones, artillery and cluster bombs. Yet on Israel’s northern border sits Hezbollah, which is building an arsenal of rockets to terrorize and kill Israeli civilians, and has placed that arsenal in towns and villages in hopes that Lebanese civilians will be killed if Israel attempts to defend itself. The U.N. Security Council has passed resolutions demanding Hezbollah’s disarmament and the cessation of its arms smuggling. Yet while Human Rights Watch has criticized Israel’s weapons 15 times, it has criticized Hezbollah’s twice.
In the Middle East, Human Rights Watch does not actually function as a human-rights organization. If it did, it would draw attention to the plight of Palestinians in Arab countries. In Lebanon, hundreds of thousands of Palestinians are warehoused in impoverished refugee camps and denied citizenship, civil rights, and even the right to work. This has received zero coverage from the organization.
In 2007, the Lebanese Army laid siege to the Nahr al-Bared Palestinian refugee camp for over three months, killing hundreds. Human Rights Watch produced two anemic press releases. At this very moment, Jordan is stripping its Palestinians of citizenship without the slightest protest from the organization. Unfortunately, Human Rights Watch seems only to care about Palestinians when they can be used to convince the world that the Jewish state is actually a criminal state.
Mr. Pollak is a graduate student in international relations at Yale University.
Repealing ERISA—II
Repealing Erisa—II. WSJ Editorial
The House bill would harm businesses’ ability to offer insurance.
The Wall Street Journal, p A16, Jul 31, 2009
The worst thing that can be said about the House health bill is what’s in it. Presumably that explains why Speaker Nancy Pelosi’s office zapped as “false and misleading” one of our recent editorials—on the 1974 federal law known as Erisa that lets large businesses offer insurance with minimal government interference. Among the rebuttals is the “fact” that Democrats will give “all American families more choices of quality, affordable health care.”
Then again, 151 businesses and industry groups that depend on Erisa agree that the House bill will result in fewer insurance choices for employees, not more, once all benefits are exposed to political tampering. In a letter to Mrs. Pelosi this week, the coalition—including everyone from American Airlines to Xerox—says the bill includes “numerous provisions that increase the requirements and burdens on employer-sponsored coverage and limit employer flexibility to meet the needs of their workforce by requiring them to meet federal one-size-fits-all standards after a five-year ‘grace period.’”
That’s what we said. Ms. Pelosi and allies like Henry Waxman don’t dispute that new Erisa standards are built into the bill but say most employers won’t have any trouble meeting them. “The House bill actually protects and increases employer-sponsored insurance,” reads another fact-check item. But why regulate what they admit is already working?
The reality is that once Erisa is broken the whole universe of business benefits will be distorted by Congress’s gravitational pull. For instance, some employers are trying to save on insurance costs by giving workers financial incentives to lose weight or exercise more. Pressure groups such as AARP and the American Federation of State, County and Municipal Employees are demanding that Democrats prohibit this practice as discriminatory. “If you give one person a discount, someone else is going to end up paying more,” an AARP lobbyist told Kaiser Health News. Well, yes. That’s the point.
The employer-sponsored system has its problems, but one of them is not a lack of Congressional supervision. The House Erisa provisions are definitive proof that ObamaCare would in fact erode "the health care you have."
The House bill would harm businesses’ ability to offer insurance.
The Wall Street Journal, p A16, Jul 31, 2009
The worst thing that can be said about the House health bill is what’s in it. Presumably that explains why Speaker Nancy Pelosi’s office zapped as “false and misleading” one of our recent editorials—on the 1974 federal law known as Erisa that lets large businesses offer insurance with minimal government interference. Among the rebuttals is the “fact” that Democrats will give “all American families more choices of quality, affordable health care.”
Then again, 151 businesses and industry groups that depend on Erisa agree that the House bill will result in fewer insurance choices for employees, not more, once all benefits are exposed to political tampering. In a letter to Mrs. Pelosi this week, the coalition—including everyone from American Airlines to Xerox—says the bill includes “numerous provisions that increase the requirements and burdens on employer-sponsored coverage and limit employer flexibility to meet the needs of their workforce by requiring them to meet federal one-size-fits-all standards after a five-year ‘grace period.’”
That’s what we said. Ms. Pelosi and allies like Henry Waxman don’t dispute that new Erisa standards are built into the bill but say most employers won’t have any trouble meeting them. “The House bill actually protects and increases employer-sponsored insurance,” reads another fact-check item. But why regulate what they admit is already working?
The reality is that once Erisa is broken the whole universe of business benefits will be distorted by Congress’s gravitational pull. For instance, some employers are trying to save on insurance costs by giving workers financial incentives to lose weight or exercise more. Pressure groups such as AARP and the American Federation of State, County and Municipal Employees are demanding that Democrats prohibit this practice as discriminatory. “If you give one person a discount, someone else is going to end up paying more,” an AARP lobbyist told Kaiser Health News. Well, yes. That’s the point.
The employer-sponsored system has its problems, but one of them is not a lack of Congressional supervision. The House Erisa provisions are definitive proof that ObamaCare would in fact erode "the health care you have."
