The Dodd Bill: Bailouts Forever. By PETER J. WALLISON AND DAVID SKEEL
The Lehman Brothers liquidation shows that bankruptcy works fine. The FDIC has no experience with such large institutions.WSJ, Apr 07, 2010
There are many reasons to oppose Sen. Chris Dodd's (D., Conn.) financial regulation bill. The simplest and clearest is that the FDIC is completely unequipped by experience to handle the failure of a giant nonbank financial institution.
The country should be grateful for the determination with which the FDIC Chair, Sheila Bair, has thus far guided the agency through the financial crisis. But it is wrong to think that because the FDIC can handle the closure of small banks it is equipped to take over and close a giant, nonbank financial firm like a Lehman Brothers or an AIG.
Consider first that the largest bank the FDIC closed in the recent financial crisis, IndyMac, had assets of $32 billion. The largest bank ever to fail, Continental Illinois in 1984, had assets of $40 billion. At $639 billion, Lehman Brothers was nearly 15 times bigger; AIG had over $1 trillion in assets when it was kept from failing by the Federal Reserve.
The assets of a large, nonbank financial institution are also different. Neither Lehman nor AIG had insured depositors—or depositors of any kind—and their complex assets and liabilities did not look anything like the simple small loans and residential and commercial mortgages the FDIC deals with.
Moreover, the policies the FDIC follows when it closes small banks would be positively harmful if they were used to close a huge nonbank financial institution. The agency is used to operating in secret, over a weekend; its strategy is always to find a buyer. When applied in the case of a large, failing nonbank financial institution, this means that some other large, "too big to fail" institution will only become that much larger.
When the FDIC can't find a buyer, it can usually transfer a failed bank's deposits to another bank, because deposits have real business value for banks. This is not true of the liabilities of large financial institutions, which consist of derivatives contracts, repurchase agreements, and other complex instruments that no one else is interested in acquiring.
The real choice before the Senate is between the FDIC and the bankruptcy courts. It should be no contest, because bankruptcy courts do have the experience and expertise to handle a large-scale financial failure. This was demonstrated most recently by the Lehman Brothers bankruptcy.
It didn't get a lot of media attention, but an important financial event occurred on March 15, when Lehman Brothers offered a blueprint for its reorganization and exit from Chapter 11—18 months to the day after it filed its bankruptcy petition. In the course of Lehman's resolution, its creditors, shareholders and management all took severe losses.
The firm's principal assets—its broker-dealer, investment-management and underwriting businesses—were all sold off to four different buyers within weeks of the filing of its petition. At the time of its failure, the firm had over 900,000 derivatives contracts, more than 700,000 of which were canceled and the rest either enforced or settled, if its creditors agreed, in the blueprint for the firm's reorganization.
The FDIC has no significant experience with broker dealers, investment management, securities underwriting, derivatives contracts, complex collateral arrangements for repos, or the vast number of creditors that had to be included in the Lehman settlement. Is it at all likely the agency could have done any better?
There is another lesson in the Lehman bankruptcy. Mr. Dodd claims his bill cures the too-big-to-fail problem because it requires the liquidation of a failing firm. But Lehman has been liquidated; what is left is a shell that may or may not struggle back to profitability.
The difference between the Lehman bankruptcy and what the Dodd bill proposes is important to understand. The Dodd bill provides for a $50 billion fund, collected in advance from large financial firms, that will be used for the resolution process. In other words, the creditors of any company that is resolved under the Dodd bill have a chance to be bailed out. That's what these outside funds are for. But if the creditors are to take most of the losses—as they did in Lehman—a fund isn't necessary.
Which system is more likely to eliminate the moral hazard of too big to fail? In a bankruptcy, as in the Lehman case, the creditors learned that when they lend to weak companies they have to be careful. The Dodd bill would teach the opposite lesson. As Sen. Richard Shelby (R., Ala.) wrote in a March 25 letter to Treasury Secretary Tim Geithner, the Dodd bill "reinforces the expectation that the government stands ready to intervene on behalf of large and politically connected financial institutions at the expense of Main Street firms and the American taxpayer. Therefore, the bill institutionalizes 'too big to fail.'"
Mr. Shelby is right on target. It doesn't matter where the money comes from—whether it's the taxpayers or a fund collected from the financial industry itself. The question is how the money is used, and if it is used to bail out creditors of large firms—reducing their lending risks—it will encourage large firms to grow ever larger.
Like Fannie and Freddie, these large financial firms will be seen as protected by the government and, with lower funding costs, will squeeze out their Main Street competitors. Then, if these financial giants are on their way to failure, they are handed over for resolution to a government agency that has no experience with firms of this size or complexity. Surely the Senate will see the flaws in this idea.
Mr. Wallison is a senior fellow at the American Enterprise Institute. Mr. Skeel is a law professor at the University of Pennsylvania.
Tuesday, April 6, 2010
Monday, April 5, 2010
RIP Michael Foot, a Socialist Who Understood What Socialism Was
“Michael Foot, a bookish intellectual and anti-nuclear campaigner who led Britain’s Labour Party to a disastrous defeat in 1983, died [March 3],” reported the Associated Press. He was 96.
And he wasn’t the only one. The American socialist Michael Harrington wrote, “World War I showed that, despite the claims of free-enterprise ideologues, government could organize the economy effectively.” He hailed World War II as having “justified a truly massive mobilization of otherwise wasted human and material resources” and complained that the War Production Board was “a success the United States was determined to forget as quickly as possible.” He went on, “During World War II, there was probably more of an increase in social justice than at any [other] time in American history. Wage and price controls were used to try to cut the differentials between the social classes. . . . There was also a powerful moral incentive to spur workers on: patriotism.”
Collectivists such as Foot and Harrington don’t relish the killing involved in war, but they love war’s domestic effects: centralization and the growth of government power. They know, as did the libertarian writer Randolph Bourne, that “war is the health of the state”—hence the endless search for a moral equivalent of war.
As Don Lavoie demonstrated in his book National Economic Planning: What Is Left?, modern concepts of economic planning—including “industrial policy” and other euphemisms—stem from the experiences of Germany, Great Britain, and the United States in planning their economies during World War I. The power of the central governments grew dramatically during that war and during World War II, and collectivists have pined for the glory days of the War Industries Board and the War Production Board ever since.
Walter Lippmann was an early critic of the collectivists’ fascination with war planning. He wrote, “A close analysis of its theory and direct observation of its practice will disclose that all collectivism. . . is military in method, in purpose, in spirit, and can be nothing else.” Lippman went on to explain why war—or a moral equivalent—is so congenial to collectivism:
Foot personified the socialist tendency in the Labour Party, which Tony Blair successfully erased when he won power at the head of a business-friendly, interventionist “New Labour.” Yet Foot remained a respected, even revered, figure.Michael Foot may have been the most serious intellectual ever to head a major Western political party. He wrote biographies of Labour politicians Aneurin Bevan and Harold Wilson, and of H.G. Wells, and a 1988 book on Lord Byron, “The Politics of Paradise,” and he edited the “Thomas Paine Reader” in 1987. So when you asked Michael Foot what socialism was, you could expect a deeply informed answer. And that’s what the Washington Post got in 1982, when they asked the Labour Party leader for an example of socialism in practice that could “serve as a model of the Britain you envision.” Foot replied,
“Michael Foot was a giant of the Labour movement, a man of passion, principle and outstanding commitment to the many causes he fought for,” Blair said Wednesday. Prime Minister Gordon Brown, Blair’s partner in creating “New Labour,” praised Foot as a “genuine British radical” and a “man of deep principle and passionate idealism.”
The best example that I’ve seen of democratic socialism operating in this country was during the second world war. Then we ran Britain highly efficiently, got everybody a job. . . . The conscription of labor was only a very small element of it. It was a democratic society with a common aim.Wow. Michael Foot, the great socialist intellectual, a giant of the Labour movement, a man of deep principle and passionate idealism, thought that the best example ever seen of “democratic socialism” was a society organized for total war.
And he wasn’t the only one. The American socialist Michael Harrington wrote, “World War I showed that, despite the claims of free-enterprise ideologues, government could organize the economy effectively.” He hailed World War II as having “justified a truly massive mobilization of otherwise wasted human and material resources” and complained that the War Production Board was “a success the United States was determined to forget as quickly as possible.” He went on, “During World War II, there was probably more of an increase in social justice than at any [other] time in American history. Wage and price controls were used to try to cut the differentials between the social classes. . . . There was also a powerful moral incentive to spur workers on: patriotism.”
Collectivists such as Foot and Harrington don’t relish the killing involved in war, but they love war’s domestic effects: centralization and the growth of government power. They know, as did the libertarian writer Randolph Bourne, that “war is the health of the state”—hence the endless search for a moral equivalent of war.
As Don Lavoie demonstrated in his book National Economic Planning: What Is Left?, modern concepts of economic planning—including “industrial policy” and other euphemisms—stem from the experiences of Germany, Great Britain, and the United States in planning their economies during World War I. The power of the central governments grew dramatically during that war and during World War II, and collectivists have pined for the glory days of the War Industries Board and the War Production Board ever since.
Walter Lippmann was an early critic of the collectivists’ fascination with war planning. He wrote, “A close analysis of its theory and direct observation of its practice will disclose that all collectivism. . . is military in method, in purpose, in spirit, and can be nothing else.” Lippman went on to explain why war—or a moral equivalent—is so congenial to collectivism:
Under the system of centralized control without constitutional checks and balances, the war spirit identifies dissent with treason, the pursuit of private happiness with slackerism and sabotage, and, on the other side, obedience with discipline, conformity with patriotism. Thus at one stroke war extinguishes the difficulties of planning, cutting out from under the individual any moral ground as well as any lawful ground on which he might resist the execution of the official plan.National service, national industrial policy, national energy policy—all have the same essence, collectivism, and the same model, war. War is sometimes, regrettably, necessary. But why would anyone want its moral equivalent?
Sunday, April 4, 2010
Beyond Bankruptcy And Bailouts - The FDIC resolution process is the right model for failing firms
Beyond Bankruptcy And Bailouts. By SHEILA BAIR
The FDIC resolution process is the right model for failing firms.WSJ, Monday, April 5, 2010
Meaningful reform of our financial regulatory system is finally within reach. The opportunity to pass such a comprehensive overhaul may not come again in our lifetimes.
Never again should taxpayers be asked to bail out large, failing financial firms. Unfortunately, we still lack a viable way to close financial behemoths without risking market collapse.
The good news is that the FDIC has a well-established process that works for failing banks. Going forward, this model should be available to close large, failing firms. This means banning government assistance to individual companies and forcing them into orderly liquidation.
Financial institutions are unique in that their funding sources can dry up very quickly, disrupting credit flows to the real economy. Bankruptcy can abruptly sever those credit flows, which can cause an immediate systemic impact. The FDIC resolution process for insured banks provides continuity of credit functions, while liquidating the operations of a failing firm.
Over its 76-year history, the FDIC has handled thousands of resolutions of all manner of size and complexity. The FDIC resolution mechanism closes the institution and auctions it to the private sector, reallocating resources to stronger institutions. And it gives the government the right to repudiate executive contracts, eliminate bonuses, require derivatives counterparties to perform on their obligations, and impose losses where they belong: on shareholders and creditors.
Both the already passed House bill, as well as the bill approved by the Senate Banking Committee, draw on the FDIC model to create a resolution authority that specifically applies to large, complex nonbank financial firms. Under both bills, bankruptcy would be the normal process. But under extraordinary procedures, the government would have the option to put the very largest firms into an FDIC-style liquidation process if necessary to avert a broader systemic collapse.
As with banks, the legislation would allow the FDIC to create a temporary institution in order to allow continuity and prevent a systemic collapse while the firm is being liquidated. To provide working capital for this bridge, both bills would require the largest financial firms to pay assessments in advance so that taxpayers would not be at risk. The firms that pose the most risk would pay the most. This orderly liquidation process—funded by the firms themselves—would, for the first time, force these institutions to internalize the full costs of the risks they create.
The FDIC process can also facilitate pre-planning and international cooperation when a large, global financial entity gets into trouble. Given the conflicting bankruptcy regimes throughout the world, there is growing international consensus that we need a special liquidation process available as an alternative. Great Britain and the European Union are both seeking to construct special resolution mechanisms. The U.S. should draw on the FDIC's long experience and lead the way.
Some have tried to label the FDIC model as a "bailout" because it is not bankruptcy. Yet the FDIC process is anything but a bailout, as any small bank can attest.
Some are opposed to this reform because the creation of a realistic liquidation process would eliminate the funding advantage that the largest financial firms have. But these changes will strengthen the competitive position of smaller banks whose relative funding costs have grown significantly in the wake of the bailouts. Because of "too big to fail," markets assume that larger institutions do not face the same risk of failure as smaller ones. Real reform will put their shareholders and creditors on notice to do their own due diligence rather than rely on taxpayers.
The disruptions caused by forcing large, nonbank financial institutions through bankruptcy can create significant risks for the real economy, as we saw in the case of Lehman Brothers in the fall of 2008. The disorderly Lehman collapse and the AIG bailout cannot be our only models. The FDIC-style process represents a proven, third way.
We support any constructive improvements to the legislation that will reinforce market discipline and preclude future bailouts, while providing the FDIC with the necessary tools to market and sell a failed institution in a way that maximizes recoveries and protects the government against loss. Any legislation must remove all doubt that bailouts are an option. Misinformed criticisms of the legislation that simply serve to politicize, obfuscate or delay enactment will only perpetuate the favorable market funding these firms receive from their implicit government backing.
We cannot afford to let the status quo continue. We must embrace sensible regulatory changes and send a strong signal to large institutions and those who invest in them that from now on, they must sink or swim on their own. Only then will theoretical market discipline become reality.
Ms. Bair is chairman of the FDIC.
The FDIC resolution process is the right model for failing firms.WSJ, Monday, April 5, 2010
Meaningful reform of our financial regulatory system is finally within reach. The opportunity to pass such a comprehensive overhaul may not come again in our lifetimes.
Never again should taxpayers be asked to bail out large, failing financial firms. Unfortunately, we still lack a viable way to close financial behemoths without risking market collapse.
The good news is that the FDIC has a well-established process that works for failing banks. Going forward, this model should be available to close large, failing firms. This means banning government assistance to individual companies and forcing them into orderly liquidation.
Financial institutions are unique in that their funding sources can dry up very quickly, disrupting credit flows to the real economy. Bankruptcy can abruptly sever those credit flows, which can cause an immediate systemic impact. The FDIC resolution process for insured banks provides continuity of credit functions, while liquidating the operations of a failing firm.
Over its 76-year history, the FDIC has handled thousands of resolutions of all manner of size and complexity. The FDIC resolution mechanism closes the institution and auctions it to the private sector, reallocating resources to stronger institutions. And it gives the government the right to repudiate executive contracts, eliminate bonuses, require derivatives counterparties to perform on their obligations, and impose losses where they belong: on shareholders and creditors.
Both the already passed House bill, as well as the bill approved by the Senate Banking Committee, draw on the FDIC model to create a resolution authority that specifically applies to large, complex nonbank financial firms. Under both bills, bankruptcy would be the normal process. But under extraordinary procedures, the government would have the option to put the very largest firms into an FDIC-style liquidation process if necessary to avert a broader systemic collapse.
As with banks, the legislation would allow the FDIC to create a temporary institution in order to allow continuity and prevent a systemic collapse while the firm is being liquidated. To provide working capital for this bridge, both bills would require the largest financial firms to pay assessments in advance so that taxpayers would not be at risk. The firms that pose the most risk would pay the most. This orderly liquidation process—funded by the firms themselves—would, for the first time, force these institutions to internalize the full costs of the risks they create.
The FDIC process can also facilitate pre-planning and international cooperation when a large, global financial entity gets into trouble. Given the conflicting bankruptcy regimes throughout the world, there is growing international consensus that we need a special liquidation process available as an alternative. Great Britain and the European Union are both seeking to construct special resolution mechanisms. The U.S. should draw on the FDIC's long experience and lead the way.
Some have tried to label the FDIC model as a "bailout" because it is not bankruptcy. Yet the FDIC process is anything but a bailout, as any small bank can attest.
Some are opposed to this reform because the creation of a realistic liquidation process would eliminate the funding advantage that the largest financial firms have. But these changes will strengthen the competitive position of smaller banks whose relative funding costs have grown significantly in the wake of the bailouts. Because of "too big to fail," markets assume that larger institutions do not face the same risk of failure as smaller ones. Real reform will put their shareholders and creditors on notice to do their own due diligence rather than rely on taxpayers.
