Press Briefing

May 31, 2010

Readout of the President's Call with Prime Minister Netanyahu of Israel
http://www.whitehouse.gov/the-press-office/readout-presidents-call-with-prime-minister-netanyahu-israel

Seoul Reviews U.S. Military Ties
http://www.bipartisanalliance.com/2010/05/seoul-reviews-us-military-ties.html

The Return of the Raj - India should be America's key strategic and military partner in ordering the Eastern Hemisphere for the 21st-century, argues C. Raja Mohan
http://www.the-american-interest.com/article.cfm?piece=803

The Next Financial Crisis. By Jeremy C. Stein, Thursday, May 27, 2010
http://www.thecrimson.com/article/2010/5/27/assets-swifts-banks-over/

Exonerating the Community Reinvestment Act (from causing the crisis anyway)
http://www.coordinationproblem.org/2010/05/exonerating-the-community-reinvestment-act-from-causing-the-crisis-anyway.html

NYC’s Environmental Protection Dept spent $81,000 to study the city’s water supply after a scaremongering “pharmawater” investigation by The Associated Press in 2008 found traces of pharmaceuticals in municipal drinking water around the nation
http://www.acsh.org/factsfears/newsID.1479/news_detail.asp

Press Briefing

May 29, 2010

Statement by the President on Efforts by Secretary Gates to Reform Pentagon Spending
http://www.whitehouse.gov/the-press-office/statement-president-efforts-secretary-gates-reform-pentagon-spending

The global financial crisis: Why were some countries hit harder? By S. Pelin Berkmen, Gaston Gelos, Robert Rennhack, James P. Walsh
http://www.voxeu.org/index.php?q=node/4806

The Top Ten Lessons of the Global Economic Meltdown. By Walter Russell Mead
http://blogs.the-american-interest.com/wrm/2010/05/24/the-top-ten-lessons-of-the-global-economic-meltdown/

On Memorial Day - What we owe to the fallen, and to those now serving.
http://online.wsj.com/article/SB10001424052748704596504575272732097688358.html

'Pieces of Eight': The Constitution and the Dollar - With everyone suddenly fretting about the need for a new world reserve currency, unorthodox views on the Federal Reserve are getting a new hearing.
http://online.wsj.com/article/SB10001424052748704852004575258282696297108.html

Empire State Charter Victory - But unions extract some pieces of Silver
http://online.wsj.com/article/SB10001424052748704596504575272632354287918.html

Move Right and Lose: Evidence from the 2000-2008 U.S. Senate Elections
http://www.thedemocraticstrategist.org/strategist/2010/05/move_right_and_lose_evidence_f.php

Entitlements Are Forever - The legal fight over California's attempt to balance its budget.
http://online.wsj.com/article/SB10001424052748703691804575254330454011848.html

Whither Fannie and Freddie? A Proposal for Reforming the Housing GSEs
http://economics21.org/commentary/whither-fannie-and-freddie-proposal-reforming-housing-gses

Uribe, The Man Who Saved Colombia - Eight years ago, Latin America's oldest democracy was on the brink. The outgoing president explains how he restored the peace.
http://online.wsj.com/article/SB10001424052748704717004575268763528382500.html

The Fruits of Stagnation - Europe's shrunken economies yield good news for global-warming campaigners.
http://online.wsj.com/article/SB10001424052748704269204575270143314430382.html

Memorandum from White House Counsel Regarding the Review of Discussions Relating to Congressman Sestak
http://www.whitehouse.gov/the-press-office/memorandum-white-house-counsel-regarding-review-discussions-relating-congressman-se

Rahm to Bill to Joe - The former president as political cutout in the case of Sestak
http://online.wsj.com/article/SB10001424052748704596504575272702149862906.html

All The News That Fits: Junk science and The New York Times. By Henry I. Miller
http://www.forbes.com/2010/05/19/science-new-york-times-agriculture-opinions-columnists-henry-i-miller.html
On Andrew Pollack's news articles on issues related to genetic engineering applied to agriculture