Farmers Can Feed the World - Better seeds and fertilizers, not romantic myths, will let them do it
Farmers Can Feed the World. By NORMAN E. BORLAUG
Better seeds and fertilizers, not romantic myths, will let them do it.
WSJ, Jul 31, 2009
Earlier this month in L’Aquila, Italy, a small town recently devastated by an earthquake, leaders of the G-8 countries pledged $20 billion over three years for farm-investment aid that will help resource-poor farmers get access to tools like better seed and fertilizer and help poor nations feed themselves.For those of us who have spent our lives working in agriculture, focusing on growing food versus giving it away is a giant step forward.
Given the right tools, farmers have shown an uncanny ability to feed themselves and others, and to ignite the economic engine that will reverse the cycle of chronic poverty. And the escape from poverty offers a chance for greater political stability in their countries as well.
But just as the ground shifted beneath the Italian community of L’Aquila, so too has the political landscape heaved in other parts of the world, casting unfounded doubts on agricultural tools for farmers made through modern science, such as biotech corn in parts of Europe. Even here at home, some elements of popular culture romanticize older, inefficient production methods and shun fertilizers and pesticides, arguing that the U.S. should revert to producing only local organic food. People should be able to purchase organic food if they have the will and financial means to do so, but not at the expense of the world’s hungry—25,000 of whom die each day from malnutrition.
Unfortunately, these distractions keep us from the main goal. Consider that current agricultural productivity took 10,000 years to attain the production of roughly six billion gross tons of food per year. Today, nearly seven billion people consume that stockpile almost in its entirety every year. Factor in growing prosperity and nearly three billion new mouths by 2050, and you quickly see how the crudest calculations suggest that within the next four decades the world’s farmers will have to double production.
They most likely will need to accomplish this feat on a shrinking land base and in the face of environmental demands caused by climate change. Indeed, this month Oxfam released a study concluding that the multiple effects of climate change might “reverse 50 years of work to end poverty” resulting in “the defining human tragedy of this century.”
At this time of critical need, the epicenter of our collective work should focus on driving continued investments from both the public and private sectors in efficient agriculture production technologies. Investments like those announced by the G-8 leaders will most likely help to place current tools—like fertilizer and hybrid seeds that have been used for decades in the developed world—into the hands of small-holder farmers in remote places like Africa with the potential for noted and measured impact.
That investment will not continue to motivate new and novel discoveries, like drought-tolerant, insect-resistant or higher-yielding seed varieties that advance even faster. To accomplish this, governments must make their decisions about access to new technologies, such as the development of genetically modified organisms—on the basis of science, and not to further political agendas. Open markets will stimulate continued investment, innovation and new developments from public research institutions, private companies and novel public/private partnerships.
We already can see the ongoing value of these investments simply by acknowledging the double-digit productivity gains made in corn and soybeans in much of the developed world. In the U.S., corn productivity has grown more than 40% and soybeans by nearly 30% from 1987 to 2007, while wheat has lagged behind, increasing by only 19% during the same period. Lack of significant investment in rice and wheat, two of the most important staple crops needed to feed our growing world, is unfortunate and short-sighted. It has kept productivity in these two staple crops at relatively the same levels seen at the end of the 1960s and the close of the Green Revolution, which helped turn Mexico and India from starving net grain importers to exporters.
Here, too, the ground seems to be slowly shifting in the right direction, as recent private investments in wheat and public/private partnerships in maize for Africa re-enter the marketplace. These investments and collaborations are critical in our quest to realize much needed productivity gains in rice and wheat to benefit farmers around the world—and, ultimately, those of us who rely on them to produce our daily food.
Of history, one thing is certain: Civilization as we know it could not have evolved, nor can it survive, without an adequate food supply. Likewise, the civilization that our children, grandchildren and future generations come to know will not evolve without accelerating the pace of investment and innovation in agriculture production.
Mr. Borlaug, a professor at Texas A&M University, won the 1970 Nobel Peace Prize for his contributions to the world food supply.
Better seeds and fertilizers, not romantic myths, will let them do it.
WSJ, Jul 31, 2009
Earlier this month in L’Aquila, Italy, a small town recently devastated by an earthquake, leaders of the G-8 countries pledged $20 billion over three years for farm-investment aid that will help resource-poor farmers get access to tools like better seed and fertilizer and help poor nations feed themselves.For those of us who have spent our lives working in agriculture, focusing on growing food versus giving it away is a giant step forward.
Given the right tools, farmers have shown an uncanny ability to feed themselves and others, and to ignite the economic engine that will reverse the cycle of chronic poverty. And the escape from poverty offers a chance for greater political stability in their countries as well.
But just as the ground shifted beneath the Italian community of L’Aquila, so too has the political landscape heaved in other parts of the world, casting unfounded doubts on agricultural tools for farmers made through modern science, such as biotech corn in parts of Europe. Even here at home, some elements of popular culture romanticize older, inefficient production methods and shun fertilizers and pesticides, arguing that the U.S. should revert to producing only local organic food. People should be able to purchase organic food if they have the will and financial means to do so, but not at the expense of the world’s hungry—25,000 of whom die each day from malnutrition.