The disruptions caused by forcing large, nonbank financial institutions through bankruptcy can create significant risks for the real economy, as we saw in the case of Lehman Brothers in the fall of 2008. The disorderly Lehman collapse and the AIG bailout cannot be our only models. The FDIC-style process represents a proven, third way.
We support any constructive improvements to the legislation that will reinforce market discipline and preclude future bailouts, while providing the FDIC with the necessary tools to market and sell a failed institution in a way that maximizes recoveries and protects the government against loss. Any legislation must remove all doubt that bailouts are an option. Misinformed criticisms of the legislation that simply serve to politicize, obfuscate or delay enactment will only perpetuate the favorable market funding these firms receive from their implicit government backing.
We cannot afford to let the status quo continue. We must embrace sensible regulatory changes and send a strong signal to large institutions and those who invest in them that from now on, they must sink or swim on their own. Only then will theoretical market discipline become reality.
Ms. Bair is chairman of the FDIC.
Wednesday, March 31, 2010
Thin-skinned countries, and why foreigners can't win in China
Why Foreigners Can't Win in China. By WARREN KOZAK
A 1980s swimming race and its lessons for the likes of Google.WSJ, Mar 31, 2010
Nothing in China is ever as it seems—at least for an outsider. I lived there in the mid-1980s while I was working as a journalist. Throughout that period, every time something of consequence occurred there would be a three-day gestation period before all of the pieces fell together and I understood what actually had happened. Back then, I blamed this time lag on cultural differences. In retrospect, it also involved the vast chasm between someone raised in a free society and those used to a totalitarian one.
Google is the first entity—business or government—to square off against the emerging Asian power. On the surface, it's a battle over censorship. But it's important to keep in mind that in China nothing is evident on the surface and reality can reveal itself in the strangest ways. It certainly did for me.
One summer afternoon in 1985, posters went up in my neighborhood announcing a "friendly swimming competition." There were never enough opportunities to really mix with my Chinese neighbors: We would smile at each other and exchange greetings, but it rarely went beyond that. So I accepted any chance that came along.
Unlike most Western journalists in China at that time, I lived in a Chinese neighborhood in a typical Chinese apartment. Granted, the seven other British and American families in the unit were all sequestered together in one section of the building with our own entrance. But everyone around us was Chinese, which made us feel like we actually lived in China.
When the day of the swimming competition arrived one warm Sunday in July, I walked over to the local pool with all of my neighbors. I remember it as one of the more pleasant afternoons that summer, with a lot of laughing and kidding around.
I have never been much of an athlete, but I was on the swim team in high school so I thought there was a chance I might not embarrass myself. I had signed up for three events and to my surprise I managed to win all three races. Prizes were even given out, which I promptly passed on to my Chinese friends. I remember one was a bottle of perfume.
But over the next two weeks, I noticed something that should have registered with me immediately. One day at lunch I was walking with a colleague on the other side of town when some strangers pointed to me using an unfamiliar word: yo yung. I asked him what they were saying and he said "swimmer—they are calling you 'the swimmer.'" By that point, I had already forgotten about the event, but I laughed and explained my great triumph two weeks earlier.
It was around that same time that a Chinese coworker approached me and told me that I had been invited to another swimming competition. This time, it was just me. I felt flattered and I accepted.
I arrived at a different pool with an American friend and a Chinese colleague. We didn't know anyone, and it was very hot. The longer I waited for my race to be called the more uncomfortable I felt in the heat. Finally, I was told to step up to the starting block.
When the starter's pistol rang out, I dove in and quickly realized I wasn't going to lead this time. I did my best to keep up, but I came in dead last. Worse, I was so exhausted I could barely get out of the pool. My American friend said she had never seen such fast swimmers in her life.
I didn't need the three-day incubation period to figure this one out. I had committed an offense two weeks earlier by winning three races, and for this I had to be put in my place. The second race was a setup. As punishments go, this one was relatively benign. I laughed it off because the whole exercise struck me as juvenile. I couldn't imagine anyone in the U.S. going to such lengths to teach a foreigner a lesson in humility. But dismissing it was my mistake: Winning a race was anything but inconsequential to my hosts.
If this minor insult caught the attention of some local party functionary, it's safe to assume that everything from emails to Web surfing does not go unnoticed today. Google has taken a bold step by standing up to this behemoth. Perhaps only Google has the size and strength to do this. It also could make good business sense—if China, Russia or any other country were to use a dissident's email to prosecute and even execute him, it would be a disaster for any search engine. Either way, Google should be commended.
Yet the lesson here goes beyond the Internet and China. Any American doing business abroad should keep something in mind. Americans tend to walk with confidence—not arrogance, confidence—down foreign streets. It's a particular quirk in our national character and it derives, I believe, from our unusually successful history and our power. Some countries are considerably more thin-skinned and don't always view that confidence, history or power in a positive light, even when they have been its beneficiaries.
When I finally got out of the pool that afternoon, one Chinese man watching the race offered his observation: "You were very good," he said with a smile. "They were just better."
Mr. Kozak is the author of "LeMay: The Life and Wars of General Curtis LeMay" (Regnery, 2009).
A 1980s swimming race and its lessons for the likes of Google.WSJ, Mar 31, 2010
Nothing in China is ever as it seems—at least for an outsider. I lived there in the mid-1980s while I was working as a journalist. Throughout that period, every time something of consequence occurred there would be a three-day gestation period before all of the pieces fell together and I understood what actually had happened. Back then, I blamed this time lag on cultural differences. In retrospect, it also involved the vast chasm between someone raised in a free society and those used to a totalitarian one.
Google is the first entity—business or government—to square off against the emerging Asian power. On the surface, it's a battle over censorship. But it's important to keep in mind that in China nothing is evident on the surface and reality can reveal itself in the strangest ways. It certainly did for me.
One summer afternoon in 1985, posters went up in my neighborhood announcing a "friendly swimming competition." There were never enough opportunities to really mix with my Chinese neighbors: We would smile at each other and exchange greetings, but it rarely went beyond that. So I accepted any chance that came along.
Unlike most Western journalists in China at that time, I lived in a Chinese neighborhood in a typical Chinese apartment. Granted, the seven other British and American families in the unit were all sequestered together in one section of the building with our own entrance. But everyone around us was Chinese, which made us feel like we actually lived in China.
When the day of the swimming competition arrived one warm Sunday in July, I walked over to the local pool with all of my neighbors. I remember it as one of the more pleasant afternoons that summer, with a lot of laughing and kidding around.
I have never been much of an athlete, but I was on the swim team in high school so I thought there was a chance I might not embarrass myself. I had signed up for three events and to my surprise I managed to win all three races. Prizes were even given out, which I promptly passed on to my Chinese friends. I remember one was a bottle of perfume.
But over the next two weeks, I noticed something that should have registered with me immediately. One day at lunch I was walking with a colleague on the other side of town when some strangers pointed to me using an unfamiliar word: yo yung. I asked him what they were saying and he said "swimmer—they are calling you 'the swimmer.'" By that point, I had already forgotten about the event, but I laughed and explained my great triumph two weeks earlier.
It was around that same time that a Chinese coworker approached me and told me that I had been invited to another swimming competition. This time, it was just me. I felt flattered and I accepted.
I arrived at a different pool with an American friend and a Chinese colleague. We didn't know anyone, and it was very hot. The longer I waited for my race to be called the more uncomfortable I felt in the heat. Finally, I was told to step up to the starting block.
When the starter's pistol rang out, I dove in and quickly realized I wasn't going to lead this time. I did my best to keep up, but I came in dead last. Worse, I was so exhausted I could barely get out of the pool. My American friend said she had never seen such fast swimmers in her life.
I didn't need the three-day incubation period to figure this one out. I had committed an offense two weeks earlier by winning three races, and for this I had to be put in my place. The second race was a setup. As punishments go, this one was relatively benign. I laughed it off because the whole exercise struck me as juvenile. I couldn't imagine anyone in the U.S. going to such lengths to teach a foreigner a lesson in humility. But dismissing it was my mistake: Winning a race was anything but inconsequential to my hosts.
If this minor insult caught the attention of some local party functionary, it's safe to assume that everything from emails to Web surfing does not go unnoticed today. Google has taken a bold step by standing up to this behemoth. Perhaps only Google has the size and strength to do this. It also could make good business sense—if China, Russia or any other country were to use a dissident's email to prosecute and even execute him, it would be a disaster for any search engine. Either way, Google should be commended.
Yet the lesson here goes beyond the Internet and China. Any American doing business abroad should keep something in mind. Americans tend to walk with confidence—not arrogance, confidence—down foreign streets. It's a particular quirk in our national character and it derives, I believe, from our unusually successful history and our power. Some countries are considerably more thin-skinned and don't always view that confidence, history or power in a positive light, even when they have been its beneficiaries.
When I finally got out of the pool that afternoon, one Chinese man watching the race offered his observation: "You were very good," he said with a smile. "They were just better."
Mr. Kozak is the author of "LeMay: The Life and Wars of General Curtis LeMay" (Regnery, 2009).
Tuesday, March 30, 2010
The Ballad of Sallie Mae - A cautionary tale of public subsidy and arbitrary politics
The Ballad of Sallie Mae. WSJ Editorial
A cautionary tale of public subsidy and arbitrary politics.The Wall Street Journal, page A18, Mar 30, 2010
President Obama today signs his nationalization of the college student loan market, which will put the Department of Education directly in charge of doling out cash to students and colleges. It's one more plank in the cradle-to-grave entitlement state, but this landmark is also a good moment to recount the rise and fall of Sallie Mae. It's a cautionary tale for our times about public subsidy, arbitrary politics and doing business with the government.
The story begins in another progressive heyday, 1965, when the federal government launched a program to make college "affordable" by offering a taxpayer guarantee on student loans. College has if anything become even less affordable since, as the subsidies have merely driven up the prices that colleges charge.
So in 1972, with affordability still an issue, Congress created a new government-sponsored enterprise, the Student Loan Marketing Association, or Sallie Mae. Like Fannie Mae and Freddie Mac in housing, Sallie was born with a federal charter and an implied taxpayer backstop to provide a secondary market for student loans. Sallie would go public in 1983 and, also like Fan and Fred, mint money for shareholders by enjoying a lower cost of funds than fully private lenders.
[Stock price of Sallie Mae January 2000 - March 2010 http://sg.wsj.net/public/resources/images/ED-AL245_1salli_NS_20100329194502.gif]
This free lunch gradually became a source of political concern and an inviting target under federal accounting. In 1993 President Bill Clinton claimed in his first budget that the government could save billions by cutting out the private firms and lending directly to students. But even a liberal Congress had concerns about this "single-payer" model.
That year the White House and Congress compromised and created a "public option." The government's new Direct Lending program would compete with private loan originators. Sallie would still be able to provide a secondary market for the loans made by private firms, but new fees in the law took away much of Sallie's cost-of-funds advantage.
The Clinton Administration continued to push for the end of Sallie's federal charter. But in contrast to Margaret Thatcher's campaign to convert U.K. state-owned monopolies into private competitive companies, the Clinton team wanted to turn most of the market over to its new state-owned program at the Department of Education.
A 1996 law set a 2008 deadline to make Sallie fully private. The company moved aggressively into the loan origination market and went private a few years early, in 2004. For a time, business was very good, and the leader in the student-loan market saw its stock approach $60 a share as recently as 2007.
However, liberals were perennially disappointed that the "public option" at the Department of Education, plagued by customer-service failures, had failed to win most of this business. So when Democrats took control of Congress in 2007, they also seized greater control of education financing. First they reduced the return on originating government loans, then they increased regulation of private loans, and this year they pressed their outright ban on private origination of federal loans. Today a Sallie share costs $12.67. Sallie's shares fell with the financial panic, but thanks to the Congressional squeeze they haven't rebounded like those of the big banks.
We have no special brief for Sallie or its shareholders, who presumably understood the political risks they were running. Democrats have also been shrewd in pitching their takeover as an end to public subsidy, though there will be no such thing. The reality going forward is likely to be even more subsidies, more taxpayer risk and higher tuition prices.
George Miller in the House and Tom Harkin in the Senate are on a march to all-government financing, and that includes enacting new rules in recent years to discourage even private student loans with no taxpayer risk. Sallie had a booming business in fully private loans, but expansions of the federal Stafford and PLUS programs helped drive the volume of Sallie's private business down 50% last year. The PLUS expansion was enacted in 2006, proving that Republicans have also helped to build the subsidy machine.
This week's legislation is also a way to lever up spending on federal college grants. That's because Congress is pouring the putative savings from punishing Sallie and other private companies into more Pell grants. The savings are illusory, based on government accounting rules that ignore the likelihood of higher future loan losses, but the spending will be all too real for taxpayers.
We should note that not even the Congressional Budget Office believes that CBO's analysis is correct. In an only-in-Washington farce, CBO director Douglas Elmendorf has to his credit written a series of letters explaining in detail why his official estimates are wrong, which of course Congress ignores.
Following today's signing ceremony, Sallie says it will have to fire 2,500 of its 8,600 employees, though perhaps they can look for jobs at the Department of Education. Sallie's saga is almost certainly the future of health-care insurers as liberals attempt to resurrect their "public option" once insurance premiums inevitably rise.
As for the cost of college, expect it to become even less affordable as the subsidies keep flowing. The main achievements of this new legislation will be to give more power to government, and to transfer more of the costs and risks of college financing to taxpayers. There's no such thing as a free entitlement state.
A cautionary tale of public subsidy and arbitrary politics.The Wall Street Journal, page A18, Mar 30, 2010
President Obama today signs his nationalization of the college student loan market, which will put the Department of Education directly in charge of doling out cash to students and colleges. It's one more plank in the cradle-to-grave entitlement state, but this landmark is also a good moment to recount the rise and fall of Sallie Mae. It's a cautionary tale for our times about public subsidy, arbitrary politics and doing business with the government.
The story begins in another progressive heyday, 1965, when the federal government launched a program to make college "affordable" by offering a taxpayer guarantee on student loans. College has if anything become even less affordable since, as the subsidies have merely driven up the prices that colleges charge.
So in 1972, with affordability still an issue, Congress created a new government-sponsored enterprise, the Student Loan Marketing Association, or Sallie Mae. Like Fannie Mae and Freddie Mac in housing, Sallie was born with a federal charter and an implied taxpayer backstop to provide a secondary market for student loans. Sallie would go public in 1983 and, also like Fan and Fred, mint money for shareholders by enjoying a lower cost of funds than fully private lenders.
[Stock price of Sallie Mae January 2000 - March 2010 http://sg.wsj.net/public/resources/images/ED-AL245_1salli_NS_20100329194502.gif]
This free lunch gradually became a source of political concern and an inviting target under federal accounting. In 1993 President Bill Clinton claimed in his first budget that the government could save billions by cutting out the private firms and lending directly to students. But even a liberal Congress had concerns about this "single-payer" model.
That year the White House and Congress compromised and created a "public option." The government's new Direct Lending program would compete with private loan originators. Sallie would still be able to provide a secondary market for the loans made by private firms, but new fees in the law took away much of Sallie's cost-of-funds advantage.
The Clinton Administration continued to push for the end of Sallie's federal charter. But in contrast to Margaret Thatcher's campaign to convert U.K. state-owned monopolies into private competitive companies, the Clinton team wanted to turn most of the market over to its new state-owned program at the Department of Education.
A 1996 law set a 2008 deadline to make Sallie fully private. The company moved aggressively into the loan origination market and went private a few years early, in 2004. For a time, business was very good, and the leader in the student-loan market saw its stock approach $60 a share as recently as 2007.
However, liberals were perennially disappointed that the "public option" at the Department of Education, plagued by customer-service failures, had failed to win most of this business. So when Democrats took control of Congress in 2007, they also seized greater control of education financing. First they reduced the return on originating government loans, then they increased regulation of private loans, and this year they pressed their outright ban on private origination of federal loans. Today a Sallie share costs $12.67. Sallie's shares fell with the financial panic, but thanks to the Congressional squeeze they haven't rebounded like those of the big banks.
We have no special brief for Sallie or its shareholders, who presumably understood the political risks they were running. Democrats have also been shrewd in pitching their takeover as an end to public subsidy, though there will be no such thing. The reality going forward is likely to be even more subsidies, more taxpayer risk and higher tuition prices.