No, We Don't Need a Teacher Bailout. By Neal McCluskey
http://www.cato.org/pub_display.php?pub_id=11852

A Look at the Senate Democratic Proposal for Immigration Reform: Is the Glass Half Empty, Half Full or Shattered on the Ground?
http://www.cato.org/pubs/irb/irb_may2010.pdf

Press Briefing

May 28, 2010

Joint Statement of the U.S.-Japan Security Consultative Committee
http://www.state.gov/r/pa/prs/ps/2010/05/142318.htm

Meatloaf From a Petri Dish Is Innovator’s Goal for the Masses
http://www.bloomberg.com/apps/news?pid=20601124&sid=aI9nZXjYAzeE

What Our Intelligence Agencies Could Learn from Silicon Valley - The clamor to increase the power of the Director of National Intelligence is mistaken. We need less hierarchy and centralization.
http://online.wsj.com/article/SB10001424052748704717004575268783383613118.html

Bank funding and liquidity management: new report from the Committee on the Global Financial System
http://www.bis.org/press/p100527.htm

Canceling, delaying, banning domestic offshore exploration will increase tanker traffic, foreign imports
http://www.instituteforenergyresearch.org/2010/05/27/white-house-pr-political-response-misguided/

Toward a global risk map, by Stephen Cecchetti, Ingo Fender and Patrick McGuire. BIS Working Papers No 309
http://www.bis.org/publ/work309.htm

Global risk maps are unified databases that provide risk exposure data to supervisors and the broader financial market community worldwide. We think of them as giant matrices that track the bilateral (firm-level) exposures of banks, non-bank financial institutions and other relevant market participants. While useful in principle, these giant matrices are unlikely to materialise outside the narrow and targeted efforts currently being pursued in the supervisory domain. This reflects the well known trade-offs between the macro and micro dimensions of data collection and dissemination. It is possible, however, to adapt existing statistical reporting frameworks in ways that would facilitate an analysis of exposures and build-ups of risk over time at the aggregate (sectoral) level. To do so would move us significantly in the direction of constructing the ideal global risk map. It would also help us sidestep the complex legal challenges surrounding the sharing or dissemination of firm-level data, and it would support a two-step approach to systemic risk monitoring. That is, the alarms sounded by the aggregate data would yield the critical pieces of information to inform targeted analysis of more detailed data at the firm- or market-level.


What Our Intelligence Agencies Could Learn from Silicon Valley - The clamor to increase the power of the Director of National Intelligence is mistaken. We need less hierarchy and centralization.
http://online.wsj.com/article/SB10001424052748704717004575268783383613118.html

Near-zero interest rates have made investors susceptible to the same stresses at the same time.
http://www.bipartisanalliance.com/2010/05/fed-and-may-6-flash-crash-near-zero.html

Medicare and Double Standards - An ObamaCare mailer tells some howlers.
http://www.bipartisanalliance.com/2010/05/this-week-medicare-sent-flyer-to.html

How to Handle North Korea - Pass the South Korea free trade agreement and give up on negotiating with Kim Jong Il
http://online.wsj.com/article/SB10001424052748704717004575268992030246802.html

Statement by the President on Votes to Repeal “Don’t Ask, Don’t Tell”
http://www.whitehouse.gov/the-press-office/statement-president-votes-repeal-don-t-ask-don-t-tell

Obama's Blowout Preventer - In case you hadn't heard, Ken Salazar had a reform plan . . .
http://www.bipartisanalliance.com/2010/05/obamas-blowout-preventer-in-case-you.html

Study Reveals that Regulatory Spending and Staffing Reaches All-Time High. The George Washington University and Washington University in St. Louis
http://www.gwu.edu/explore/mediaroom/newsreleases/studyrevealsthatregulatoryspendingandstaffingreachesalltimehigh

Regulatory Spending Rose under Bush
http://www.cato-at-liberty.org/2010/05/26/regulatory-spending-actually-rose-under-bush/