Unfortunately, these distractions keep us from the main goal. Consider that current agricultural productivity took 10,000 years to attain the production of roughly six billion gross tons of food per year. Today, nearly seven billion people consume that stockpile almost in its entirety every year. Factor in growing prosperity and nearly three billion new mouths by 2050, and you quickly see how the crudest calculations suggest that within the next four decades the world’s farmers will have to double production.
They most likely will need to accomplish this feat on a shrinking land base and in the face of environmental demands caused by climate change. Indeed, this month Oxfam released a study concluding that the multiple effects of climate change might “reverse 50 years of work to end poverty” resulting in “the defining human tragedy of this century.”
At this time of critical need, the epicenter of our collective work should focus on driving continued investments from both the public and private sectors in efficient agriculture production technologies. Investments like those announced by the G-8 leaders will most likely help to place current tools—like fertilizer and hybrid seeds that have been used for decades in the developed world—into the hands of small-holder farmers in remote places like Africa with the potential for noted and measured impact.
That investment will not continue to motivate new and novel discoveries, like drought-tolerant, insect-resistant or higher-yielding seed varieties that advance even faster. To accomplish this, governments must make their decisions about access to new technologies, such as the development of genetically modified organisms—on the basis of science, and not to further political agendas. Open markets will stimulate continued investment, innovation and new developments from public research institutions, private companies and novel public/private partnerships.
We already can see the ongoing value of these investments simply by acknowledging the double-digit productivity gains made in corn and soybeans in much of the developed world. In the U.S., corn productivity has grown more than 40% and soybeans by nearly 30% from 1987 to 2007, while wheat has lagged behind, increasing by only 19% during the same period. Lack of significant investment in rice and wheat, two of the most important staple crops needed to feed our growing world, is unfortunate and short-sighted. It has kept productivity in these two staple crops at relatively the same levels seen at the end of the 1960s and the close of the Green Revolution, which helped turn Mexico and India from starving net grain importers to exporters.
Here, too, the ground seems to be slowly shifting in the right direction, as recent private investments in wheat and public/private partnerships in maize for Africa re-enter the marketplace. These investments and collaborations are critical in our quest to realize much needed productivity gains in rice and wheat to benefit farmers around the world—and, ultimately, those of us who rely on them to produce our daily food.
Of history, one thing is certain: Civilization as we know it could not have evolved, nor can it survive, without an adequate food supply. Likewise, the civilization that our children, grandchildren and future generations come to know will not evolve without accelerating the pace of investment and innovation in agriculture production.
Mr. Borlaug, a professor at Texas A&M University, won the 1970 Nobel Peace Prize for his contributions to the world food supply.
Thursday, July 30, 2009
Brookings: Effective Development Assistance Through Competition
Effective Development Assistance Through Competition. By Clifford F. Zinnes, Senior Fellow, IRIS Center, Department of Economics and Affiliate Faculty, Maryland School of Public Policy at the University of Maryland
The Brookings Institution
Download (PDF)
July 2009 — Introduction
I is now generally accepted that development interventions can only be successful and sustainable if they are accepted by stakeholders and implemented in accordance with local institutions, culture and norms. “Tournament Approaches to Policy Reform—Making Development Assistance more Effective,” by Clifford Zinnes (Brookings Press, 2009), identifies a new class of emerging development intervention designs fitting this mold. In these designs the intervention is approached as a “game” with players, predefined—and, therefore, prospective—rules and payoff s, strategies, and beliefs in which players must compete to achieve the best implementation. “Winning” is based on scores on preannounced purpose-built indicators. Rewards are the sponsor’s aid. While players can be individual organizations (such as schools or even water companies), they are typically jurisdictions (from countries down to villages) so the underlying class of incentive mechanism is called “prospective inter-jurisdictional competition” (PIJC).
This brief summarizes an evaluation of past PIJC applications running from reducing red tape, youth unemployment, and pollution through to increasing literacy, public services, and governance. It asks how successful and sustain able they have been across a variety of situations and whether the approach merits replication and scaling up, particularly for improving the effectiveness of development assistance
The Brookings Institution
Download (PDF)
July 2009 — Introduction
I is now generally accepted that development interventions can only be successful and sustainable if they are accepted by stakeholders and implemented in accordance with local institutions, culture and norms. “Tournament Approaches to Policy Reform—Making Development Assistance more Effective,” by Clifford Zinnes (Brookings Press, 2009), identifies a new class of emerging development intervention designs fitting this mold. In these designs the intervention is approached as a “game” with players, predefined—and, therefore, prospective—rules and payoff s, strategies, and beliefs in which players must compete to achieve the best implementation. “Winning” is based on scores on preannounced purpose-built indicators. Rewards are the sponsor’s aid. While players can be individual organizations (such as schools or even water companies), they are typically jurisdictions (from countries down to villages) so the underlying class of incentive mechanism is called “prospective inter-jurisdictional competition” (PIJC).