George Miller in the House and Tom Harkin in the Senate are on a march to all-government financing, and that includes enacting new rules in recent years to discourage even private student loans with no taxpayer risk. Sallie had a booming business in fully private loans, but expansions of the federal Stafford and PLUS programs helped drive the volume of Sallie's private business down 50% last year. The PLUS expansion was enacted in 2006, proving that Republicans have also helped to build the subsidy machine.
This week's legislation is also a way to lever up spending on federal college grants. That's because Congress is pouring the putative savings from punishing Sallie and other private companies into more Pell grants. The savings are illusory, based on government accounting rules that ignore the likelihood of higher future loan losses, but the spending will be all too real for taxpayers.
We should note that not even the Congressional Budget Office believes that CBO's analysis is correct. In an only-in-Washington farce, CBO director Douglas Elmendorf has to his credit written a series of letters explaining in detail why his official estimates are wrong, which of course Congress ignores.
Following today's signing ceremony, Sallie says it will have to fire 2,500 of its 8,600 employees, though perhaps they can look for jobs at the Department of Education. Sallie's saga is almost certainly the future of health-care insurers as liberals attempt to resurrect their "public option" once insurance premiums inevitably rise.
As for the cost of college, expect it to become even less affordable as the subsidies keep flowing. The main achievements of this new legislation will be to give more power to government, and to transfer more of the costs and risks of college financing to taxpayers. There's no such thing as a free entitlement state.
Monday, March 29, 2010
The Rich Can't Pay for ObamaCare - The president intends to squeeze an extra $1.2 trillion over 10 years from a tiny sliver of taxpayers who already pay more than half of all individual taxes. It won't work.
The Rich Can't Pay for ObamaCare. By ALAN REYNOLDS
The president intends to squeeze an extra $1.2 trillion over 10 years from a tiny sliver of taxpayers who already pay more than half of all individual taxes. It won't work.
WSJ, Mar 03, 2010
President Barack Obama's new health-care legislation aims to raise $210 billion over 10 years to pay for the extensive new entitlements. How? By slapping a 3.8% "Medicare tax" on interest and rental income, dividends and capital gains of couples earning more than $250,000, or singles with more than $200,000.
The president also hopes to raise $364 billion over 10 years from the same taxpayers by raising the top two tax rates to 36%-39.6% from 33%-35%, plus another $105 billion by raising the tax on dividends and capital gains to 20% from 15%, and another $500 billion by capping and phasing out exemptions and deductions.
Add it up and the government is counting on squeezing an extra $1.2 trillion over 10 years from a tiny sliver of taxpayers who already pay more than half of all individual taxes.
It won't work. It never works.
The maximum tax rate fell to 28% in 1988-90 from 50% in 1986, yet individual income tax receipts rose to 8.3% of GDP in 1989 from 7.9% in 1986. The top tax rate rose to 31% in 1991 and revenue fell to 7.6% of GDP in 1992. The top tax rate was increased to 39.6% in 1993, along with numerous major revenue enhancers such as raising the taxable portion of Social Security to 85% of benefits from 50% for seniors who saved or kept working. Yet individual tax revenues were only 7.8% of GDP in 1993, 8.1% in 1994, and did not get back to the 1989 level until 1995.
Punitive tax rates on high-income individuals do not increase revenue. Successful people are not docile sheep just waiting to be shorn.
From past experience, these are just a few of the ways that taxpayers will react to the Obama administration's tax plans:
• Professionals and companies who currently file under the individual income tax as partnerships, LLCs or Subchapter S corporations would form C-corporations to shelter income, because the corporate tax rate would then be lower with fewer arbitrary limits on deductions for costs of earning income.
• Investors who jumped into dividend-paying stocks after 2003 when the tax rate fell to 15% would dump many of those shares in favor of tax-free municipal bonds if the dividend tax went up to 23.8% as planned.
• Faced with a 23.8% capital gains tax, high-income investors would avoid realizing gains in taxable accounts unless they had offsetting losses.
• Faced with a rapid phase-out of deductions and exemptions for reported income above $250,000, any two-earner family in a high-tax state could keep their income below that pain threshold by increasing 401(k) contributions, switching investments into tax-free bond funds, and avoiding the realization of capital gains.
• Faced with numerous tax penalties on added income in general, many two-earner couples would become one-earner couples, early retirement would become far more popular, executives would substitute perks for taxable paychecks, physicians would play more golf, etc.
In short, the evidence is clear that when marginal tax rates go up, the amount of reported incomes goes down. Economists call that "the elasticity of taxable income" (ETI), and measure it by examining income tax returns before and after marginal tax rates claimed a bigger slice of income reported to the IRS.
The evidence is surveyed in a May 2009 paper for the National Bureau of Economic Research by Emmanuel Saez of the University of California at Berkeley, Joel Slemrod of the University of Michigan, and Seth Giertz of the University of Nebraska. They review a number of studies and find that "for an elasticity estimate of 0.5 . . . the fraction of tax revenue lost from behavioral responses would be 43.1%." That elasticity estimate of 0.5 would whittle the Obama team's hoped-for $1.2 trillion down to $671 billion. As the authors note, however, "there is much evidence to suggest that the ETI is higher for high-income individuals." The authors' illustrative use of a 0.5 figure is a perfectly reasonable approximation for most purposes, but not for tax hikes aimed at the very rich.
For incomes above $100,000, a 2008 study by MIT economist Jon Gruber and Mr. Saez found an ETI of 0.57. But for incomes above $350,000 (the top 1%), they estimated the ETI at 0.62. And for incomes above $500,000, Treasury Department economist Bradley Heim recently estimated the ETI at 1.2—which means higher tax rates on the super-rich yield less revenue than lower tax rates.
If an accurate ETI estimate for the highest incomes is closer to 1.0 than 0.5, as such studies suggest, the administration's intended tax hikes on high-income families will raise virtually no revenue at all. Yet the higher tax rates will harm economic growth through reduced labor effort, thwarted entrepreneurship, and diminished investments in physical and human capital. And that, in turn, means a smaller tax base and less revenue in the future.
The ETI studies exclude capital gains, but other research shows that when the capital gains tax goes up investors avoid that tax by selling assets less frequently, and therefore not realizing as many gains in taxable accounts. In these studies elasticity of about 1.0 suggests the higher tax is unlikely to raise revenue and elasticity above 1.0 means higher tax rates will lose revenue.
In a 1999 paper for the Australian Stock Exchange I examined estimates of the elasticity of capital gains realization in 11 studies from the Treasury, Congressional Budget Office and various academics. Whenever there was a range of estimates I used only the lowest figures. The resulting average was 0.9, very close to one. Four of those studies estimated the revenue-maximizing capital gains tax rate, suggesting (on average) that a tax rate higher than 17% would lose revenue.
Raising the top tax on dividends to 23.8% would prove as self-defeating as raising the capital gains tax. Figures from a well-know 2003 study by the Paris School of Economics' Thomas Piketty and Mr. Saez show that the amount of real, inflation-adjusted dividends reported by the top 1% of taxpayers dropped to about $3 billion a year (in 2007 dollars) after the 1993 tax hike. It hovered in that range until 2002, then soared by 169% to nearly $8 billion by 2007 after the dividend tax fell to 15%. Since very few dividends were subject to the highest tax rates before 2003 (many income stocks were held by tax-exempt entities), the 15% dividend tax probably raised revenue.
In short, the belief that higher tax rates on the rich could eventually raise significant sums over the next decade is a dangerous delusion, because it means the already horrific estimates of long-term deficits are seriously understated. The cost of new health-insurance subsidies and Medicaid enrollees are projected to grow by at least 7% a year, which means the cost doubles every decade—to $432 billion a year by 2029, $864 billion by 2039, and more than $1.72 trillion by 2049. If anyone thinks taxing the rich will cover any significant portion of such expenses, think again.
The federal government has embarked on an unprecedented spending spree, granting new entitlements in the guise of refundable tax credits while drawing false comfort from phantom revenue projections that will never materialize.
Mr. Reynolds is a senior fellow with the Cato Institute and the author of "Income and Wealth" (Greenwood Press, 2006).
The president intends to squeeze an extra $1.2 trillion over 10 years from a tiny sliver of taxpayers who already pay more than half of all individual taxes. It won't work.
WSJ, Mar 03, 2010
President Barack Obama's new health-care legislation aims to raise $210 billion over 10 years to pay for the extensive new entitlements. How? By slapping a 3.8% "Medicare tax" on interest and rental income, dividends and capital gains of couples earning more than $250,000, or singles with more than $200,000.
The president also hopes to raise $364 billion over 10 years from the same taxpayers by raising the top two tax rates to 36%-39.6% from 33%-35%, plus another $105 billion by raising the tax on dividends and capital gains to 20% from 15%, and another $500 billion by capping and phasing out exemptions and deductions.
Add it up and the government is counting on squeezing an extra $1.2 trillion over 10 years from a tiny sliver of taxpayers who already pay more than half of all individual taxes.
It won't work. It never works.
The maximum tax rate fell to 28% in 1988-90 from 50% in 1986, yet individual income tax receipts rose to 8.3% of GDP in 1989 from 7.9% in 1986. The top tax rate rose to 31% in 1991 and revenue fell to 7.6% of GDP in 1992. The top tax rate was increased to 39.6% in 1993, along with numerous major revenue enhancers such as raising the taxable portion of Social Security to 85% of benefits from 50% for seniors who saved or kept working. Yet individual tax revenues were only 7.8% of GDP in 1993, 8.1% in 1994, and did not get back to the 1989 level until 1995.
Punitive tax rates on high-income individuals do not increase revenue. Successful people are not docile sheep just waiting to be shorn.
From past experience, these are just a few of the ways that taxpayers will react to the Obama administration's tax plans:
• Professionals and companies who currently file under the individual income tax as partnerships, LLCs or Subchapter S corporations would form C-corporations to shelter income, because the corporate tax rate would then be lower with fewer arbitrary limits on deductions for costs of earning income.
• Investors who jumped into dividend-paying stocks after 2003 when the tax rate fell to 15% would dump many of those shares in favor of tax-free municipal bonds if the dividend tax went up to 23.8% as planned.
• Faced with a 23.8% capital gains tax, high-income investors would avoid realizing gains in taxable accounts unless they had offsetting losses.
• Faced with a rapid phase-out of deductions and exemptions for reported income above $250,000, any two-earner family in a high-tax state could keep their income below that pain threshold by increasing 401(k) contributions, switching investments into tax-free bond funds, and avoiding the realization of capital gains.
• Faced with numerous tax penalties on added income in general, many two-earner couples would become one-earner couples, early retirement would become far more popular, executives would substitute perks for taxable paychecks, physicians would play more golf, etc.
In short, the evidence is clear that when marginal tax rates go up, the amount of reported incomes goes down. Economists call that "the elasticity of taxable income" (ETI), and measure it by examining income tax returns before and after marginal tax rates claimed a bigger slice of income reported to the IRS.
The evidence is surveyed in a May 2009 paper for the National Bureau of Economic Research by Emmanuel Saez of the University of California at Berkeley, Joel Slemrod of the University of Michigan, and Seth Giertz of the University of Nebraska. They review a number of studies and find that "for an elasticity estimate of 0.5 . . . the fraction of tax revenue lost from behavioral responses would be 43.1%." That elasticity estimate of 0.5 would whittle the Obama team's hoped-for $1.2 trillion down to $671 billion. As the authors note, however, "there is much evidence to suggest that the ETI is higher for high-income individuals." The authors' illustrative use of a 0.5 figure is a perfectly reasonable approximation for most purposes, but not for tax hikes aimed at the very rich.
For incomes above $100,000, a 2008 study by MIT economist Jon Gruber and Mr. Saez found an ETI of 0.57. But for incomes above $350,000 (the top 1%), they estimated the ETI at 0.62. And for incomes above $500,000, Treasury Department economist Bradley Heim recently estimated the ETI at 1.2—which means higher tax rates on the super-rich yield less revenue than lower tax rates.
If an accurate ETI estimate for the highest incomes is closer to 1.0 than 0.5, as such studies suggest, the administration's intended tax hikes on high-income families will raise virtually no revenue at all. Yet the higher tax rates will harm economic growth through reduced labor effort, thwarted entrepreneurship, and diminished investments in physical and human capital. And that, in turn, means a smaller tax base and less revenue in the future.
The ETI studies exclude capital gains, but other research shows that when the capital gains tax goes up investors avoid that tax by selling assets less frequently, and therefore not realizing as many gains in taxable accounts. In these studies elasticity of about 1.0 suggests the higher tax is unlikely to raise revenue and elasticity above 1.0 means higher tax rates will lose revenue.
In a 1999 paper for the Australian Stock Exchange I examined estimates of the elasticity of capital gains realization in 11 studies from the Treasury, Congressional Budget Office and various academics. Whenever there was a range of estimates I used only the lowest figures. The resulting average was 0.9, very close to one. Four of those studies estimated the revenue-maximizing capital gains tax rate, suggesting (on average) that a tax rate higher than 17% would lose revenue.
Raising the top tax on dividends to 23.8% would prove as self-defeating as raising the capital gains tax. Figures from a well-know 2003 study by the Paris School of Economics' Thomas Piketty and Mr. Saez show that the amount of real, inflation-adjusted dividends reported by the top 1% of taxpayers dropped to about $3 billion a year (in 2007 dollars) after the 1993 tax hike. It hovered in that range until 2002, then soared by 169% to nearly $8 billion by 2007 after the dividend tax fell to 15%. Since very few dividends were subject to the highest tax rates before 2003 (many income stocks were held by tax-exempt entities), the 15% dividend tax probably raised revenue.
In short, the belief that higher tax rates on the rich could eventually raise significant sums over the next decade is a dangerous delusion, because it means the already horrific estimates of long-term deficits are seriously understated. The cost of new health-insurance subsidies and Medicaid enrollees are projected to grow by at least 7% a year, which means the cost doubles every decade—to $432 billion a year by 2029, $864 billion by 2039, and more than $1.72 trillion by 2049. If anyone thinks taxing the rich will cover any significant portion of such expenses, think again.
The federal government has embarked on an unprecedented spending spree, granting new entitlements in the guise of refundable tax credits while drawing false comfort from phantom revenue projections that will never materialize.
Mr. Reynolds is a senior fellow with the Cato Institute and the author of "Income and Wealth" (Greenwood Press, 2006).
Sunday, March 28, 2010
'Basically an Optimist'—Still. Nobel economist Gary Becker says the health-care bill will cause serious damage, but that the American people can be trusted to vote for limited government in November
'Basically an Optimist'—Still. By PETER ROBINSON
The Nobel economist says the health-care bill will cause serious damage, but that the American people can be trusted to vote for limited government in November.WSJ, Mar 27, 2010
Stanford, Calif.
"No, no. Not at all."
So says Gary Becker when asked if the financial collapse, the worst recession in a quarter of a century, and the rise of an administration intent on expanding the federal government have prompted him to reconsider his commitment to free markets.
Mr. Becker is a founder, along with his friend and teacher the late Milton Friedman, of the Chicago school of economics. More than four decades after winning the John Bates Clark Medal and almost two after winning the Nobel Prize, the 79-year-old occupies an unusual position for a man who has spent his entire professional life in the intensely competitive field of economics: He has nothing left to prove. Which makes it all the more impressive that he works as hard as an associate professor trying to earn tenure. He publishes regularly, carries a full-time teaching load at the University of Chicago (he's in his 32nd year), and engages in a running argument with his friend Judge Richard Posner on the "Becker-Posner Blog," one of the best-read Web sites on economics and the law.
When his teaching schedule permits, Mr. Becker visits the Hoover Institution, the think tank at Stanford where he has been a fellow since 1988. The day he and I meet in his Hoover office, Mr. Becker has already attended a meeting with former Treasury Secretary Hank Paulson and spent several hours touring Apple headquarters down the road in Cupertino with his wife, Guity Nashat, a historian of the Middle East, and their grandson. "I guess you'd call our grandson a computer whiz," he explains proudly. "He's just 14, but he has already sold a couple of apps."
I begin with the obvious question. "The health-care legislation? It's a bad bill," Mr. Becker replies. "Health care in the United States is pretty good, but it does have a number of weaknesses. This bill doesn't address them. It adds taxation and regulation. It's going to increase health costs—not contain them."