White House: Growing Businesses and Putting Unemployed Workers Back on the Job
http://www.whitehouse.gov/blog/2010/05/27/growing

Obamacare’s Cooked Books and the “Doc Fix”
http://fixhealthcarepolicy.com/in-the-news/obamacares-cooked-books-and-the-doc-fix

Remarks by the President on the Gulf Oil Spill
http://www.whitehouse.gov/the-press-office/remarks-president-gulf-oil-spill

Panicked Republicans risk future energy development
http://online.wsj.com/article/SB10001424052748704269204575270842009220082.html

American Action Forum: Labor Markets and Health Care Reform: New Results (PDF)
http://americanactionforum.org/files/LaborMktsHCRAAF5-27-10.pdf

The White House Blog: A Blueprint for Pursuing the World that We Seek
http://www.whitehouse.gov/blog/2010/05/27/a-blueprint-pursuing-world-we-seek

Recommitting to a Strong National Defense, by The Honorable Eric Cantor
http://www.heritage.org/Research/Lecture/Recommitting-to-a-Strong-National-Defense

Budget Hearing for the University of the District of Columbia. By Alice M. Rivlin, Senior Fellow, Economic Studies. Brookings Institution.
http://www.brookings.edu/testimony/2010/0414_community_college_rivlin.aspx

Republicans in the Senate: Evaluating the Kagan Nomination - What is known, so far, about President Obama’s choice for the Supreme Court
http://rpc.senate.gov/public/_files/EvaluatingtheKaganNominationFINAL052610_2_.pdf

This week Medicare sent a flyer to seniors: The act passed by Congress "will provide you and your family greater savings and increased quality health care"

Medicare and Double Standards. WSJ Editorial
An ObamaCare mailer tells some howlers.WSJ, May 28, 2010

In the full-circle department, recall the moment last September when Senator Max Baucus and Medicare went after the insurer Humana for having the nerve to criticize one part of ObamaCare. It turns out those same regulators have different standards for their own political advocacy.

This week Medicare sent a flyer to seniors, ostensibly to inform them of what ObamaCare "means for you." Many elderly Americans are worried—and rightly so—about where they'll rank in national health care, given that the new entitlement is funded by nearly a half-trillion dollars in Medicare cuts. They must have been relieved to hear that "The Affordable Care Act passed by Congress and signed by President Obama this year will provide you and your family greater savings and increased quality health care."

That's the first sentence of the four-page mailer, and it gives a flavor of the Administration's respect for the public's intelligence. It goes on to mention "improvements to Medicare Advantage," the program that Democrats hate because it gives nearly one out of four seniors private health insurance options. "If you are in a Medicare Advantage plan, you will still receive guaranteed Medicare benefits."

But that's not what Medicare's own actuary thinks. In an April memo, Richard Foster estimated that the $206 billion hole in Advantage will reduce benefits, cause insurers to withdraw from the program and reduce overall enrollment by half. Doug Elmendorf and his team at the Congressional Budget Office came to the same conclusion, as did every other honest expert.

That's also what Humana told its customers, warning that seniors "could lose many of the important benefits and services that make Medicare Advantage so valuable." Medicare threatened the Kentucky-based company with fines and regulatory punishments for "misleading and confusing" beneficiaries, then issued a blanket gag order on Advantage insurers. The agency later backed down, once its Cosa Nostra message had been signed, sealed and delivered.

Medicare's flyer includes answers to other pressing questions in Boca Raton and Scottsdale, such as allowing children up to age 26 to remain on their parents' health plans, and further misleading commentary about keeping the program "strong and solvent." Dave Camp, the ranking Republican on the Ways and Means Committee, believes the mailer may violate the prohibition on using taxpayer dollars for political propaganda.

The larger issue is the White House's view of political opposition. It seems to think its assertions will be true if they are repeated often enough, as long as no one is allowed to disagree.