This brief summarizes an evaluation of past PIJC applications running from reducing red tape, youth unemployment, and pollution through to increasing literacy, public services, and governance. It asks how successful and sustain able they have been across a variety of situations and whether the approach merits replication and scaling up, particularly for improving the effectiveness of development assistance
Can the Fed Identify Bubbles Before They Happen?
Can the Fed Identify Bubbles Before They Happen? By DONALD L. LUSKIN
The New York Fed’s president says it can. If only it were that easy.
WSJ, Jul 30, 2009
President Barack Obama proposed last month that the Fed act as an overall “systemic risk” regulator, with consolidated supervisory responsibility over “large, interconnected firms whose failure could threaten the stability of the system.” Now William C. Dudley, the ex-Goldman Sachs economist just appointed president of the New York Federal Reserve, has upped the ante. He thinks the Fed should be responsible for identifying and preventing asset-price bubbles. Considering that the Fed’s track record reveals more skill at causing bubbles than preventing them, this is a very dangerous idea.
In a speech in late June in Switzerland, Mr. Dudley said, “I think that this crisis has demonstrated that the cost of waiting to clean up asset bubbles after they burst can be very high. That suggests we should explore how to respond earlier.” Mr. Dudley claims that “Asset bubbles may not be that hard to identify—especially large ones” and suggests “additional policy instruments”—that is, new regulatory powers for the Fed to “more directly influence risk premia.” Because risk premia are a key element in determining asset prices, Mr. Dudley is effectively asking for the power to control asset prices.
Fed Chairman Ben Bernanke and former Chairman Alan Greenspan both disagree. Mr. Greenspan once said that he doubted “that bubbles, even if identified early, could be pre-empted short of the central bank inducing a substantial contraction in economic activity—the very outcome we would be seeking to avoid.” According to Mr. Bernanke, even if the Fed “could identify bubbles, monetary policy is far too blunt a tool for effective use against them.” For these experienced central bankers, policy is a matter of risk-management under uncertainty; they don’t imagine that they are wise enough to detect every problem and solve it.
Mr. Dudley seems surer of himself. He notes confidently, by way of example, that “the housing bubble in the United States had been identified by many by 2005.” Well, that’s true. But it is only true in retrospect. It offers no justification for a leap toward government control of asset prices.
If the housing bubble hadn’t burst, the “many” who identified it in 2005 would have been wrong. The reality is that at all times in markets there are multiple opinions. There can be no assurance that those who hold the correct ones about what is or is not a bubble will end up at the Fed, where they can make prescient policy decisions.
Consider Mr. Dudley himself. In a 2006 speech at a conference of the National Bureau of Economic Research, when he was still with Goldman Sachs, Mr. Dudley listed “five bubbles that one could reasonably have identified in real time.” He said that he’d “tried to speculate against three of the five bubbles” but confessed his speculations met only “with limited success.”
Second, Mr. Dudley’s claim that the housing bubble had been identified in 2005 is a red herring, because by then the bubble was already well advanced (the peak in home prices came in May 2006). To do any good, the Fed would have to identify bubbles before they even happen.
But by 2005, Alan Greenspan had already begun gradually raising interest rates a year earlier, referring to “signs of froth in some local markets.” Mr. Dudley is asking for new regulatory powers based on faulting the Fed for not having or acting on insights that it, in fact, did have and did act on. He has not adduced an example of a bubble that could have been identified and prevented before it happened.
More broadly, there’s little reason to expect the Fed can deal effectively even with a bubble identified well before the fact, or that it might not do more harm than good trying. While John Maynard Keynes and Milton Friedman didn’t agree on much, they did agree that the Great Depression was caused less by the stock market crash of 1929 than by the Fed’s tight-money policies aimed at curbing stock speculation (which those policies failed to do).
It seems unproductive, as we try to extract lessons from the present recession, to go back to the regulatory policies that caused the Great Depression—and to put them on steroids with “additional policy instruments.”
In the end all these concerns, however urgent, are merely pragmatic. The overarching philosophical concern is whether we ought to empower the Federal Reserve to determine asset prices. If so, then on what basis?
In the case of oil, many argue that its price is too high because of speculation. Yet many also say it’s too low, because markets aren’t pricing the negative externalities of carbon emissions.
Which bubble should the Fed prevent—with arbitrary leverage restrictions, position limits, transaction taxes, and who knows what else—the speculation bubble or the carbon bubble?
And if we don’t want the Fed controlling asset prices, then how do we tell the central bank where to stop once we’ve given it a new mandate (on top of the many it already has) to prevent asset bubbles? If the Fed is to determine the price of the overall housing market, or stock market, or oil market, how is that different in principle from having it determine the price of every individual item at Wal-Mart, or the salary of every individual who works there?
This brings us back to politics. The issues involved with bubbles are of more than merely philosophical concern.
Mr. Bernanke’s term as Fed chairman expires in January. Based on his track record, he’s likely a shoo-in for reappointment. But in politics, the winner is often the candidate who makes the biggest promises. So perhaps we’ll be hearing more about preventing bubbles from Mr. Dudley.
Mr. Luskin is chief investment officer at Trend Macrolytics LLC.