Drafting a good bill would have been easy, he continues. Health savings accounts could have been expanded. Consumers could have been permitted to purchase insurance across state lines, which would have increased competition among insurers. The tax deductibility of health-care spending could have been extended from employers to individuals, giving the same tax treatment to all consumers. And incentives could have been put in place to prompt consumers to pay a larger portion of their health-care costs out of their own pockets.
"Here in the United States," Mr. Becker says, "we spend about 17% of our GDP on health care, but out-of-pocket expenses make up only about 12% of total health-care spending. In Switzerland, where they spend only 11% of GDP on health care, their out-of-pocket expenses equal about 31% of total spending. The difference between 12% and 31% is huge. Once people begin spending substantial sums from their own pockets, they become willing to shop around. Ordinary market incentives begin to operate. A good bill would have encouraged that."
Despite the damage this new legislation appears certain to cause, Mr. Becker believes we're probably stuck with it. "Repealing this bill will be very, very difficult," he says. "Once you've got a piece of legislation in place, interest groups grow up around it. Look at Medicare and Medicaid. Originally, the American Medical Association opposed Medicare and Medicaid. Then the AMA came to see them as a source of demand for physicians' services. Today the AMA supports Medicare and Medicaid as staunchly as anyone. Something like that will happen with this new legislation."
Bad legislation, maintained by self-seeking interest groups. Back in 1982, I remind Mr. Becker, the economist Mancur Olson published a book, "The Rise and Decline of Nations," predicting just that trend. Over time, Olson argued, interest groups would form to press for policies that would almost invariably prove protectionist, redistributive or antitechnological. Policies, in a word, that would inhibit economic growth. Yet since the benefits of such policies would accrue directly to interest groups while the costs would be spread across the entire population, very little opposition to such self-seeking would ever develop. Interest groups—and bad policies—would proliferate, and the nation would stagnate.
Olson may have sketched his portrait during the 1980s, but doesn't it display a remarkable likeness to the United States today? Mr. Becker thinks for a moment, swiveling toward the window. Then he swivels back. "Not necessarily," he replies.
"The idea that interest groups can derive specific, concentrated benefits from the political system—yes, that's a very important insight," he says. "But you can have competing interest groups. Look at the automobile industry. The domestic manufacturers in Detroit want protectionist policies. But the auto importers want free trade. So they fight it out. Now sometimes in these fights the dark forces prevail, and sometimes the forces of light prevail. But if you have competing interest groups you don't end up with a systematic bias toward bad policy."
Mr. Becker places his hands behind his head. Once again, he reflects, then smiles wryly. "Of course that doesn't mean there isn't any systematic bias toward bad policy," he says. "There's one bias that we're up against all the time: Markets are hard to appreciate."
Capitalism has produced the highest standard of living in history, and yet markets are hard to appreciate? Mr. Becker explains: "People tend to impute good motives to government. And if you assume that government officials are well meaning, then you also tend to assume that government officials always act on behalf of the greater good. People understand that entrepreneurs and investors by contrast just try to make money, not act on behalf of the greater good. And they have trouble seeing how this pursuit of profits can lift the general standard of living. The idea is too counterintuitive. So we're always up against a kind of in-built suspicion of markets. There's always a temptation to believe that markets succeed by looting the unfortunate."
As he speaks, Mr. Becker appears utterly at ease. He wears loose-fitting clothes and slouches comfortably in his chair. His hair, wispy and white, sets off his most striking feature—penetrating eyes so dark they seem nearly black. Yet those dark eyes display not foreboding, but contentment. He does not have the air of a man contemplating national decline.
I read aloud from an article by historian Victor Davis Hanson that had appeared in the morning newspaper. "[W]e are in revolutionary times," Mr. Hanson argues, "in which the government will grow to assume everything from energy to student loans." Next I read from a column by economist Thomas Sowell. "With the passage of the legislation allowing the federal government to take control of the medical system," Mr. Sowell asserts, "a major turning point has been reached in the dismantling of the values and institutions of America."
"They're very eloquent," Mr. Becker replies, his equanimity undisturbed. "And maybe they're right. But I'm not that pessimistic." The temptation to view markets with suspicion, he explains, is just that: a temptation. Although voters might succumb to the temptation temporarily, over time they know better.
"One of the points Secretary Paulson made earlier today was how outraged—how unexpectedly outraged—the American people became when the government bailed out the banks. This belief in individual responsibility—the belief that people ought to be free to make their own decisions, but should then bear the consequences of those decisions—this remains very powerful. The American people don't want an expansion of government. They want more of what Reagan provided. They want limited government and economic growth. I expect them to say so in the elections this November."
Even if ordinary Americans still want limited government, I ask, what about those who dominate the press and universities? What about the molders of received opinion who claim that the financial crisis marked the demise of capitalism, rendering the Chicago school irrelevant?
"During the financial crisis," he replies, "the government and markets—or rather, some aspects of markets—both failed."
The Federal Reserve, Mr. Becker explains, kept interest rates too low for too long. Freddie Mac and Fannie Mae made the mistake of participating in the market for subprime instruments. And as the crisis developed, regulators failed to respond. "The Fed and the Treasury didn't see the crisis coming until very late. The SEC didn't see it at all," he says.
"The markets made mistakes, too. And some of us who study the markets made mistakes. Some of my colleagues at Chicago probably overestimated the ability of the Fed to smooth disruptions. I didn't write much about the Fed, but if I had I would probably have overestimated the Fed myself. As the banks developed new instruments, economists paid too little attention to the systemic risks—the risks the instruments posed for the whole financial system—as opposed to the risks they posed for individual institutions.
"I learned from Milton Friedman that from time to time there are going to be financial problems, so I wasn't surprised that we had a financial crisis. But I was surprised that the financial crisis spilled over into the real economy. I hadn't expected the crisis to become that bad. That was my mistake."
Once again, Mr. Becker reflects. "So, yes, we economists made mistakes. But has the experience of the past few years invalidated the finding that markets remain the most efficient means for producing economic growth? Not in any way.
"Look at growth in developed countries since the Second World War," he continues. "Even after you take into account the various recessions, including this one, you still end up with a good record. So even if a recession as bad as this one were the price of free markets—and I don't believe that's the correct way of looking at it, because government actions contributed so greatly to the current problem—but even if a bad recession were the price, you'd still decide it was worth paying.
"Or look at developing countries," he says. "China, India, Brazil. A billion people have been lifted out of poverty since 1990 because their countries moved toward more market-based economies—a billion people. Nobody's arguing for taking that back."
My last question involves a little story. Not long before Milton Friedman's death in 2006, I tell Mr. Becker, I had a conversation with Friedman. He had just reviewed the growth of spending that was then taking place under the Bush administration, and he was not happy. After a pause during the Reagan years, Friedman had explained, government spending had once again begun to rise. "The challenge for my generation," Friedman had told me, "was to provide an intellectual defense of liberty." Then Friedman had looked at me. "The challenge for your generation is to keep it."
What was the prospect, I asked Mr. Becker, that this generation would indeed keep its liberty? "It could go either way," he replies. "Milton was right about that."
Mr. Becker recites some figures. For years, federal spending remained level at about 20% of GDP. Now federal spending has risen to 25% of GDP. On current projections, federal spending would soon rise to 28%. "That concerns me," Mr. Becker says. "It concerns me a great deal.
"But when Milton was starting out," he continues, "people really believed a state-run economy was the most efficient way of promoting growth. Today nobody believes that, except maybe in North Korea. You go to China, India, Brazil, Argentina, Mexico, even Western Europe. Most of the economists under 50 have a free-market orientation. Now, there are differences of emphasis and opinion among them. But they're oriented toward the markets. That's a very, very important intellectual victory. Will this victory have an effect on policy? Yes. It already has. And in years to come, I believe it will have an even greater impact."
The sky outside his window has begun to darken. Mr. Becker stands, places some papers into his briefcase, then puts on a tweed jacket and cap. "When I think of my children and grandchildren," he says, "yes, they'll have to fight. Liberty can't be had on the cheap. But it's not a hopeless fight. It's not a hopeless fight by any means. I remain basically an optimist."
Mr. Robinson, a former speechwriter for President Ronald Reagan, is a fellow at Stanford University's Hoover Institution.
The Nobel economist says the health-care bill will cause serious damage, but that the American people can be trusted to vote for limited government in November.WSJ, Mar 27, 2010
Stanford, Calif.
"No, no. Not at all."
So says Gary Becker when asked if the financial collapse, the worst recession in a quarter of a century, and the rise of an administration intent on expanding the federal government have prompted him to reconsider his commitment to free markets.
Mr. Becker is a founder, along with his friend and teacher the late Milton Friedman, of the Chicago school of economics. More than four decades after winning the John Bates Clark Medal and almost two after winning the Nobel Prize, the 79-year-old occupies an unusual position for a man who has spent his entire professional life in the intensely competitive field of economics: He has nothing left to prove. Which makes it all the more impressive that he works as hard as an associate professor trying to earn tenure. He publishes regularly, carries a full-time teaching load at the University of Chicago (he's in his 32nd year), and engages in a running argument with his friend Judge Richard Posner on the "Becker-Posner Blog," one of the best-read Web sites on economics and the law.
When his teaching schedule permits, Mr. Becker visits the Hoover Institution, the think tank at Stanford where he has been a fellow since 1988. The day he and I meet in his Hoover office, Mr. Becker has already attended a meeting with former Treasury Secretary Hank Paulson and spent several hours touring Apple headquarters down the road in Cupertino with his wife, Guity Nashat, a historian of the Middle East, and their grandson. "I guess you'd call our grandson a computer whiz," he explains proudly. "He's just 14, but he has already sold a couple of apps."
I begin with the obvious question. "The health-care legislation? It's a bad bill," Mr. Becker replies. "Health care in the United States is pretty good, but it does have a number of weaknesses. This bill doesn't address them. It adds taxation and regulation. It's going to increase health costs—not contain them."
Drafting a good bill would have been easy, he continues. Health savings accounts could have been expanded. Consumers could have been permitted to purchase insurance across state lines, which would have increased competition among insurers. The tax deductibility of health-care spending could have been extended from employers to individuals, giving the same tax treatment to all consumers. And incentives could have been put in place to prompt consumers to pay a larger portion of their health-care costs out of their own pockets.
"Here in the United States," Mr. Becker says, "we spend about 17% of our GDP on health care, but out-of-pocket expenses make up only about 12% of total health-care spending. In Switzerland, where they spend only 11% of GDP on health care, their out-of-pocket expenses equal about 31% of total spending. The difference between 12% and 31% is huge. Once people begin spending substantial sums from their own pockets, they become willing to shop around. Ordinary market incentives begin to operate. A good bill would have encouraged that."
Despite the damage this new legislation appears certain to cause, Mr. Becker believes we're probably stuck with it. "Repealing this bill will be very, very difficult," he says. "Once you've got a piece of legislation in place, interest groups grow up around it. Look at Medicare and Medicaid. Originally, the American Medical Association opposed Medicare and Medicaid. Then the AMA came to see them as a source of demand for physicians' services. Today the AMA supports Medicare and Medicaid as staunchly as anyone. Something like that will happen with this new legislation."
Bad legislation, maintained by self-seeking interest groups. Back in 1982, I remind Mr. Becker, the economist Mancur Olson published a book, "The Rise and Decline of Nations," predicting just that trend. Over time, Olson argued, interest groups would form to press for policies that would almost invariably prove protectionist, redistributive or antitechnological. Policies, in a word, that would inhibit economic growth. Yet since the benefits of such policies would accrue directly to interest groups while the costs would be spread across the entire population, very little opposition to such self-seeking would ever develop. Interest groups—and bad policies—would proliferate, and the nation would stagnate.
Olson may have sketched his portrait during the 1980s, but doesn't it display a remarkable likeness to the United States today? Mr. Becker thinks for a moment, swiveling toward the window. Then he swivels back. "Not necessarily," he replies.
"The idea that interest groups can derive specific, concentrated benefits from the political system—yes, that's a very important insight," he says. "But you can have competing interest groups. Look at the automobile industry. The domestic manufacturers in Detroit want protectionist policies. But the auto importers want free trade. So they fight it out. Now sometimes in these fights the dark forces prevail, and sometimes the forces of light prevail. But if you have competing interest groups you don't end up with a systematic bias toward bad policy."
Mr. Becker places his hands behind his head. Once again, he reflects, then smiles wryly. "Of course that doesn't mean there isn't any systematic bias toward bad policy," he says. "There's one bias that we're up against all the time: Markets are hard to appreciate."
Capitalism has produced the highest standard of living in history, and yet markets are hard to appreciate? Mr. Becker explains: "People tend to impute good motives to government. And if you assume that government officials are well meaning, then you also tend to assume that government officials always act on behalf of the greater good. People understand that entrepreneurs and investors by contrast just try to make money, not act on behalf of the greater good. And they have trouble seeing how this pursuit of profits can lift the general standard of living. The idea is too counterintuitive. So we're always up against a kind of in-built suspicion of markets. There's always a temptation to believe that markets succeed by looting the unfortunate."
As he speaks, Mr. Becker appears utterly at ease. He wears loose-fitting clothes and slouches comfortably in his chair. His hair, wispy and white, sets off his most striking feature—penetrating eyes so dark they seem nearly black. Yet those dark eyes display not foreboding, but contentment. He does not have the air of a man contemplating national decline.
I read aloud from an article by historian Victor Davis Hanson that had appeared in the morning newspaper. "[W]e are in revolutionary times," Mr. Hanson argues, "in which the government will grow to assume everything from energy to student loans." Next I read from a column by economist Thomas Sowell. "With the passage of the legislation allowing the federal government to take control of the medical system," Mr. Sowell asserts, "a major turning point has been reached in the dismantling of the values and institutions of America."
"They're very eloquent," Mr. Becker replies, his equanimity undisturbed. "And maybe they're right. But I'm not that pessimistic." The temptation to view markets with suspicion, he explains, is just that: a temptation. Although voters might succumb to the temptation temporarily, over time they know better.
"One of the points Secretary Paulson made earlier today was how outraged—how unexpectedly outraged—the American people became when the government bailed out the banks. This belief in individual responsibility—the belief that people ought to be free to make their own decisions, but should then bear the consequences of those decisions—this remains very powerful. The American people don't want an expansion of government. They want more of what Reagan provided. They want limited government and economic growth. I expect them to say so in the elections this November."
Even if ordinary Americans still want limited government, I ask, what about those who dominate the press and universities? What about the molders of received opinion who claim that the financial crisis marked the demise of capitalism, rendering the Chicago school irrelevant?
"During the financial crisis," he replies, "the government and markets—or rather, some aspects of markets—both failed."
The Federal Reserve, Mr. Becker explains, kept interest rates too low for too long. Freddie Mac and Fannie Mae made the mistake of participating in the market for subprime instruments. And as the crisis developed, regulators failed to respond. "The Fed and the Treasury didn't see the crisis coming until very late. The SEC didn't see it at all," he says.
"The markets made mistakes, too. And some of us who study the markets made mistakes. Some of my colleagues at Chicago probably overestimated the ability of the Fed to smooth disruptions. I didn't write much about the Fed, but if I had I would probably have overestimated the Fed myself. As the banks developed new instruments, economists paid too little attention to the systemic risks—the risks the instruments posed for the whole financial system—as opposed to the risks they posed for individual institutions.
"I learned from Milton Friedman that from time to time there are going to be financial problems, so I wasn't surprised that we had a financial crisis. But I was surprised that the financial crisis spilled over into the real economy. I hadn't expected the crisis to become that bad. That was my mistake."
Once again, Mr. Becker reflects. "So, yes, we economists made mistakes. But has the experience of the past few years invalidated the finding that markets remain the most efficient means for producing economic growth? Not in any way.
"Look at growth in developed countries since the Second World War," he continues. "Even after you take into account the various recessions, including this one, you still end up with a good record. So even if a recession as bad as this one were the price of free markets—and I don't believe that's the correct way of looking at it, because government actions contributed so greatly to the current problem—but even if a bad recession were the price, you'd still decide it was worth paying.
"Or look at developing countries," he says. "China, India, Brazil. A billion people have been lifted out of poverty since 1990 because their countries moved toward more market-based economies—a billion people. Nobody's arguing for taking that back."
My last question involves a little story. Not long before Milton Friedman's death in 2006, I tell Mr. Becker, I had a conversation with Friedman. He had just reviewed the growth of spending that was then taking place under the Bush administration, and he was not happy. After a pause during the Reagan years, Friedman had explained, government spending had once again begun to rise. "The challenge for my generation," Friedman had told me, "was to provide an intellectual defense of liberty." Then Friedman had looked at me. "The challenge for your generation is to keep it."