The Fed and the May 6 'Flash Crash' - Near-zero interest rates have made investors susceptible to the same stresses at the same time

The Fed and the May 6 'Flash Crash'. By MARK SPITZNAGEL
Near-zero interest rates have made investors susceptible to the same stresses at the same time.WSJ, May 28, 2010

Regulators have been busy searching for the cause of the May 6 "flash crash" when the market dropped by 9.3% and then recovered within minutes. I think it's a good bet no cause will be found; there is still no consensus on what triggered the one-day 20% stock market crash of 1987. But even if there was no trigger, market conditions created by the Federal Reserve's easy money policy definitely made the crash more likely.

The market is a critical system. To illustrate, let's consider another fragile system: the earth's crust. Imagine geologists scouring through the debris of a big earthquake in search of its trigger—as in, "Let's investigate anyone jack hammering in the minutes leading up to the quake." It is intuitively obvious that earthquakes don't have identifiable triggers. We know that big earthquakes, which happen very rarely, are nothing more than many little earthquakes piled on top of each other due to stresses built up within intricate networks of faults. These little fissures cascade into enormous ruptures. The more correlated the fissures, the more delicate the system.

Back to markets. Think of every investor holding a risky position. Then think of all of these investors together in a big herd. Each member of the herd focuses on what the others will do next, since the only reason anyone takes a position is because others are initiating like-minded ones.

When imitative behavior starts happening in markets en masse, expect funny things to happen to liquidity. All you need to know about market dynamics—as I learned as a Chicago pit trader—is that market prices always adjust to the level where market-makers see balanced two-way order flow between buyers and sellers. All market-makers want to do is buy at the bid price, sell at the offer price, and at the end of the day go home unscathed. When there are only buy orders, for instance, expect market-makers to be unwilling to sell to those buyers until the price has adjusted to the point where they see roughly equal buyers and sellers again. To expect them to do anything else is to imagine them as charities.

So when you combine imitative behavior with noncharitable market-makers, there will be seismic waves from time to time. What makes our current system particularly prone to global ruptures is that hair-trigger traders have crowded into exceedingly risky bets. Why would that be, with the crash of 2008 so fresh in traders' minds?

This type of alignment among investors in risky positions is precisely what the central economic planners at the Federal Reserve intended when, in response to the historic credit collapse, they commanded interest rates to zero and signaled that they would prop up all risky assets.

The profitability of an investment is simply its return on capital beyond the cost of that capital. It is against this spread that investors must assess risk. So when the Fed distorted the cost of capital following the 2008 collapse by lowering it for many by roughly 2% (to about 0% for banks), it had the same effect as the 2% higher aggregate dividend yield for stocks or higher credit spreads for investment grade bonds. Suddenly what was toxic looked cheap.

The Fed lured everyone to buy everything and anything that was risky—and did so itself with outright purchases of risky assets like mortgage-backed bonds. Anyone eager for easy profits fell right in line, bidding up dangerous assets like clockwork. Sensing safety in numbers, the herd quickly followed, and in no time the market had consumed the Fed's gifted 2% profit spread and then some.

All in all, it seemed like an impressively engineered recovery. In reality, it was an ephemeral illusion caused by distorting investors' assessment of risk. Despite what zero interest rates were signaling, savers flush with cash weren't flooding the capital markets and credit wasn't expanding.

The Fed has managed to align every little market fault right with each other such that they all succumb to the very same stresses at the very same time. Meanwhile—no surprise—the world remains a very seismically active place. What's extraordinary is that the Fed continues this intentional deception about the real cost of credit, even as we've repeatedly witnessed the consequences of this policy.

Left alone, the market works naturally, with waves of buy-order ruptures and waves of sell-order ruptures. Sometimes mini-ruptures coincide to form much larger ones, such as on May 6. But searching for a discreet trigger for such events is futile. To find the real source of the system's excessive fragility, the regulators will need to look much closer to home.

Mr. Spitznagel is the founder and chief investment officer of the hedge fund Universa Investments LP, based in Santa Monica, Calif.

Obama's Blowout Preventer - In case you hadn't heard, Ken Salazar had a reform plan . . .