The New York Fed’s president says it can. If only it were that easy.
WSJ, Jul 30, 2009
President Barack Obama proposed last month that the Fed act as an overall “systemic risk” regulator, with consolidated supervisory responsibility over “large, interconnected firms whose failure could threaten the stability of the system.” Now William C. Dudley, the ex-Goldman Sachs economist just appointed president of the New York Federal Reserve, has upped the ante. He thinks the Fed should be responsible for identifying and preventing asset-price bubbles. Considering that the Fed’s track record reveals more skill at causing bubbles than preventing them, this is a very dangerous idea.
In a speech in late June in Switzerland, Mr. Dudley said, “I think that this crisis has demonstrated that the cost of waiting to clean up asset bubbles after they burst can be very high. That suggests we should explore how to respond earlier.” Mr. Dudley claims that “Asset bubbles may not be that hard to identify—especially large ones” and suggests “additional policy instruments”—that is, new regulatory powers for the Fed to “more directly influence risk premia.” Because risk premia are a key element in determining asset prices, Mr. Dudley is effectively asking for the power to control asset prices.
Fed Chairman Ben Bernanke and former Chairman Alan Greenspan both disagree. Mr. Greenspan once said that he doubted “that bubbles, even if identified early, could be pre-empted short of the central bank inducing a substantial contraction in economic activity—the very outcome we would be seeking to avoid.” According to Mr. Bernanke, even if the Fed “could identify bubbles, monetary policy is far too blunt a tool for effective use against them.” For these experienced central bankers, policy is a matter of risk-management under uncertainty; they don’t imagine that they are wise enough to detect every problem and solve it.
Mr. Dudley seems surer of himself. He notes confidently, by way of example, that “the housing bubble in the United States had been identified by many by 2005.” Well, that’s true. But it is only true in retrospect. It offers no justification for a leap toward government control of asset prices.
If the housing bubble hadn’t burst, the “many” who identified it in 2005 would have been wrong. The reality is that at all times in markets there are multiple opinions. There can be no assurance that those who hold the correct ones about what is or is not a bubble will end up at the Fed, where they can make prescient policy decisions.
Consider Mr. Dudley himself. In a 2006 speech at a conference of the National Bureau of Economic Research, when he was still with Goldman Sachs, Mr. Dudley listed “five bubbles that one could reasonably have identified in real time.” He said that he’d “tried to speculate against three of the five bubbles” but confessed his speculations met only “with limited success.”
Second, Mr. Dudley’s claim that the housing bubble had been identified in 2005 is a red herring, because by then the bubble was already well advanced (the peak in home prices came in May 2006). To do any good, the Fed would have to identify bubbles before they even happen.
But by 2005, Alan Greenspan had already begun gradually raising interest rates a year earlier, referring to “signs of froth in some local markets.” Mr. Dudley is asking for new regulatory powers based on faulting the Fed for not having or acting on insights that it, in fact, did have and did act on. He has not adduced an example of a bubble that could have been identified and prevented before it happened.
More broadly, there’s little reason to expect the Fed can deal effectively even with a bubble identified well before the fact, or that it might not do more harm than good trying. While John Maynard Keynes and Milton Friedman didn’t agree on much, they did agree that the Great Depression was caused less by the stock market crash of 1929 than by the Fed’s tight-money policies aimed at curbing stock speculation (which those policies failed to do).
It seems unproductive, as we try to extract lessons from the present recession, to go back to the regulatory policies that caused the Great Depression—and to put them on steroids with “additional policy instruments.”
In the end all these concerns, however urgent, are merely pragmatic. The overarching philosophical concern is whether we ought to empower the Federal Reserve to determine asset prices. If so, then on what basis?
In the case of oil, many argue that its price is too high because of speculation. Yet many also say it’s too low, because markets aren’t pricing the negative externalities of carbon emissions.
Which bubble should the Fed prevent—with arbitrary leverage restrictions, position limits, transaction taxes, and who knows what else—the speculation bubble or the carbon bubble?
And if we don’t want the Fed controlling asset prices, then how do we tell the central bank where to stop once we’ve given it a new mandate (on top of the many it already has) to prevent asset bubbles? If the Fed is to determine the price of the overall housing market, or stock market, or oil market, how is that different in principle from having it determine the price of every individual item at Wal-Mart, or the salary of every individual who works there?
This brings us back to politics. The issues involved with bubbles are of more than merely philosophical concern.
Mr. Bernanke’s term as Fed chairman expires in January. Based on his track record, he’s likely a shoo-in for reappointment. But in politics, the winner is often the candidate who makes the biggest promises. So perhaps we’ll be hearing more about preventing bubbles from Mr. Dudley.
Mr. Luskin is chief investment officer at Trend Macrolytics LLC.
The bipartisan Senate negotiators are leaning toward proposing a health-care Fannie Mae
Fannie Med. WSJ Editorial
The bipartisan Senate negotiators are leaning toward proposing a health-care Fannie Mae.