What was the prospect, I asked Mr. Becker, that this generation would indeed keep its liberty? "It could go either way," he replies. "Milton was right about that."
Mr. Becker recites some figures. For years, federal spending remained level at about 20% of GDP. Now federal spending has risen to 25% of GDP. On current projections, federal spending would soon rise to 28%. "That concerns me," Mr. Becker says. "It concerns me a great deal.
"But when Milton was starting out," he continues, "people really believed a state-run economy was the most efficient way of promoting growth. Today nobody believes that, except maybe in North Korea. You go to China, India, Brazil, Argentina, Mexico, even Western Europe. Most of the economists under 50 have a free-market orientation. Now, there are differences of emphasis and opinion among them. But they're oriented toward the markets. That's a very, very important intellectual victory. Will this victory have an effect on policy? Yes. It already has. And in years to come, I believe it will have an even greater impact."
The sky outside his window has begun to darken. Mr. Becker stands, places some papers into his briefcase, then puts on a tweed jacket and cap. "When I think of my children and grandchildren," he says, "yes, they'll have to fight. Liberty can't be had on the cheap. But it's not a hopeless fight. It's not a hopeless fight by any means. I remain basically an optimist."
Mr. Robinson, a former speechwriter for President Ronald Reagan, is a fellow at Stanford University's Hoover Institution.
The ObamaCare Writedowns - The corporate damage rolls in, and Democrats are shocked!
The ObamaCare Writedowns. WSJ Editorial
The corporate damage rolls in, and Democrats are shocked!
WSJ, Mar 27, 2010
It's been a banner week for Democrats: ObamaCare passed Congress in its final form on Thursday night, and the returns are already rolling in. Yesterday AT&T announced that it will be forced to make a $1 billion writedown due solely to the health bill, in what has become a wave of such corporate losses.
This wholesale destruction of wealth and capital came with more than ample warning. Turning over every couch cushion to make their new entitlement look affordable under Beltway accounting rules, Democrats decided to raise taxes on companies that do the public service of offering prescription drug benefits to their retirees instead of dumping them into Medicare. We and others warned this would lead to AT&T-like results, but like so many other ObamaCare objections Democrats waved them off as self-serving or "political."
Perhaps that explains why the Administration is now so touchy. Commerce Secretary Gary Locke took to the White House blog to write that while ObamaCare is great for business, "In the last few days, though, we have seen a couple of companies imply that reform will raise costs for them." In a Thursday interview on CNBC, Mr. Locke said "for them to come out, I think is premature and irresponsible."
Meanwhile, Henry Waxman and House Democrats announced yesterday that they will haul these companies in for an April 21 hearing because their judgment "appears to conflict with independent analyses, which show that the new law will expand coverage and bring down costs."
In other words, shoot the messenger. Black-letter financial accounting rules require that corporations immediately restate their earnings to reflect the present value of their long-term health liabilities, including a higher tax burden. Should these companies have played chicken with the Securities and Exchange Commission to avoid this politically inconvenient reality? Democrats don't like what their bill is doing in the real world, so they now want to intimidate CEOs into keeping quiet.
On top of AT&T's $1 billion, the writedown wave so far includes Deere & Co., $150 million; Caterpillar, $100 million; AK Steel, $31 million; 3M, $90 million; and Valero Energy, up to $20 million. Verizon has also warned its employees about its new higher health-care costs, and there will be many more in the coming days and weeks.
As Joe Biden might put it, this is a big, er, deal for shareholders and the economy. The consulting firm Towers Watson estimates that the total hit this year will reach nearly $14 billion, unless corporations cut retiree drug benefits when their labor contracts let them.
Meanwhile, John DiStaso of the New Hampshire Union Leader reported this week that ObamaCare could cost the Granite State's major ski resorts as much as $1 million in fines, because they hire large numbers of seasonal workers without offering health benefits. "The choices are pretty clear, either increase prices or cut costs, which could mean hiring fewer workers next winter," he wrote.
The Democratic political calculation with ObamaCare is the proverbial boiling frog: Gradually introduce a health-care entitlement by hiding the true costs, hook the middle class on new subsidies until they become unrepealable, but try to delay the adverse consequences and major new tax hikes so voters don't make the connection between their policy and the economic wreckage. But their bill was such a shoddy, jerry-rigged piece of work that the damage is coming sooner than even some critics expected.
The corporate damage rolls in, and Democrats are shocked!
WSJ, Mar 27, 2010
It's been a banner week for Democrats: ObamaCare passed Congress in its final form on Thursday night, and the returns are already rolling in. Yesterday AT&T announced that it will be forced to make a $1 billion writedown due solely to the health bill, in what has become a wave of such corporate losses.
This wholesale destruction of wealth and capital came with more than ample warning. Turning over every couch cushion to make their new entitlement look affordable under Beltway accounting rules, Democrats decided to raise taxes on companies that do the public service of offering prescription drug benefits to their retirees instead of dumping them into Medicare. We and others warned this would lead to AT&T-like results, but like so many other ObamaCare objections Democrats waved them off as self-serving or "political."
Perhaps that explains why the Administration is now so touchy. Commerce Secretary Gary Locke took to the White House blog to write that while ObamaCare is great for business, "In the last few days, though, we have seen a couple of companies imply that reform will raise costs for them." In a Thursday interview on CNBC, Mr. Locke said "for them to come out, I think is premature and irresponsible."
Meanwhile, Henry Waxman and House Democrats announced yesterday that they will haul these companies in for an April 21 hearing because their judgment "appears to conflict with independent analyses, which show that the new law will expand coverage and bring down costs."
In other words, shoot the messenger. Black-letter financial accounting rules require that corporations immediately restate their earnings to reflect the present value of their long-term health liabilities, including a higher tax burden. Should these companies have played chicken with the Securities and Exchange Commission to avoid this politically inconvenient reality? Democrats don't like what their bill is doing in the real world, so they now want to intimidate CEOs into keeping quiet.
On top of AT&T's $1 billion, the writedown wave so far includes Deere & Co., $150 million; Caterpillar, $100 million; AK Steel, $31 million; 3M, $90 million; and Valero Energy, up to $20 million. Verizon has also warned its employees about its new higher health-care costs, and there will be many more in the coming days and weeks.
As Joe Biden might put it, this is a big, er, deal for shareholders and the economy. The consulting firm Towers Watson estimates that the total hit this year will reach nearly $14 billion, unless corporations cut retiree drug benefits when their labor contracts let them.
Meanwhile, John DiStaso of the New Hampshire Union Leader reported this week that ObamaCare could cost the Granite State's major ski resorts as much as $1 million in fines, because they hire large numbers of seasonal workers without offering health benefits. "The choices are pretty clear, either increase prices or cut costs, which could mean hiring fewer workers next winter," he wrote.
The Democratic political calculation with ObamaCare is the proverbial boiling frog: Gradually introduce a health-care entitlement by hiding the true costs, hook the middle class on new subsidies until they become unrepealable, but try to delay the adverse consequences and major new tax hikes so voters don't make the connection between their policy and the economic wreckage. But their bill was such a shoddy, jerry-rigged piece of work that the damage is coming sooner than even some critics expected.
Sunday, March 21, 2010
The Truth about Health Insurance Premiums and Profits
The Truth about Health Insurance Premiums and Profits, by Alan Reynolds
Cato, Mar 15, 2010
On a recent Fox News debate about health insurance, Democratic political strategist Bob Beckel explained that, "The president needed an enemy, and the insurance companies are it."
Proving that point in a Pennsylvania stump speech, President Obama asked, "How much higher do premiums have to go before we do something about it? We can't have a system that works better for the insurance companies than it does for the American people."On February 20, President Obama used his weekly radio show to express outrage that a fraction of Californians buying individual Anthem Blue Cross Blue Shield (BCBS) plans "are likely (sic) to see their rates go up anywhere from 35 to 39 percent." He used those figures to justify preempting state regulation "by ensuring that, if a rate increase is unreasonable and unjustified, health insurers must lower premiums, provide rebates, or take other actions to make premiums affordable."
There was always something peculiar about this desperate effort to demonize certain health insurers. Individual plans account for only 4 percent of the insurance market. So why do they account for 100 percent of the president's fulminations about insurance premiums? Could it be because insurance premiums for the other 96percent have not been rising much?
Nonprofit BCBS plans account for a third of the private health insurance market. Michigan's nonprofit asked for 56 percent premium hike without the national media taking that Hail Mary pass too seriously. But even Obama finds it difficult to accuse nonprofits of being too profitable, so he needed to pin his enemy badge on a for-profit firm – one of Wellpoint's "Anthem" BCBS plans.
Anthem of California's requested rate increase on individual policies was actually 20-35 percent. The only way it could get to 39percent would be if a policyholder insisted on a gold-plated Cadillac plan and also happened to move up into a higher age group. Besides, requesting a rate hike means nothing. Even Obama's radio address mentioned two requests that had been cut in half. Many are denied.
So, how many Californians have actually been faced with a 39 percent increase in their premiums? Exactly zero.
How many are really "likely" to be faced with even a 35 percent increase after state insurance regulators have their say? My forecast: Zero.
The president highlighted the "likely" increases of "35 to 39 percent" to suggest insurance companies in general were asking for huge premium increases just to boost their lavish profits. He complained that in the $1.2 trillion health insurance industry, "the five largest insurers made record profits of over $12 billion." But that puny sum includes WellPoint's sale of its pharmacy benefits management company NextRX to Express Scripts for $4.7 billion last April. Adding that $4.7 billion to WellPoint profits is like saying a family's income rose by $1 million because they sold a million-dollar home.
University of Michigan economist Mark Perry calculated that without the sale of NextRX, "WellPoint's profit margin would have been only 3.9 percent, the industry average profit margin would have been closer to 3percent"— $100 per policy. Yet Obama concluded that, "The bottom line is that the status quo is good for the insurance industry and bad for America."
The media echoed the president words endlessly, and wrote as though one company's hypothetical request for increases of 35 percent-39 percent were a nationwide threat—even to those with group insurance—rather than an unique and highly unlikely request that might (if magically approved) touch a miniscule number in a hostile state for health insurers.
"It doesn't take too many 39 percent increases, like the recent one proposed in California that has garnished so much attention, to put insurance out of reach," exclaimed a New York Times report. That same paper's editorial added, "The recently announced plan by Anthem Blue Cross in California to raise annual premiums by 35 to 39 percent for nearly a quarter of its individual subscribers is a chilling harbinger of what is to come if reform fails." Really?
Grasping for confirmation of the 39 percent figure, some reporters cited a Feb. 24 memo about Wellpoint written by journalist Scott Paltrow for The Center for American Progress Action Fund. Paltrow gathered news clippings suggesting premiums are "expected to" increase by "up to" some scary number in various states. For California, however, Paltrow's source was the president's speech. This Action Fund is a is no "liberal think tank," as the Wall Street Journal put it, but a 501(c)4 lobby which can participate in campaigns and elections. Founded by Bill Clinton's former chief of staff John Podesta, it's a propaganda arm of the Democratic Party.
A Wall Street Journal story about Wellpoint's wish list for higher premiums cites the Department of Health and Human Services as its source. That means a shoddy four-page polemic at HealthReform.gov, "Insurance Companies Prosper, Families Suffer." That pamphlet, like another from the Commonwealth Fund, cites Duke Helfand, an L.A. Times reporter who wrote on Feb. 4 that, "brokers who sell these policies say they are fielding numerous calls from customers incensed over premium increases of 30percent to 39 percent."
So, the president's 39 percent figure came from Duke Helfand, who heard it from insurance brokers who, in turn, said they heard it from customers. The 39 percent figure referred to one person named Mary. After rounding Helfand's 30 percent up to 35 percent, however, that was good enough for the president's purposes.
Like Obama, the "Insurance Companies Prosper" pamphlet repeatedly confuses asking with getting. "Anthem Blue Cross isn't alone in insisting on premium hikes," it says; "Anthem of Connecticut requested an increase of 24 percent last year, which was rejected by the state." So what? If you went to your boss and insisted on a 24 percent raise, would that constitute proof that wages are rising too fast?
If Obama has been reduced to basing the redistribution of health care on the cost of health insurance premiums, he will need much better facts. Fortunately, credible statistics on health insurance premiums are readily available from the Centers for Medicare and Medicaid Services (CMS) and Bureau of Labor Statistics.
CMS statistics (Table 12) reveal that the net cost of private health insurance – premiums minus benefits – fell by 2.8percent in 2008. Furthermore, CMS Health Spending Projections predict that spending on private health insurance will rise 2.5percent in 2010, while prices of medical goods and services rise by 2.8percent.
Consumers' cost of health premiums is also part of the detailed consumer price index. After all the overheated rhetoric about "requested" or "expected" increases of "up to" 39 percent, who would have imagined that the average consumer cost of health insurance premiums fell by 3.5 percent in 2008 and fell by another 3.2 percent in 2009?
The president's health insurance proposals hoped to use stern command-and-control techniques to run the health insurance system. It was all about minimizing free choice and maximizing brute force—forcing people to buy certain kinds of politically-designed insurance, forcing insurers to cover services many consumers do not want to pay for, and forcing insurers to curb or roll back premiums even as medical costs go up. The whole shaky apparatus was built upon even shakier statistics—including the purely hypothetical 39 percent increase in premiums that Mary's insurance agent reported to Duke Helfand.
Tuesday, March 16, 2010
Principles for enhancing corporate governance issued by Basel Committee
Principles for enhancing corporate governance issued by Basel Committee
BIS, March 16, 2010
Drawing on lessons learned during the financial crisis, the Basel Committee's document, Principles for enhancing corporate governance, sets out best practices for banking organisations. Mr Nout Wellink, Chairman of the Basel Committee and President of the Netherlands Bank, stated that "the crisis has highlighted the critical importance of sound corporate governance for banking organisations. Careful implementation of these principles by banks, along with rigorous supervisory review and follow-up, will enhance bank safety and soundness as well as the stability of the financial system".
The Committee's principles address fundamental deficiencies in bank corporate governance that became apparent during the financial crisis. The principles cover:
- the role of the board, which includes approving and overseeing the implementation of the bank's risk strategy taking account of the bank's long-term financial interests and safety;
- the board's qualifications. For example, the board should have adequate knowledge and experience relevant to each of the material financial activities the bank intends to pursue to enable effective governance and oversight of the bank;
- the importance of an independent risk management function, including a chief risk officer or equivalent with sufficient authority, stature, independence, resources and access to the board;
- the need to identify, monitor and manage risks on an ongoing firm-wide and individual entity basis. This should be based on risk management systems and internal control infrastructures that are appropriate for the external risk landscape and the bank's risk profile; and
- the board's active oversight of the compensation system's design and operation, including careful alignment of employee compensation with prudent risk-taking, consistent with the Financial Stability Board's principles.
Supervisors also have a critical role in ensuring that banks practice good corporate governance. In line with the Committee's principles, supervisors should establish guidance or rules requiring banks to have robust corporate governance strategies, policies and procedures. Commensurate with a bank's size, complexity, structure and risk profile, supervisors should regularly evaluate the bank's corporate governance policies and practices as well as its implementation of the Committee's principles.
Ms Danièle Nouy, Chair of the Corporate Governance Task Force and Secretary General of the French Banking Commission, noted that "the financial crisis has underscored how insufficient attention to fundamental corporate governance concepts can have devastating effects on an institution and its continued viability. It is clear that many banks did not fully implement these fundamental concepts. The obvious lesson is that banks need to improve their corporate governance practices and supervisors must ensure that sound corporate governance principles are thoroughly and consistently implemented".
The need for sound corporate governance improvements has also been observed in other financial sectors. That is why, in developing the principles issued today, the Basel Committee has coordinated its work with the International Association of Insurance Supervisors (IAIS), which is currently reviewing its Insurance Core Principles to address corporate governance areas more fully. The Basel Committee and the IAIS seek to collaborate on monitoring the sound implementation of their respective principles.
The U.S. in the World Race for Clean Electric Generating Capacity
The U.S. in the World Race for Clean Electric Generating Capacity
IER, March 15, 2010
China has already made its choice. China is spending about $9 billion a month on clean energy. It is also investing $44 billion by 2012 and $88 billion by 2020 in Ultra High Voltage transmission lines. These lines will allow China to transmit power from huge wind and solar farms far from its cities. While every country’s transmission needs are different, this is a clear sign of China’s commitment to developing renewable energy.