Obama's Blowout Preventer. WSJ Editorial
In case you hadn't heard, Ken Salazar had a reform plan . . .WSJ, May 28, 2010

BP and the Coast Guard yesterday were cautiously optimistic that the "top kill" maneuver could stanch the Gulf of Mexico oil leak, and let us hope this is the beginning of the end of the disaster. In Washington, meanwhile, the White House's panicked efforts to put a tourniquet on the political consequences were notably less successful.

"I take responsibility," President Obama said at his press conference yesterday—though responsibility for what? As he explained it, the Deepwater Horizon disaster was predominantly a failure of government, namely, the "scandalously close relationship between oil companies and the agency that regulates them." Mr. Obama is referring to the Minerals Management Service, or MMS, and he claims the Administration had a plan to end this putative regulatory capture.

Interior Secretary Ken Salazar "was in the process of making these reforms," Mr. Obama continued. "But the point that I'm making is, is that, obviously, they weren't happening fast enough. If they had been happening fast enough, this might have been caught." In other words, this is really the fault of the Bush Administration, like everything else.

It would certainly be interesting to hear more details about this no doubt ambitious and unprecedented reform that no one knew anything about until this oil disaster. Mr. Obama made no mention of it when he announced in late March that new offshore areas would be opened to oil and gas development.

"This is not a decision that I've made lightly," the President said at the time. "It's one that Ken and I—as well as Carol Browner, my energy adviser, and others in my Administration—looked at closely for more than a year."

The ex post facto reform effort did get off to a start yesterday with Elizabeth Birnbaum's sacking as the head of MMS. The Administration wants Americans to believe that, finally, someone less corrupted by industry will run the joint—though it has been run for years, under Democratic and Republican Administrations, with rules established by Congress.

But is this the same Elizabeth Birnbaum who Mr. Salazar nominated to run MMS last June? Why yes, it is. "Her in-depth knowledge of energy issues, natural resource policy and environmental law as well as her managerial expertise and work in coalition building," Mr. Salazar said then, "will be especially important as we advance President Obama's new energy frontier and lay the foundation for a clean energy economy."

Mr. Obama's faith in government is so expansive that he thinks it can build a "new energy economy," so perhaps it's not surprising that he also thinks government could have averted the Gulf spill:

To wit, that a far-flung bureaucracy like MMS would have prevented a platform 40 miles offshore—using the planet's most advanced engineering technology to execute the undersea equivalent of landing on the moon—from suffering a massive explosion that killed 11 people and caused the rig to sink 4,993 feet to the ocean floor. Presumably, too, this oversight would have ensured that the cement around the wellhead's casing pipe sealed properly, and that the blowout preventer didn't malfunction, among other miracles.

Mr. Obama added yesterday, with his customary modesty, that "we're also moving quickly on steps to ensure that a catastrophe like this never happens again." This mainly seems to mean delaying or banning any offshore drilling leases in America.

The White House extended its moratorium on deep water drilling permits for another six months, suspended upcoming lease sales in the Gulf, suspended indefinitely 33 deep water exploratory wells, and delayed a drilling program in Alaska's Chukchi and Beaufort seas that was scheduled for next month. The green lobby has been obsessed with the last item for years; a crisis is a terrible thing to waste.

Drilling on the Outer Continental Shelf accounts for about 27% of U.S. domestic oil production, and overreacting politically to a genuine disaster isn't in anyone's interests. Senator Mary Landrieu (D., La.) noted in a recent letter to Mr. Salazar that the moratorium even on the 57 Gulf platforms drilling in shallow water, which is much safer and with fewer risks, will result in more than 5,000 lost jobs if work doesn't resume within six weeks.

More broadly, whatever Mr. Obama's ambitions for windmills and plug-in cars, the world is dependent on oil. Most of the demand growth is coming from China, India and the developing world, and if America doesn't produce its own energy it will merely import it from somewhere else.

Messrs. Obama and Salazar claim to believe that one more bureaucratic reshuffle can prevent oil spills. They would be more honest, and reduce cynicism about government, if they acknowledged that no human endeavor is without risk, and that government can't prevent every accident.