The Wall Street Journal, p A16, Jul 30, 2009
The details of the Senate Finance Committee’s hush-hush health talks aren’t fully known, but leaks suggest that one all-but-certain highlight will be new federally created health “cooperatives” to compete against private insurers. The onus is on Republican negotiators Chuck Grassley and Mike Enzi to explain why this isn’t merely the House “public option” in a better suit.
North Dakota Democrat Kent Conrad floated the co-op concept last month, to attract Republicans who oppose President Obama’s state-run plan. According to Mr. Conrad, these nonprofits—modeled on local electricity or rural farm co-ops—fulfill the liberal goal of competing against private insurers, yet avoid “government control,” since they will be member-owned. Presto, a Beltway splitting of the political baby.
And in theory, health-care co-ops needn’t be destructive. Blue Cross and Blue Shield began as nonprofit health insurers, and some state Blues still are. Organizations like the Group Health Cooperative of Puget Sound are consumer-owned and compete with private plans.
But the Senate is talking about government-sponsored co-ops, and that means multiple devils are in the details. Mr. Conrad confirmed this week that the current plan is to have the feds provide $6 billion in start-up cash, then appoint an “interim” national board to set policies for a network of state or regional co-ops. Mr. Conrad said this new network could attract 12 million people, making it the third-largest health insurer in the country.
Here’s where the trouble starts. At least with the public option, Washington acknowledges that taxpayers are subsidizing public plans. With co-ops, the government role is more subtle, if nearly as corrosive. Start with Mr. Conrad’s $6 billion in “seed money,” which is more than the total annual revenue of all but 20 of the nation’s private plans. This would provide a lower cost of capital than private firms and an implicit claim on any other money the co-ops need. The feds may also exempt co-ops from the taxes that private insurers pay, which average about 1.2% of premiums. This would let co-ops offer lower prices and poach customers with government-subsidized premiums.
The Senators may also exempt co-ops from the state mandates that now drive up the cost of private policies. We’ve long wanted the feds to let individuals or groups (such as the National Federation of Independent Business) form risk pools and buy insurance across state lines free of these costly requirements. But liberals have killed attempts at such Association Health Plans, which suggests their goal in exempting these “government-sponsored health enterprises” from state mandates is merely to give them another pricing edge.
Mr. Conrad suggests the federal board overseeing this network would be temporary, meaning at some point government appointees would be replaced by elected private directors. Mr. Grassley is said to be resisting federal control, but even if he succeeds for now, neither he nor Mr. Conrad can bind a future Congress. When was the last time government supervision became less onerous over time, especially in health care?
All of which makes these co-ops sound a lot like a health-care Fannie Mae and Freddie Mac, which Congress created because there was supposedly no secondary mortgage market. The duo proceeded to use their government subsidy to dominate the market and drive out private competitors.
And all of this is before Congressional liberals get their hands on these co-ops. “We’re going to have some type of public option, call it ‘co-op,’ call it what you want,” Senate Majority Leader Harry Reid said earlier this month. New York’s Chuck Schumer wants $10 billion to seed a single, nationwide co-op that will be governed by a federal board and have the authority to impose price controls. At the very least, liberals will demand to load up co-ops with the minimum-coverage mandates they’ve already included in the House and rival Senate legislation—from maternity care to government-funded abortion.
Messrs. Grassley and Enzi and Maine’s Olympia Snowe are under great pressure to agree to a deal, as Democrats grow more desperate to get political cover for reform that is sinking fast in the polls. The co-op idea might have begun as a benign proposal, but it is likely to become a mini-me public option. Senate Republicans can best serve the cause of bipartisan reform and fiscal sanity by opposing any form of new government health care, and urging Mr. Baucus to turn to the Plan B of helping the uninsured with tax credits.
The bipartisan Senate negotiators are leaning toward proposing a health-care Fannie Mae.
The Wall Street Journal, p A16, Jul 30, 2009
The details of the Senate Finance Committee’s hush-hush health talks aren’t fully known, but leaks suggest that one all-but-certain highlight will be new federally created health “cooperatives” to compete against private insurers. The onus is on Republican negotiators Chuck Grassley and Mike Enzi to explain why this isn’t merely the House “public option” in a better suit.
North Dakota Democrat Kent Conrad floated the co-op concept last month, to attract Republicans who oppose President Obama’s state-run plan. According to Mr. Conrad, these nonprofits—modeled on local electricity or rural farm co-ops—fulfill the liberal goal of competing against private insurers, yet avoid “government control,” since they will be member-owned. Presto, a Beltway splitting of the political baby.
And in theory, health-care co-ops needn’t be destructive. Blue Cross and Blue Shield began as nonprofit health insurers, and some state Blues still are. Organizations like the Group Health Cooperative of Puget Sound are consumer-owned and compete with private plans.
But the Senate is talking about government-sponsored co-ops, and that means multiple devils are in the details. Mr. Conrad confirmed this week that the current plan is to have the feds provide $6 billion in start-up cash, then appoint an “interim” national board to set policies for a network of state or regional co-ops. Mr. Conrad said this new network could attract 12 million people, making it the third-largest health insurer in the country.