The United States, meanwhile, has fallen behind.
– U.S. Secretary of Energy, Steven Chu
In an attempt to generate support for implementing a cap on carbon dioxide, Energy Secretary Steven Chu and others paint a very dire picture of the U.S.-vs.-China race for clean energy, implying that China is quickly outstripping us in that race.[i] However, all the facts are not on the table. In both 2008 and 2009, the U.S. added more non-hydroelectric renewable capacity than it added traditional capacity (natural gas, coal, oil, and nuclear).[ii] At the end of 2009, the U.S. ranked first in wind capacity in the world with China’s wind capacity about 30 percent less than the U.S. level. At the end of 2008 (the most recent data available), the U.S. ranked fourth in solar capacity, with only Germany, Spain, and Japan having a larger amount. Where China is outstripping us in domestic construction is in coal-fired, nuclear, and hydroelectric generating technologies. Because of U.S. legal and regulatory red tape, it is much harder to build these energy technologies in the U.S. than in China.
What Does the Capacity Data Show for Wind and Solar Power?
According to the Solar Energy Industries Association, the U.S. ranks fourth in the world in solar capacity with 8,800 megawatts at the end of 2008.[iii] Germany, Spain, and Japan, in that order, had larger amounts of solar power at the end of 2008 than the U.S.[iv] China had just 0.3 megawatts of installed solar PV capacity at the end of 2009[v] or 0.003 percent of the solar capacity of the U.S.
According to the Global Wind Energy Council, the U.S. leads the world in wind generating capacity, with 35.2 gigawatts at the end of 2009; Germany is second with 25.8 gigawatts, and China is third with 25.1 gigawatts.[vi] In 2009, the U.S. installed almost 10 gigawatts of wind capacity, a record,[vii] and China installed 13 gigawatts.[viii]
Why is China Building Wind and Solar Capacity?
China builds wind and solar because ratepayers in other countries are paying them to do so. China has been taking advantage of the Clean Development Mechanism (CDM) under the Kyoto Protocol to obtain funding for its solar and wind power.[ix] Under this program, administered by the United Nations, wealthy countries can contribute funds and get credit for “clean technology” built elsewhere as long as it is additional, that is, as long as that technology would not have been built otherwise. China is the world’s largest beneficiary of the program and has benefited to the point where 30 percent of its wind capacity is not operable because it is not connected to the grid.[x] However, in mid 2009, the U.N. started questioning whether the Chinese CDM program was in fact “additional,” because the U.N. found that China was lowering its subsidies to qualify for the program.[xi] That is, China was reducing its own government’s support in order to get international subsidies.
How Do the U.S. and China Electric Construction Programs Compare?
While China is building non-hydro renewable slightly faster than the United States, overall it is building new electrical generation much, much faster than the United States. The most comparable international database on electric generating capacity is found on the Energy Information Administration (EIA) website.[xii] Comparing the electric generating capacity data by technology type for the two countries, at the end of 2007 (the last year of comparable data), the Chinese had a total of 716 gigawatts of generating capacity, about 280 gigawatts less than the 995 gigawatts of capacity in the U.S.
The U.S. has been building generating capacity at a very slow rate, adding between 8 and 15 gigawatts a year since 2004. The Chinese in contrast, to fuel their bulging economy, have added between 75 and 106 gigawatts a year, from 2004 to 2007. Based on Secretary Chu’s comments, one might think that the additional capacity that China was adding was all non-hydroelectric renewable and nuclear capacity. However, that has not been the case. Between 2004 and 2007, the Chinese have added 226 gigawatts of fossil fuel generating capacity, 40 gigawatts of hydroelectric capacity, 2 gigawatts of nuclear capacity, and only 6 gigawatts of non-hydro renewable capacity.
What are China’s Electric Construction Plans?
Both China’s generating sector and its industrial sector rely heavily on coal, with 79 percent of its electric generation being coal-fired.[xiii] According to the National Energy Technology Laboratory (NETL), from 2004 through 2007, China has been building 30 to 70 gigawatts of coal-fired power a year, and has about 70 gigawatts more under construction. NETL sees China building over 185 gigawatts of coal-fired plants in the future.[xiv] (See figure below.)
According to Australia, China is planning to build 500 coal-fired plants over the next ten years.[xv] That means: every week or so, for the next decade, China will open another large coal-fired power plant.[xvi] Australia has just signed a $60 billion deal with China to build a coal mine in Queensland and a 311-mile rail way for transporting the coal to the coast for export to China’s power plants.[xvii]
While China has been slow in adding nuclear power plants, it currently has 20 nuclear reactors under construction and more starting construction this year.[xviii] Four AP 1000 reactors are under construction at 2 different sites: Haiyang and Sanmen.[xix] These are the same reactors that the U.S. Nuclear Regulatory Commission (NRC) has ruled need additional analysis, testing, or design modifications of the shield building to ensure compliance with NRC requirements before they can be constructed in the U.S.[xx] China expects to achieve a total nuclear capacity of 60 gigawatts by 2020, and 120 to 160 gigawatts by 2030,[xxi] surpassing the total nuclear capacity of the United States.
China has a goal to produce 15 percent of its energy from renewables by 2020.[xxii] To help meet this goal, China is planning to build the world’s largest wind farm in the northwest part of the country. The plan is for 5 gigawatts in 2010, expanding to 20 gigawatts in 2020, at a cost of $1 million per megawatt,[xxiii] or $1,000 per kilowatt, about half the cost of an onshore wind unit in the U.S., according to the Energy Information Administration.[xxiv]
What about the U.S.?
The U.S. has made it difficult to build generating plants in this country, particularly coal-fired and nuclear power plants. According to NETL, only eight coal-fired plants totaling 3,218 megawatts became operational in the U.S. in 2009, the largest increase in coal-fired capacity additions in one year since 1991.[xxv] Prospects of cap-and-trade legislation, reviews and re-reviews by the Environmental Protection Agency, direct action protests, petition drives, renewable portfolio standards in many states, competition from wind power, and lawsuits have slowed the construction of new coal-fired plants.[xxvi] As of late February, activists had derailed 97 of the 151 new plants that were in the pipeline in May 2007. According to the Sierra Club, 126 coal plants have been stopped since 2001. And, for the first time in more than 6 years, not one new coal plant broke ground in 2009. The graph above compares the coal-plant additions in the U.S. to that of China, showing only a handful of coal plants under construction in the U.S. With new coal-fired plants extremely limited by the above, some are purporting that the current direction for activists may be to phase out the existing fleet of coal-fired power plants.[xxvii] Because the capital cost of most of our coal-fired plants has been paid, that fleet produces almost 50 percent of our electricity at very little cost. Average production costs for coal-fired generators in 2008 were only 2.75 cents per kilowatt hour, second to our nuclear plants at 1.87 cents per kilowatt hour.[xxviii]
No nuclear plant has started up in the U.S. since 1996,[xxix] and no construction permits have been issued since 1979.[xxx]NRC requirements, financing difficulties, and slow fulfillment of the nuclear provisions of the Energy Policy Act of 2005 have slowed the construction of new nuclear power reactors. However, as part of the 2005 Energy Policy Act, President Obama announced last month that his administration is offering conditional commitments for $8.33 billion in loan guarantees for nuclear power construction and operation. Two new 1,100 megawatt Westinghouse AP1000 nuclear reactors are to be constructed at the Alvin W. Vogtle Electric Generating Plant in Burke, Georgia, supplementing the two reactors already at the site. The two new nuclear generating units are expected to begin commercial operation in 2016 and 2017 at a cost of $14 billion. As part of the conditional loan guarantee deal, the U.S. Nuclear Regulatory Commission must determine if the AP1000 fulfills the regulatory requirements for a construction and operating license.[xxxi] (These are the same units permitted, licensed, and being constructed in China right now.) But, as a recent Wall Street Journal energy conference noted, loan guarantees are “meaningless in the absence of regulatory certainty.” Further, Obama’s budget cutbacks for Yucca Mountain, the proposed nuclear waste repository, are yet another signal that President Obama may not “walk the talk.”[xxxii]
Natural gas and wind power are the technologies that seem best able to surmount the financial, regulatory, and legal hurdles of getting plants permitted and operational. In 2008, the U.S. added over 15,000 megawatts of electric generating capacity, of which 4,556 megawatts was natural gas-fired and 8,136 megawatts was wind power.[xxxiii] However, organized local opposition has halted even some renewable energy projects by using “not in my back yard” (NIMBY) issues, changing zoning laws, opposing permits, filing lawsuits, and bleeding projects of their financing.[xxxiv]
The Energy information Administration projects that the U.S. will need 200 gigawatts of additional generating capacity by 2035 to replace capacity that will be retired and to meet new electricity demand.[xxxv] Of that amount, EIA expects that 13 percent will be coal-fired, 53 percent natural gas-fired, 4 percent will be from nuclear power, and 29 percent from renewable power (23 percent is expected to be wind power), assuming that no changes would be made to current laws and regulations.[xxxvi]
Conclusion
China realizes that it needs affordable energy to fuel its economic growth, and is building all forms of generating technologies at breakneck speed. By contrast, the electric generating construction program in the United States has slowed tremendously, owing to regulatory, financial, and legal problems. Without reasonably priced energy, it will be difficult to achieve high levels of economic growth in the U.S., and industry will move offshore where energy is more affordable. Will Secretary Chu’s policies get us to affordable energy, or will the administration’s policies divert us from obtaining the energy that we need to fuel our economy?
[i] Climate Wire, Energy policy: U.S. clean tech outpaced by China—Chu, March 9, 2010, http://www.eenews.net/climatewire/2010/03/09/3 [ii] Renewable Energy Policy Network for the 21st Century, Renewables Global Status Report 2009 Update, May 13, 2009, http://www.ren21.net/pdf/RE_GSR_2009_Update.pdf
[iii] http://www.seia.org/cs/about_solar_energy/industry_data
[iv] Ibid.
[v] Center for American Progress, Out of the Running, March 2010, http://www.eenews.net/public/25/14571/features/documents/2010/03/04/document_cw_01.pdf
[vi] Global Wind Energy Council, http://www.gwec.net/index.php?id=13, and Global Wind Energy Council, Global wind power boom continues amid economic woes, March 2, 2010, http://www.gwec.net/index.php?id=30&no_cache=1&tx_ttnews[tt_news]=247&tx_ttnews[backPid]=4&cHash=1196e940a0
[vii] American Wind Energy Association, U.S. Wind Energy breaks all records, January 26, 2010, http://www.awea.org/newsroom/releases/01-26-10_AWEA_Q4_and_Year-End_Report_Release.html
[viii] Global Wind Energy Council, Global wind power boom continues amid economic woes, March 2, 2010, http://www.gwec.net/index.php?id=30&no_cache=1&tx_ttnews[tt_news]=247&tx_ttnews[backPid]=4&cHash=1196e940a0
[ix] CNN, U.N. halts funds to China wind farms, December 1, 2010, http://edition.cnn.com/2009/BUSINESS/12/01/un.china.wind.ft/index.html
[x] The Wall Street Journal, “China’s Wind Farms Come with a Catch: Coal Plants”, September 28, 2009, http://online.wsj.com/article/SB125409730711245037.html
[xi] CNN, U.N. halts funds to China wind farms, December 1, 2010, http://edition.cnn.com/2009/BUSINESS/12/01/un.china.wind.ft/index.html
[xii]http://tonto.eia.doe.gov/cfapps/ipdbproject/iedindex3.cfm?tid=2&pid=34&aid=7&cid=r1,&syid=2004&eyid=2008&unit=MK
[xiii] Energy information Administration, International Energy Outlook 2009, http://www.eia.doe.gov/oiaf/ieo/index.html
[xiv] National Energy Technology Laboratory, Tracking New Coal-fired Power Plants, January 8, 2010, http://www.netl.doe.gov/coal/refshelf/ncp.pdf
[xv] http://windfarms.wordpress.com/2009/01/29/china-building-500-coal-plants/
[xvi] The New York Times, “Pollution From Chinese Coal Casts a Global Shadow”, http://www.nytimes.com/2006/06/11/business/worldbusiness/11chinacoal.html?_r=1
[xvii] Australia Signs Huge China Coal Deal, http://windfarms.wordpress.com/2010/02/06/australia-signs-huge-china-coal-deal/
[xviii] Nuclear Power in China”, World Nuclear Association, November 6, 2009, www.world-nuclear.org/info/inf63.html
[xix] Westinghouse News Releases, “Westinghouse and the Shaw Group Celebrate First Concrete Pour at Haiyang Nuclear Site in China”, September 29, 2009, http://westinghousenuclear.mediaroom.com/index.php?s=43&item=200
[xx] Westinghouse Statement Regarding NRC News Release on AP1000 Shield Building, http://westinghousenuclear.mediaroom.com/index.php?s=43&item=203
[xxi] Nuclear Power in China, World Nuclear Association, November 6, 2009, www.world-nuclear.org/info/inf63.html
[xxii] USA Today, “China Pushes Solar, Wind Power Development”, http://www.usatoday.com/money/industries/energy/environment/2009-11-17-chinasolar17_CV_N.htm
[xxiii] The Wall Street Journal, “Wind Power: China’s Massive and Cheap Bet on Wind Farms”, July 6, 2009, http://blogs.wsj.com/environmentalcapital/2009/07/06/wind-power-chinas-massive-and-cheap-bet-on-wind-farms/
[xxiv] Energy information Administration, Assumptions to the Annual Energy Outlook 2009, Table 8.2, Electricity Market Module, http://www.eia.doe.gov/oiaf/aeo/assumption/index.html
[xxv] National Energy Technology Laboratory, Tracking New Coal-fired Power Plants, January 8, 2010, http://www.netl.doe.gov/coal/refshelf/ncp.pdf
[xxvi] A messy but practical strategy for phasing out the U.S. coal fleet, http://www.grist.org/article/death-of-a-thousand-cuts/
[xxvii]Ibid.
[xxviii]http://www.nei.org/resourcesandstats/documentlibrary/reliableandaffordableenergy/graphicsandcharts/uselectricityproductioncosts
[xxix] “Nuclear Power: Outlook for new U.S. Reactors”, Congressional Research Service, March 9, 2007, www.fas.org/sgp/crs/misc/RL33442.pdf
[xxx] Energy Information Administration, Annual Energy Review 2008, Table 9.1, http://www.eia.doe.gov/emeu/aer/pdf/pages/sec9_3.pdf
[xxxi] Environment News Service, Obama Backs First New U.S. Nuclear Plant with $8.3 Billion, February 16, 2010, http://www.ens-newswire.com/ens/feb2010/2010-02-16-091.html
[xxxii] The Wall Street Journal, An Energy Head Fake, March 11,2010, http://online.wsj.com/article/SB10001424052748704784904575112144130306052.html?mod=WSJ_Opinion_AboveLEFTTop
[xxxiii] Energy Information Administration, Electric Power Annual, Tables 1.1 and 1.1.A, http://www.eia.doe.gov/cneaf/electricity/epa/epa_sum.html
[xxxiv] For a repository of stalled and stopped energy projects, see U.S. Chamber of Commerce, “Project No Project Energy-Back On Track”, http://pnp.uschamber.com/
[xxxv] Energy Information Administration, Annual Energy Outlook 2010 Early Release, Table A9, http://www.eia.doe.gov/oiaf/aeo/pdf/appa.pdf
[xxxvi] Ibid.
The United States, meanwhile, has fallen behind.
– U.S. Secretary of Energy, Steven Chu
In an attempt to generate support for implementing a cap on carbon dioxide, Energy Secretary Steven Chu and others paint a very dire picture of the U.S.-vs.-China race for clean energy, implying that China is quickly outstripping us in that race.[i] However, all the facts are not on the table. In both 2008 and 2009, the U.S. added more non-hydroelectric renewable capacity than it added traditional capacity (natural gas, coal, oil, and nuclear).[ii] At the end of 2009, the U.S. ranked first in wind capacity in the world with China’s wind capacity about 30 percent less than the U.S. level. At the end of 2008 (the most recent data available), the U.S. ranked fourth in solar capacity, with only Germany, Spain, and Japan having a larger amount. Where China is outstripping us in domestic construction is in coal-fired, nuclear, and hydroelectric generating technologies. Because of U.S. legal and regulatory red tape, it is much harder to build these energy technologies in the U.S. than in China.
What Does the Capacity Data Show for Wind and Solar Power?