Obamacare's Cooked Books and the “Doc Fix”

Obamacare's Cooked Books and the “Doc Fix”, by James Capretta
May 26, 2010

The Obama administration continues to insist (see this post from White House budget director Peter Orszag) that the recently enacted health-care law will reduce the federal budget deficit by $100 billion over ten years and by ten times that amount in the second decade of implementation. They cite the Congressional Budget Office’s cost estimate for the final legislation to back their claims.

And it is undeniably true that CBO says the legislation, as written, would reduce the federal budget deficit by $124 billion over ten years from the health-related provisions of the new law.
But that’s not whole story about Obamacare’s budgetary implications — not by a long shot.

For starters, CBO is not the only game in town. In the executive branch, the chief actuary of the Medicare program is supposed to provide the official health-care cost projections for the administration — at least he always has in the past. His cost estimate for the new health law differs in important ways from the one provided by CBO and calls into question every major contention the administration has advanced about the bill. The president says the legislation will slow the pace of rising costs; the actuary says it won’t. The president says people will get to keep their job-based plans if they want to; the actuary says 14 million people will lose their employer coverage, many of whom would certainly rather keep it than switch into an untested program. The president says the new law will improve the budget outlook; in so many words, the chief actuary says, don’t bet on it.

All of this helps explain why the president of the United States would be so sensitive about the release of the actuary’s official report that he would dispatch political subordinates to undermine it with the media.

It’s not the chief actuary’s assignment to provide estimates of non-Medicare-related tax provisions, so his cost projections for Obamacare do not capture all of the needed budget data to estimate the full impact on the budget deficit. But it’s possible to back into such a figure by using the Joint Tax Committee’s estimates for the tax provisions missing from the chief actuary’s report. When that is done, $50 billion of deficit reduction found in the CBO report is wiped out.

And that’s before the other gimmicks, double counting, and hidden costs are exposed and removed from the accounting, too.

For instance, this week House and Senate Democratic leaders are rushing to approve a massive, budget-busting, tax-and-spending bill. Among its many provisions is a three-year Medicare “doc fix,” which will effectively undo the scheduled 21 percent cut in Medicare physician fees set to go into effect in June. CBO says this version of the “doc fix” would add $65 billion to the budget deficit over 10 years. The entire bill would pile another $134 billion onto the national debt over the next decade.

If the Obama administration gets its way, this three-year physician-fee fix will eventually get extended again, and also without offsets. Over a full 10-year period, an unfinanced “doc fix” would add $250 to $400 billion to the budget deficit, depending on design and who is doing the cost projection (CBO or the actuary).

Administration officials and their outside enthusiasts (see here) say the Democratic Congress shouldn’t have to find offsets for the “doc fix” because everybody knows a fix needs to be enacted and therefore should go into the baseline. (By the way, the history of the sustainable growth rate [SGR] that Ezra Klein provides at the link above is a misleading one. The SGR was a replacement for a predecessor program that too had run off the rails — the so-called “Volume Performance Standard” enacted by a Democratic Congress in 1989.)

But supporting a “doc fix” is not the same as supporting an unfinanced one on a long-term or permanent basis. Not everybody in Congress is for running up more debt to pay for a permanent repeal of the scheduled fee cuts, which is why such a repeal has never been passed before. In the main, the previous administration and Congresses worked to find ways to prevent Medicare fee cuts while finding offsets to pay for it.

But that’s not the policy of the Obama administration. The truth is the president and his allies in Congress worked overtime to pull together every Medicare cut they could find — nearly $500 billion in all over ten years — and put them into the health law to pay for the massive entitlement expansion they so coveted. They could have used those cuts to pay for the “doc fix” if they had wanted to, as well as for a slightly less expansive health program. But that’s not what they did. That wasn’t their priority. They chose instead to break their agenda into multiple bills, and “pay for” the massive health entitlement (on paper) while claiming they shouldn’t have to find offsets for the “doc fix.” But it doesn’t matter to taxpayers if they enact their agenda in one, two, or ten pieces of legislation. The total cost is still the same. All of the supposed deficit reduction now claimed from the health-care law is more than wiped out by the Democrats’ insistent march to borrow and spend for Medicare physician fees.