Here’s where the trouble starts. At least with the public option, Washington acknowledges that taxpayers are subsidizing public plans. With co-ops, the government role is more subtle, if nearly as corrosive. Start with Mr. Conrad’s $6 billion in “seed money,” which is more than the total annual revenue of all but 20 of the nation’s private plans. This would provide a lower cost of capital than private firms and an implicit claim on any other money the co-ops need. The feds may also exempt co-ops from the taxes that private insurers pay, which average about 1.2% of premiums. This would let co-ops offer lower prices and poach customers with government-subsidized premiums.
The Senators may also exempt co-ops from the state mandates that now drive up the cost of private policies. We’ve long wanted the feds to let individuals or groups (such as the National Federation of Independent Business) form risk pools and buy insurance across state lines free of these costly requirements. But liberals have killed attempts at such Association Health Plans, which suggests their goal in exempting these “government-sponsored health enterprises” from state mandates is merely to give them another pricing edge.
Mr. Conrad suggests the federal board overseeing this network would be temporary, meaning at some point government appointees would be replaced by elected private directors. Mr. Grassley is said to be resisting federal control, but even if he succeeds for now, neither he nor Mr. Conrad can bind a future Congress. When was the last time government supervision became less onerous over time, especially in health care?
All of which makes these co-ops sound a lot like a health-care Fannie Mae and Freddie Mac, which Congress created because there was supposedly no secondary mortgage market. The duo proceeded to use their government subsidy to dominate the market and drive out private competitors.
And all of this is before Congressional liberals get their hands on these co-ops. “We’re going to have some type of public option, call it ‘co-op,’ call it what you want,” Senate Majority Leader Harry Reid said earlier this month. New York’s Chuck Schumer wants $10 billion to seed a single, nationwide co-op that will be governed by a federal board and have the authority to impose price controls. At the very least, liberals will demand to load up co-ops with the minimum-coverage mandates they’ve already included in the House and rival Senate legislation—from maternity care to government-funded abortion.
Messrs. Grassley and Enzi and Maine’s Olympia Snowe are under great pressure to agree to a deal, as Democrats grow more desperate to get political cover for reform that is sinking fast in the polls. The co-op idea might have begun as a benign proposal, but it is likely to become a mini-me public option. Senate Republicans can best serve the cause of bipartisan reform and fiscal sanity by opposing any form of new government health care, and urging Mr. Baucus to turn to the Plan B of helping the uninsured with tax credits.
Workers will pay for the new health-care payroll levy
The Pelosi Jobs Tax. WSJ Editorial
Workers will pay for the new health-care payroll levy.
The Wall Street Journal, page A16, Jul 30, 2009
Even many Democrats are revolting against Speaker Nancy Pelosi’s 5.4% income surtax to finance ObamaCare, but another tax in her House bill isn’t getting enough attention. To wit, the up to 10-percentage point payroll tax increase on workers and businesses that don’t provide health insurance. This should put to rest the illusion that no one making more than $250,000 in income will pay higher taxes.
To understand why, consider how the Pelosi jobs tax works. Under the House bill, firms with employee payroll of above $250,000 without a company health plan would pay a tax starting at 2% of wages per employee. That rate would quickly rise to 8% on firms with total payroll of $400,000 or more. A tax credit would help very small businesses adjust to the new costs, but even a firm with a handful of workers is likely to be subject to this payroll levy. As we went to press, Blue Dogs were taking credit for pushing those payroll amounts up to $500,000 and $750,0000, but those are still small employers.
So who bears the burden of this tax? The economic research is close to unanimous that a payroll tax is a tax on labor and is thus shouldered mostly if not entirely by workers. Employers merely collect the tax and then pass along its costs in lower wages or benefits. This is the view of the Democratic-controlled Congressional Budget Office, which advised on July 13: “If employers who did not offer health insurance were required to pay a fee, employee’s wages and other forms of compensation would generally decline by the amount of that fee from what they otherwise would have been.”
To put this in actual dollars, a worker earning, say, $70,000 a year could lose some $5,600 in take home pay to cover the costs of ObamaCare. And, by the way, this is in addition to the 2.5% tax that the individual worker would have to pay on gross income, if he doesn’t buy the high-priced health insurance that the government will mandate. In sum, that’s a near 10-percentage point tax on wages and salaries on top of the 15% that already hits workers to finance Medicare and Social Security.
Even Democrats are aware that his tax would come out of the wallets of the very workers they pretend to be helping, so they inserted a provision on page 147 of the bill prohibiting firms from cutting salaries to pay the tax. Thus they figure they can decree that wages cannot fall even as costs rise. Of course, all this means is that businesses would lay off some workers, or hire fewer new ones, or pay lower starting salaries or other benefits to the workers they do hire.
Cornell economists Richard Burkhauser and Kosali Simon predicted in a 2007 National Bureau of Economic Research study that a payroll tax increase of about this magnitude plus the recent minimum wage increase will translate into hundreds of thousands of lost jobs for those with low wages. Pay or play schemes, says Mr. Burkauser, “wind up hurting the very low-wage workers they are supposed to help.” The CBO agrees, arguing that play or pay policies “could reduce the hiring of low-wage workers, whose wages could not fall by the full cost of health insurance or a substantial play-or-pay fee if they were close to the minimum wage.”