According to the Solar Energy Industries Association, the U.S. ranks fourth in the world in solar capacity with 8,800 megawatts at the end of 2008.[iii] Germany, Spain, and Japan, in that order, had larger amounts of solar power at the end of 2008 than the U.S.[iv] China had just 0.3 megawatts of installed solar PV capacity at the end of 2009[v] or 0.003 percent of the solar capacity of the U.S.
According to the Global Wind Energy Council, the U.S. leads the world in wind generating capacity, with 35.2 gigawatts at the end of 2009; Germany is second with 25.8 gigawatts, and China is third with 25.1 gigawatts.[vi] In 2009, the U.S. installed almost 10 gigawatts of wind capacity, a record,[vii] and China installed 13 gigawatts.[viii]
Why is China Building Wind and Solar Capacity?
China builds wind and solar because ratepayers in other countries are paying them to do so. China has been taking advantage of the Clean Development Mechanism (CDM) under the Kyoto Protocol to obtain funding for its solar and wind power.[ix] Under this program, administered by the United Nations, wealthy countries can contribute funds and get credit for “clean technology” built elsewhere as long as it is additional, that is, as long as that technology would not have been built otherwise. China is the world’s largest beneficiary of the program and has benefited to the point where 30 percent of its wind capacity is not operable because it is not connected to the grid.[x] However, in mid 2009, the U.N. started questioning whether the Chinese CDM program was in fact “additional,” because the U.N. found that China was lowering its subsidies to qualify for the program.[xi] That is, China was reducing its own government’s support in order to get international subsidies.
How Do the U.S. and China Electric Construction Programs Compare?
While China is building non-hydro renewable slightly faster than the United States, overall it is building new electrical generation much, much faster than the United States. The most comparable international database on electric generating capacity is found on the Energy Information Administration (EIA) website.[xii] Comparing the electric generating capacity data by technology type for the two countries, at the end of 2007 (the last year of comparable data), the Chinese had a total of 716 gigawatts of generating capacity, about 280 gigawatts less than the 995 gigawatts of capacity in the U.S.
The U.S. has been building generating capacity at a very slow rate, adding between 8 and 15 gigawatts a year since 2004. The Chinese in contrast, to fuel their bulging economy, have added between 75 and 106 gigawatts a year, from 2004 to 2007. Based on Secretary Chu’s comments, one might think that the additional capacity that China was adding was all non-hydroelectric renewable and nuclear capacity. However, that has not been the case. Between 2004 and 2007, the Chinese have added 226 gigawatts of fossil fuel generating capacity, 40 gigawatts of hydroelectric capacity, 2 gigawatts of nuclear capacity, and only 6 gigawatts of non-hydro renewable capacity.
What are China’s Electric Construction Plans?
Both China’s generating sector and its industrial sector rely heavily on coal, with 79 percent of its electric generation being coal-fired.[xiii] According to the National Energy Technology Laboratory (NETL), from 2004 through 2007, China has been building 30 to 70 gigawatts of coal-fired power a year, and has about 70 gigawatts more under construction. NETL sees China building over 185 gigawatts of coal-fired plants in the future.[xiv] (See figure below.)
While China has been slow in adding nuclear power plants, it currently has 20 nuclear reactors under construction and more starting construction this year.[xviii] Four AP 1000 reactors are under construction at 2 different sites: Haiyang and Sanmen.[xix] These are the same reactors that the U.S. Nuclear Regulatory Commission (NRC) has ruled need additional analysis, testing, or design modifications of the shield building to ensure compliance with NRC requirements before they can be constructed in the U.S.[xx] China expects to achieve a total nuclear capacity of 60 gigawatts by 2020, and 120 to 160 gigawatts by 2030,[xxi] surpassing the total nuclear capacity of the United States.
China has a goal to produce 15 percent of its energy from renewables by 2020.[xxii] To help meet this goal, China is planning to build the world’s largest wind farm in the northwest part of the country. The plan is for 5 gigawatts in 2010, expanding to 20 gigawatts in 2020, at a cost of $1 million per megawatt,[xxiii] or $1,000 per kilowatt, about half the cost of an onshore wind unit in the U.S., according to the Energy Information Administration.[xxiv]
What about the U.S.?
The U.S. has made it difficult to build generating plants in this country, particularly coal-fired and nuclear power plants. According to NETL, only eight coal-fired plants totaling 3,218 megawatts became operational in the U.S. in 2009, the largest increase in coal-fired capacity additions in one year since 1991.[xxv] Prospects of cap-and-trade legislation, reviews and re-reviews by the Environmental Protection Agency, direct action protests, petition drives, renewable portfolio standards in many states, competition from wind power, and lawsuits have slowed the construction of new coal-fired plants.[xxvi] As of late February, activists had derailed 97 of the 151 new plants that were in the pipeline in May 2007. According to the Sierra Club, 126 coal plants have been stopped since 2001. And, for the first time in more than 6 years, not one new coal plant broke ground in 2009. The graph above compares the coal-plant additions in the U.S. to that of China, showing only a handful of coal plants under construction in the U.S. With new coal-fired plants extremely limited by the above, some are purporting that the current direction for activists may be to phase out the existing fleet of coal-fired power plants.[xxvii] Because the capital cost of most of our coal-fired plants has been paid, that fleet produces almost 50 percent of our electricity at very little cost. Average production costs for coal-fired generators in 2008 were only 2.75 cents per kilowatt hour, second to our nuclear plants at 1.87 cents per kilowatt hour.[xxviii]
No nuclear plant has started up in the U.S. since 1996,[xxix] and no construction permits have been issued since 1979.[xxx]NRC requirements, financing difficulties, and slow fulfillment of the nuclear provisions of the Energy Policy Act of 2005 have slowed the construction of new nuclear power reactors. However, as part of the 2005 Energy Policy Act, President Obama announced last month that his administration is offering conditional commitments for $8.33 billion in loan guarantees for nuclear power construction and operation. Two new 1,100 megawatt Westinghouse AP1000 nuclear reactors are to be constructed at the Alvin W. Vogtle Electric Generating Plant in Burke, Georgia, supplementing the two reactors already at the site. The two new nuclear generating units are expected to begin commercial operation in 2016 and 2017 at a cost of $14 billion. As part of the conditional loan guarantee deal, the U.S. Nuclear Regulatory Commission must determine if the AP1000 fulfills the regulatory requirements for a construction and operating license.[xxxi] (These are the same units permitted, licensed, and being constructed in China right now.) But, as a recent Wall Street Journal energy conference noted, loan guarantees are “meaningless in the absence of regulatory certainty.” Further, Obama’s budget cutbacks for Yucca Mountain, the proposed nuclear waste repository, are yet another signal that President Obama may not “walk the talk.”[xxxii]
Natural gas and wind power are the technologies that seem best able to surmount the financial, regulatory, and legal hurdles of getting plants permitted and operational. In 2008, the U.S. added over 15,000 megawatts of electric generating capacity, of which 4,556 megawatts was natural gas-fired and 8,136 megawatts was wind power.[xxxiii] However, organized local opposition has halted even some renewable energy projects by using “not in my back yard” (NIMBY) issues, changing zoning laws, opposing permits, filing lawsuits, and bleeding projects of their financing.[xxxiv]
The Energy information Administration projects that the U.S. will need 200 gigawatts of additional generating capacity by 2035 to replace capacity that will be retired and to meet new electricity demand.[xxxv] Of that amount, EIA expects that 13 percent will be coal-fired, 53 percent natural gas-fired, 4 percent will be from nuclear power, and 29 percent from renewable power (23 percent is expected to be wind power), assuming that no changes would be made to current laws and regulations.[xxxvi]
Conclusion
China realizes that it needs affordable energy to fuel its economic growth, and is building all forms of generating technologies at breakneck speed. By contrast, the electric generating construction program in the United States has slowed tremendously, owing to regulatory, financial, and legal problems. Without reasonably priced energy, it will be difficult to achieve high levels of economic growth in the U.S., and industry will move offshore where energy is more affordable. Will Secretary Chu’s policies get us to affordable energy, or will the administration’s policies divert us from obtaining the energy that we need to fuel our economy?
[i] Climate Wire, Energy policy: U.S. clean tech outpaced by China—Chu, March 9, 2010, http://www.eenews.net/climatewire/2010/03/09/3 [ii] Renewable Energy Policy Network for the 21st Century, Renewables Global Status Report 2009 Update, May 13, 2009, http://www.ren21.net/pdf/RE_GSR_2009_Update.pdf
[iii] http://www.seia.org/cs/about_solar_energy/industry_data
[iv] Ibid.
[v] Center for American Progress, Out of the Running, March 2010, http://www.eenews.net/public/25/14571/features/documents/2010/03/04/document_cw_01.pdf
[vi] Global Wind Energy Council, http://www.gwec.net/index.php?id=13, and Global Wind Energy Council, Global wind power boom continues amid economic woes, March 2, 2010, http://www.gwec.net/index.php?id=30&no_cache=1&tx_ttnews[tt_news]=247&tx_ttnews[backPid]=4&cHash=1196e940a0
[vii] American Wind Energy Association, U.S. Wind Energy breaks all records, January 26, 2010, http://www.awea.org/newsroom/releases/01-26-10_AWEA_Q4_and_Year-End_Report_Release.html
[viii] Global Wind Energy Council, Global wind power boom continues amid economic woes, March 2, 2010, http://www.gwec.net/index.php?id=30&no_cache=1&tx_ttnews[tt_news]=247&tx_ttnews[backPid]=4&cHash=1196e940a0
[ix] CNN, U.N. halts funds to China wind farms, December 1, 2010, http://edition.cnn.com/2009/BUSINESS/12/01/un.china.wind.ft/index.html
[x] The Wall Street Journal, “China’s Wind Farms Come with a Catch: Coal Plants”, September 28, 2009, http://online.wsj.com/article/SB125409730711245037.html
[xi] CNN, U.N. halts funds to China wind farms, December 1, 2010, http://edition.cnn.com/2009/BUSINESS/12/01/un.china.wind.ft/index.html
[xii]http://tonto.eia.doe.gov/cfapps/ipdbproject/iedindex3.cfm?tid=2&pid=34&aid=7&cid=r1,&syid=2004&eyid=2008&unit=MK
[xiii] Energy information Administration, International Energy Outlook 2009, http://www.eia.doe.gov/oiaf/ieo/index.html
[xiv] National Energy Technology Laboratory, Tracking New Coal-fired Power Plants, January 8, 2010, http://www.netl.doe.gov/coal/refshelf/ncp.pdf
[xv] http://windfarms.wordpress.com/2009/01/29/china-building-500-coal-plants/
[xvi] The New York Times, “Pollution From Chinese Coal Casts a Global Shadow”, http://www.nytimes.com/2006/06/11/business/worldbusiness/11chinacoal.html?_r=1
[xvii] Australia Signs Huge China Coal Deal, http://windfarms.wordpress.com/2010/02/06/australia-signs-huge-china-coal-deal/
[xviii] Nuclear Power in China”, World Nuclear Association, November 6, 2009, www.world-nuclear.org/info/inf63.html
[xix] Westinghouse News Releases, “Westinghouse and the Shaw Group Celebrate First Concrete Pour at Haiyang Nuclear Site in China”, September 29, 2009, http://westinghousenuclear.mediaroom.com/index.php?s=43&item=200
[xx] Westinghouse Statement Regarding NRC News Release on AP1000 Shield Building, http://westinghousenuclear.mediaroom.com/index.php?s=43&item=203
[xxi] Nuclear Power in China, World Nuclear Association, November 6, 2009, www.world-nuclear.org/info/inf63.html
[xxii] USA Today, “China Pushes Solar, Wind Power Development”, http://www.usatoday.com/money/industries/energy/environment/2009-11-17-chinasolar17_CV_N.htm
[xxiii] The Wall Street Journal, “Wind Power: China’s Massive and Cheap Bet on Wind Farms”, July 6, 2009, http://blogs.wsj.com/environmentalcapital/2009/07/06/wind-power-chinas-massive-and-cheap-bet-on-wind-farms/
[xxiv] Energy information Administration, Assumptions to the Annual Energy Outlook 2009, Table 8.2, Electricity Market Module, http://www.eia.doe.gov/oiaf/aeo/assumption/index.html
[xxv] National Energy Technology Laboratory, Tracking New Coal-fired Power Plants, January 8, 2010, http://www.netl.doe.gov/coal/refshelf/ncp.pdf
[xxvi] A messy but practical strategy for phasing out the U.S. coal fleet, http://www.grist.org/article/death-of-a-thousand-cuts/
[xxvii]Ibid.
[xxviii]http://www.nei.org/resourcesandstats/documentlibrary/reliableandaffordableenergy/graphicsandcharts/uselectricityproductioncosts
[xxix] “Nuclear Power: Outlook for new U.S. Reactors”, Congressional Research Service, March 9, 2007, www.fas.org/sgp/crs/misc/RL33442.pdf
[xxx] Energy Information Administration, Annual Energy Review 2008, Table 9.1, http://www.eia.doe.gov/emeu/aer/pdf/pages/sec9_3.pdf
[xxxi] Environment News Service, Obama Backs First New U.S. Nuclear Plant with $8.3 Billion, February 16, 2010, http://www.ens-newswire.com/ens/feb2010/2010-02-16-091.html
[xxxii] The Wall Street Journal, An Energy Head Fake, March 11,2010, http://online.wsj.com/article/SB10001424052748704784904575112144130306052.html?mod=WSJ_Opinion_AboveLEFTTop
[xxxiii] Energy Information Administration, Electric Power Annual, Tables 1.1 and 1.1.A, http://www.eia.doe.gov/cneaf/electricity/epa/epa_sum.html
[xxxiv] For a repository of stalled and stopped energy projects, see U.S. Chamber of Commerce, “Project No Project Energy-Back On Track”, http://pnp.uschamber.com/
[xxxv] Energy Information Administration, Annual Energy Outlook 2010 Early Release, Table A9, http://www.eia.doe.gov/oiaf/aeo/pdf/appa.pdf
[xxxvi] Ibid.
Saturday, March 13, 2010
Ma’s Puzzling Midterm Malaise
Ma’s Puzzling Midterm Malaise. By Shelley Rigger, Brown Professor of East Asian Politics, Davidson College
The Brookings Institution, March 2010
It is two years this month since Ma Ying-jeou was elected president of Taiwan. As he approaches the mid-term milestone, President Ma’s record is puzzling. On the one hand, he has made significant progress toward his most important goals. First, he’s stabilized cross-Strait relations. The tension that gripped Taiwan and China during the Chen years has abated, high-level visits have become routine and the two sides are engaged in energetic negotiations on a wide range of issues. Also, after taking a hard hit in the global economic downturn of 2008, Taiwan’s economy is bouncing back. Exports in December 2009 were almost 50 percent greater than December 2008 (admittedly a very low baseline), and economic forecasters predict a 2010 economic growth rate between 4 and 5 percent, although unemployment remains high. Ma has also rebuilt the all-important Taipei-Washington relationship, culminating in the Obama administration’s recent announcement that it would complete a long-awaited arms sale to Taiwan.
What is puzzling is that these successes have failed to endear President Ma to his constituents. On the contrary, his popularity has plummeted since the election, and today his personal approval ratings hover below 30 percent. The dissatisfaction extends to his party as well, and it’s been manifested concretely in elections. Ma’s party, the Kuomintang (KMT), won a far smaller share of the vote in December’s local elections than it captured in the previous round, and it lost 6 out of 7 legislative by-elections in January and February. Municipal elections at the end of this year already are being touted as a bellwether for the 2012 presidential race, when Ma is expected to seek a second term, and the trends do not look good. Hence the conundrum: Why are Ma’s successes in areas believed to be important to voters – reducing cross-Strait tension and reviving the economy – not boosting his approval ratings or his party’s political fortunes?
When Ma Ying-jeou was elected president two years ago, there was a widespread feeling that Taiwan would “get back to normal.” From 2000 to 2008, relations between Taipei and Beijing stagnated, mainly because PRC leaders refused contact with Taiwan’s Sino-skeptical president, the Democratic Progressive Party (DPP) leader Chen Shui-bian. For eight years, neither Taipei nor Beijing was interested in taking the political risks that reaching out to the other side would have entailed, and in the absence of progress, tensions increased. Thus, the return to power of the KMT, Taiwan’s long-time ruling party, was a welcome development in Washington and Beijing – and in Taiwan, where voters gave Ma 58 percent of the presidential vote as well as a legislature in which his party controlled almost 75 percent of the seats.