To make matters worse, many workers and firms would have to pay the Pelosi tax even if the employer already provides health insurance. That’s because the House bill requires firms to pay at least 72.5% of health-insurance premiums for individual workers and 65% for families in order to avoid the tax. A Kaiser Family Foundation survey in 2008 found that about three in five small businesses fail to meet the Pelosi test and will have to pay the tax. In these instances, the businesses will have every incentive simply to drop their coverage.
A new study by Sageworks, Inc., a financial consulting firm, runs the numbers on the income statements of actual companies. It looks at three types of firms with at least $5 million in sales: a retailer, a construction company and a small manufacturer. The companies each have total payroll of between $750,000 and $1 million a year. Assuming the firms absorb the cost of the payroll tax, their net profits fall by one-third on average. That is on top of the 45% income tax and surtax that many small business owners would pay as part of the House tax scheme, so the total reduction in some small business profits would climb to nearly 80%. These lower after-tax profits would mean fewer jobs.
To put it another way, the workers who will gain health insurance from ObamaCare will pay the steepest price for it in either a shrinking pay check, or no job at all.
Workers will pay for the new health-care payroll levy.
The Wall Street Journal, page A16, Jul 30, 2009
Even many Democrats are revolting against Speaker Nancy Pelosi’s 5.4% income surtax to finance ObamaCare, but another tax in her House bill isn’t getting enough attention. To wit, the up to 10-percentage point payroll tax increase on workers and businesses that don’t provide health insurance. This should put to rest the illusion that no one making more than $250,000 in income will pay higher taxes.
To understand why, consider how the Pelosi jobs tax works. Under the House bill, firms with employee payroll of above $250,000 without a company health plan would pay a tax starting at 2% of wages per employee. That rate would quickly rise to 8% on firms with total payroll of $400,000 or more. A tax credit would help very small businesses adjust to the new costs, but even a firm with a handful of workers is likely to be subject to this payroll levy. As we went to press, Blue Dogs were taking credit for pushing those payroll amounts up to $500,000 and $750,0000, but those are still small employers.
So who bears the burden of this tax? The economic research is close to unanimous that a payroll tax is a tax on labor and is thus shouldered mostly if not entirely by workers. Employers merely collect the tax and then pass along its costs in lower wages or benefits. This is the view of the Democratic-controlled Congressional Budget Office, which advised on July 13: “If employers who did not offer health insurance were required to pay a fee, employee’s wages and other forms of compensation would generally decline by the amount of that fee from what they otherwise would have been.”
To put this in actual dollars, a worker earning, say, $70,000 a year could lose some $5,600 in take home pay to cover the costs of ObamaCare. And, by the way, this is in addition to the 2.5% tax that the individual worker would have to pay on gross income, if he doesn’t buy the high-priced health insurance that the government will mandate. In sum, that’s a near 10-percentage point tax on wages and salaries on top of the 15% that already hits workers to finance Medicare and Social Security.
Even Democrats are aware that his tax would come out of the wallets of the very workers they pretend to be helping, so they inserted a provision on page 147 of the bill prohibiting firms from cutting salaries to pay the tax. Thus they figure they can decree that wages cannot fall even as costs rise. Of course, all this means is that businesses would lay off some workers, or hire fewer new ones, or pay lower starting salaries or other benefits to the workers they do hire.
Cornell economists Richard Burkhauser and Kosali Simon predicted in a 2007 National Bureau of Economic Research study that a payroll tax increase of about this magnitude plus the recent minimum wage increase will translate into hundreds of thousands of lost jobs for those with low wages. Pay or play schemes, says Mr. Burkauser, “wind up hurting the very low-wage workers they are supposed to help.” The CBO agrees, arguing that play or pay policies “could reduce the hiring of low-wage workers, whose wages could not fall by the full cost of health insurance or a substantial play-or-pay fee if they were close to the minimum wage.”
To make matters worse, many workers and firms would have to pay the Pelosi tax even if the employer already provides health insurance. That’s because the House bill requires firms to pay at least 72.5% of health-insurance premiums for individual workers and 65% for families in order to avoid the tax. A Kaiser Family Foundation survey in 2008 found that about three in five small businesses fail to meet the Pelosi test and will have to pay the tax. In these instances, the businesses will have every incentive simply to drop their coverage.
A new study by Sageworks, Inc., a financial consulting firm, runs the numbers on the income statements of actual companies. It looks at three types of firms with at least $5 million in sales: a retailer, a construction company and a small manufacturer. The companies each have total payroll of between $750,000 and $1 million a year. Assuming the firms absorb the cost of the payroll tax, their net profits fall by one-third on average. That is on top of the 45% income tax and surtax that many small business owners would pay as part of the House tax scheme, so the total reduction in some small business profits would climb to nearly 80%. These lower after-tax profits would mean fewer jobs.
To put it another way, the workers who will gain health insurance from ObamaCare will pay the steepest price for it in either a shrinking pay check, or no job at all.
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