If Ma’s election meant things were “getting back to normal,” two years into his presidency we have a clear picture of what “normal” really means in the Taiwan Strait. In Taiwan’s domestic politics, “normal” is a highly-competitive democracy in which the executive is forced to accommodate an active and activist legislature while defending its positions from an energetic – and politically viable – opposition. In cross-Strait relations, “normal” means little overt tension, but no great breakthroughs to permanently resolve the conflict between Taiwan and the People’s Republic of China.
To understand the state of play in the Taiwan Strait it is helpful to keep in mind Robert Putnam’s “two-level game” metaphor for international negotiations. Beijing and Taipei are working together to design a framework for relations that allows for mutually-beneficial economic and people-to-people interactions while balancing the two sides’ long-term goals regarding international status and potential unification. Some of this work is conducted by representatives of the two governments in high-level, formal negotiations. The content of those negotiations is shaped and constrained by what Putnam calls “level two” interactions – more commonly known as domestic politics. In Taiwan’s case, Ma’s domestic weakness constrains the pace and content of cross-Strait rapprochement.
Under President Ma, elite-level interactions have been smoother than ever before, but that only accentuates the ways domestic politics limit Taiwan leaders’ options. Those limitations are more evident today in part because the game was suspended for most of the Chen era. When Chen took office, PRC leaders paused the game because they perceived little benefit in negotiating with Chen, whom they believed was irreversibly committed to a pro-independence line. In their view, a small group of “stubborn independence elements” had wrested political control from the pro-China mainstream. They hoped that refusing to deal with Chen would help to restore the mainstream to power.
When Ma was elected, Beijing was happy to resume play. In the view of Chinese leaders, Ma was an improvement, not only over his immediate predecessor, but over the previous president, Lee Teng-hui, too. To give Ma a solid start, Beijing was prepared to concede important points. Rather than repeating their demand that Taiwan agree to their One China Principle as the basis for reopening negotiations, PRC leaders accepted Ma’s endorsement of the 1992 Consensus (a bit of verbal hand-waving in which the two sides agreed to set aside the problem of defining the “one China” they both claimed to believe in) as “close enough.”
Once it restarted the game, Beijing quickly discovered that having the right elite-level interlocutor was only the beginning. Many Taiwanese found Chen’s Sino-phobic policies unnecessarily provocative, but that did not mean they were ready to support blindly whatever policy the next administration proposed. As the pace of elite-level interactions accelerated, the focus of the domestic political debated shifted from restraining Chen’s provocations to scrutinizing Ma’s performance. At first, voters gave Ma (and, to a lesser extent, the KMT-controlled legislature) the benefit of the doubt, but new government’s record was disappointing, and voters began to lose confidence.
A number of factors contributed to the public’s waning trust in Ma. The lack of transparency in decision-making has been a particular concern. DPP leaders suggest high-ranking KMT cross-Strait specialists might be willing to compromise Taiwan’s autonomy in order to reach an agreement with Beijing. They argue that the government’s closed cross-Strait decision-making – including on the proposed Economic Cooperation Framework Agreement (ECFA) – is dangerous, because these specialists, whether out of perfidy or naïveté, might fail to protect Taiwan’s interests. (For example, the proximate cause of National Security Advisor Su Chi’s resignation in February was his mishandling of beef import negotiations with the U.S., but as Bruce Jacobs wrote in the Taipei Times, many Taiwanese found his resignation “long overdue” because they doubted Su’s commitment to Taiwan.)
To protect Taiwan from a badly-negotiated deal, Ma’s critics are demanding ECFA be subjected to formal ratification, either by popular referendum or in the legislature. Legislative speaker Wang Jin-pyng, a KMT member, has said the legislature might overrule the ECFA deal if it does not meet lawmakers’ standards. President Ma chairs the KMT, so the lack of support for his policies within the party reinforces the sense that he and his inner circle lack a firm hand for dealing with opponents – and a firm hand is exactly what they need to deal effectively with the ever-tough negotiators from Beijing. Several of the KMT’s recent electoral set-backs resulted from local politicians rebelling against Ma’s attempts to clean up local politics, a development that further reinforces this impression.
Declining confidence in the Ma government also reflects the public’s sense that their leaders have not responded well to domestic crises. The government’s reaction to the disastrous typhoon last summer attracted enormous criticism, much of it focused on the perception that Ma had failed to register the impact of the disaster and react swiftly and proportionately. The government also has been hammered for dismissing popular fears about H1N1 vaccine and beef imported from the U.S. A DPP official suggested, “Ma just doesn’t seem to speak the people’s language.”
Paradoxically, Ma’s political weakness at home may help him protect Taiwan’s interests in negotiations with Beijing. Taiwan’s economic, political and military power all are declining relative to the PRC, so the negotiations are in danger of becoming perilously uneven. The practical difficulty of ratifying a cross-Strait deal in Taiwan’s nervous domestic climate helps balance that asymmetry. In his discussion of two-level games, Putnam argues that authoritarian states are at a disadvantage in international bargaining for precisely that reason: they cannot plausibly claim that certain agreements will fail the test of domestic ratification. Leaders from democratic states can make that case, and they can extract concessions from the other side on those grounds. The dynamic that Putnam describes may benefit Taiwan, but it is no fun for the man caught in the middle: President Ma Ying-jeou.
Beijing is unlikely to find any Taiwanese leader easier to deal with than Ma, so it is in China’s interest to keep the relationship on a positive track – even if that means accepting slower progress than it would like. That logic helps to explain why, even as Chinese leaders fulminated against the U.S. for its decision to follow through on arms sales to Taiwan, they chose not to direct their venom at Taipei. Likewise, the PRC continues to send high-level representatives and delegations to Taiwan despite large protests, including one in November 2008 that trapped PRC representative Chen Yunlin in a hotel for hours. And in December 2009 the two sides signed three technical agreements, even after Taipei nixed a fourth proposal.
Beijing has even made limited concessions on Taiwan’s demand for international space, which Ma stated last year: “There is a clear link between cross-strait relations and our international space. We’re not asking for recognition; we only want room to breathe.” The two sides are conforming to a tacit “diplomatic truce” proposed by Ma shortly after his inauguration; neither has poached a diplomatic partner from the other since that time. In 2009, Beijing even withdrew its opposition to Taiwan’s efforts to secure observer status at the UN World Health Assembly. The Ma administration touted that development as a breakthrough, but his political opponents took him to task for the opacity of the process and for overstating the benefits Taiwan derived from the deal. In fact, the WHA decision was less a precedent-setting breakthrough than a one-off deal that could be revoked in the future – but the alternative was continued exclusion and isolation.
In sum, Beijing is so far tolerating the measured pace of cross-Strait engagement imposed by Taiwan’s domestic politics. PRC leaders seem confident that over time, their position will strengthen, so there is no need to push for faster progress now. The slow pace works well for Taiwan, too, where even baby steps make many people nervous. Still, there is a sobering side to this picture. If the process slows too much, PRC leaders may determine that no Taiwan leader, including Ma, is capable of delivering any of what Beijing is seeking and so lose patience. That would mean game over for the Ma Ying-jeou approach to cross-Strait rapprochement.
The Brookings Institution, March 2010
It is two years this month since Ma Ying-jeou was elected president of Taiwan. As he approaches the mid-term milestone, President Ma’s record is puzzling. On the one hand, he has made significant progress toward his most important goals. First, he’s stabilized cross-Strait relations. The tension that gripped Taiwan and China during the Chen years has abated, high-level visits have become routine and the two sides are engaged in energetic negotiations on a wide range of issues. Also, after taking a hard hit in the global economic downturn of 2008, Taiwan’s economy is bouncing back. Exports in December 2009 were almost 50 percent greater than December 2008 (admittedly a very low baseline), and economic forecasters predict a 2010 economic growth rate between 4 and 5 percent, although unemployment remains high. Ma has also rebuilt the all-important Taipei-Washington relationship, culminating in the Obama administration’s recent announcement that it would complete a long-awaited arms sale to Taiwan.
What is puzzling is that these successes have failed to endear President Ma to his constituents. On the contrary, his popularity has plummeted since the election, and today his personal approval ratings hover below 30 percent. The dissatisfaction extends to his party as well, and it’s been manifested concretely in elections. Ma’s party, the Kuomintang (KMT), won a far smaller share of the vote in December’s local elections than it captured in the previous round, and it lost 6 out of 7 legislative by-elections in January and February. Municipal elections at the end of this year already are being touted as a bellwether for the 2012 presidential race, when Ma is expected to seek a second term, and the trends do not look good. Hence the conundrum: Why are Ma’s successes in areas believed to be important to voters – reducing cross-Strait tension and reviving the economy – not boosting his approval ratings or his party’s political fortunes?
When Ma Ying-jeou was elected president two years ago, there was a widespread feeling that Taiwan would “get back to normal.” From 2000 to 2008, relations between Taipei and Beijing stagnated, mainly because PRC leaders refused contact with Taiwan’s Sino-skeptical president, the Democratic Progressive Party (DPP) leader Chen Shui-bian. For eight years, neither Taipei nor Beijing was interested in taking the political risks that reaching out to the other side would have entailed, and in the absence of progress, tensions increased. Thus, the return to power of the KMT, Taiwan’s long-time ruling party, was a welcome development in Washington and Beijing – and in Taiwan, where voters gave Ma 58 percent of the presidential vote as well as a legislature in which his party controlled almost 75 percent of the seats.
If Ma’s election meant things were “getting back to normal,” two years into his presidency we have a clear picture of what “normal” really means in the Taiwan Strait. In Taiwan’s domestic politics, “normal” is a highly-competitive democracy in which the executive is forced to accommodate an active and activist legislature while defending its positions from an energetic – and politically viable – opposition. In cross-Strait relations, “normal” means little overt tension, but no great breakthroughs to permanently resolve the conflict between Taiwan and the People’s Republic of China.
To understand the state of play in the Taiwan Strait it is helpful to keep in mind Robert Putnam’s “two-level game” metaphor for international negotiations. Beijing and Taipei are working together to design a framework for relations that allows for mutually-beneficial economic and people-to-people interactions while balancing the two sides’ long-term goals regarding international status and potential unification. Some of this work is conducted by representatives of the two governments in high-level, formal negotiations. The content of those negotiations is shaped and constrained by what Putnam calls “level two” interactions – more commonly known as domestic politics. In Taiwan’s case, Ma’s domestic weakness constrains the pace and content of cross-Strait rapprochement.
Under President Ma, elite-level interactions have been smoother than ever before, but that only accentuates the ways domestic politics limit Taiwan leaders’ options. Those limitations are more evident today in part because the game was suspended for most of the Chen era. When Chen took office, PRC leaders paused the game because they perceived little benefit in negotiating with Chen, whom they believed was irreversibly committed to a pro-independence line. In their view, a small group of “stubborn independence elements” had wrested political control from the pro-China mainstream. They hoped that refusing to deal with Chen would help to restore the mainstream to power.
When Ma was elected, Beijing was happy to resume play. In the view of Chinese leaders, Ma was an improvement, not only over his immediate predecessor, but over the previous president, Lee Teng-hui, too. To give Ma a solid start, Beijing was prepared to concede important points. Rather than repeating their demand that Taiwan agree to their One China Principle as the basis for reopening negotiations, PRC leaders accepted Ma’s endorsement of the 1992 Consensus (a bit of verbal hand-waving in which the two sides agreed to set aside the problem of defining the “one China” they both claimed to believe in) as “close enough.”
Once it restarted the game, Beijing quickly discovered that having the right elite-level interlocutor was only the beginning. Many Taiwanese found Chen’s Sino-phobic policies unnecessarily provocative, but that did not mean they were ready to support blindly whatever policy the next administration proposed. As the pace of elite-level interactions accelerated, the focus of the domestic political debated shifted from restraining Chen’s provocations to scrutinizing Ma’s performance. At first, voters gave Ma (and, to a lesser extent, the KMT-controlled legislature) the benefit of the doubt, but new government’s record was disappointing, and voters began to lose confidence.
A number of factors contributed to the public’s waning trust in Ma. The lack of transparency in decision-making has been a particular concern. DPP leaders suggest high-ranking KMT cross-Strait specialists might be willing to compromise Taiwan’s autonomy in order to reach an agreement with Beijing. They argue that the government’s closed cross-Strait decision-making – including on the proposed Economic Cooperation Framework Agreement (ECFA) – is dangerous, because these specialists, whether out of perfidy or naïveté, might fail to protect Taiwan’s interests. (For example, the proximate cause of National Security Advisor Su Chi’s resignation in February was his mishandling of beef import negotiations with the U.S., but as Bruce Jacobs wrote in the Taipei Times, many Taiwanese found his resignation “long overdue” because they doubted Su’s commitment to Taiwan.)
To protect Taiwan from a badly-negotiated deal, Ma’s critics are demanding ECFA be subjected to formal ratification, either by popular referendum or in the legislature. Legislative speaker Wang Jin-pyng, a KMT member, has said the legislature might overrule the ECFA deal if it does not meet lawmakers’ standards. President Ma chairs the KMT, so the lack of support for his policies within the party reinforces the sense that he and his inner circle lack a firm hand for dealing with opponents – and a firm hand is exactly what they need to deal effectively with the ever-tough negotiators from Beijing. Several of the KMT’s recent electoral set-backs resulted from local politicians rebelling against Ma’s attempts to clean up local politics, a development that further reinforces this impression.
Declining confidence in the Ma government also reflects the public’s sense that their leaders have not responded well to domestic crises. The government’s reaction to the disastrous typhoon last summer attracted enormous criticism, much of it focused on the perception that Ma had failed to register the impact of the disaster and react swiftly and proportionately. The government also has been hammered for dismissing popular fears about H1N1 vaccine and beef imported from the U.S. A DPP official suggested, “Ma just doesn’t seem to speak the people’s language.”
Paradoxically, Ma’s political weakness at home may help him protect Taiwan’s interests in negotiations with Beijing. Taiwan’s economic, political and military power all are declining relative to the PRC, so the negotiations are in danger of becoming perilously uneven. The practical difficulty of ratifying a cross-Strait deal in Taiwan’s nervous domestic climate helps balance that asymmetry. In his discussion of two-level games, Putnam argues that authoritarian states are at a disadvantage in international bargaining for precisely that reason: they cannot plausibly claim that certain agreements will fail the test of domestic ratification. Leaders from democratic states can make that case, and they can extract concessions from the other side on those grounds. The dynamic that Putnam describes may benefit Taiwan, but it is no fun for the man caught in the middle: President Ma Ying-jeou.
Beijing is unlikely to find any Taiwanese leader easier to deal with than Ma, so it is in China’s interest to keep the relationship on a positive track – even if that means accepting slower progress than it would like. That logic helps to explain why, even as Chinese leaders fulminated against the U.S. for its decision to follow through on arms sales to Taiwan, they chose not to direct their venom at Taipei. Likewise, the PRC continues to send high-level representatives and delegations to Taiwan despite large protests, including one in November 2008 that trapped PRC representative Chen Yunlin in a hotel for hours. And in December 2009 the two sides signed three technical agreements, even after Taipei nixed a fourth proposal.
Beijing has even made limited concessions on Taiwan’s demand for international space, which Ma stated last year: “There is a clear link between cross-strait relations and our international space. We’re not asking for recognition; we only want room to breathe.” The two sides are conforming to a tacit “diplomatic truce” proposed by Ma shortly after his inauguration; neither has poached a diplomatic partner from the other since that time. In 2009, Beijing even withdrew its opposition to Taiwan’s efforts to secure observer status at the UN World Health Assembly. The Ma administration touted that development as a breakthrough, but his political opponents took him to task for the opacity of the process and for overstating the benefits Taiwan derived from the deal. In fact, the WHA decision was less a precedent-setting breakthrough than a one-off deal that could be revoked in the future – but the alternative was continued exclusion and isolation.
In sum, Beijing is so far tolerating the measured pace of cross-Strait engagement imposed by Taiwan’s domestic politics. PRC leaders seem confident that over time, their position will strengthen, so there is no need to push for faster progress now. The slow pace works well for Taiwan, too, where even baby steps make many people nervous. Still, there is a sobering side to this picture. If the process slows too much, PRC leaders may determine that no Taiwan leader, including Ma, is capable of delivering any of what Beijing is seeking and so lose patience. That would mean game over for the Ma Ying-jeou approach to cross-Strait rapprochement.
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