And the games don’t end there. CBO’s cost estimate assumes $70 billion in deficit reduction from the so-called “CLASS Act.” This is the new voluntary long-term-care insurance program that hitched a ride on Obamacare because it too created the illusion of deficit reduction. People who sign up for the insurance must pay premiums for at least five years before they are eligible to draw benefits. By definition, then, at start-up and for several years thereafter, there will be a surplus in the program as new entrants pay premiums and very few people draw benefits. That’s the source of the $70 billion “savings.” But the premiums collected in the program’s early years will be needed very soon to pay actual claims. Not only that, but the new insurance program is so poorly designed it too will need a federal bailout. So this is far worse than a benign sleight of hand. The Democrats have created a budgetary monster even as they used misleading estimates to tout their budgetary virtue.

There is much more, of course. CBO’s cost projections don’t reflect the administrative costs required to micromanage the health system from the Department of Health and Human Services. The number of employers looking to dump their workers into subsidized insurance is almost certainly going to be much higher than either CBO or the chief actuary now projects. And the price inflation from the added demand of the newly entitled isn’t factored into any of the official cost projections.

We’ve seen this movie before. When the government creates a new entitlement, politicians lowball the costs to get the law passed, and then blame someone else when program costs soar. Witness Massachusetts. Most Americans are sensible enough to know already that’s what can be expected next with Obamacare.

Zero-Sum Earmarks - A new study finds that pork hurts at home

Zero-Sum Earmarks. WSJ Editorial
A new study finds that pork hurts at homeWSJ, May 27, 2010

For Members of Congress, becoming a committee chairman means more power to spend and thus help for the home district, right? That's certainly the common wisdom. But according to new research from Harvard Business School, the increased federal spending causes local companies to lose sales and cut back on research, payroll and other expenses.

The results surprised Harvard professors Lauren Cohen, Christopher Malloy and Joshua Coval, who expected to see politically connected firms prosper from federal largesse. Instead, the research, which covered 1967 to 2008, found that "strong and widespread evidence of corporate retrenchment" accompanied Congressional seniority. According to Mr. Coval, the research shows federal dollars "directly supplant private sector activity—they literally undertake projects the private sector was planning to do on its own."

The chairmanship of a powerful Senate committee such as Finance or Appropriations typically brings an increase of 40% to 50% in earmark spending for the home state. In the House, top dogs haul an average of 20% more to their states. Yet in the first year after a chairman's rise, the paper notes, the average firm in his state "cuts back capital expenditures by roughly 15%." The behavior typically continues until the Congressman steps down, and it is felt in particular by firms that have the strongest ties to the home state.

Part of the problem is that public money is "crowding out" investment opportunities for firms. "Some of our results point towards the role of competition for state specific factors of production, including labor and fixed assets such as real estates," the authors write. "Public spending appears to increase demand for state-specific factors of production and thereby compel firms to downsize and invest elsewhere." They add that "We also find evidence that the effects are most pronounced in sectors that are the target of earmark spending."

The same side effects may now be observed as the federal stimulus program also ripples through the broader economy: In the first quarter of 2010, USA Today reported, private paychecks made up the lowest share of personal income in history as government spending rose to its highest levels ever. That trend inevitably leads to higher taxes and further economic harm.

Democrats and Republicans have promised earmark reform for years, only to abandon the effort in favor of "bringing home the bacon" and incumbent protection. The Harvard study suggests the Congressmen are really bringing home less economic prosperity.

Obama's Russia Tribute - What he gave away in return for watered-down Iran sanctions

Obama's Russia Tribute. WSJ Editorial
What he gave away in return for watered-down Iran sanctions.WSJ, May 27, 2010

When the Obama Administration last week secured the Kremlin's support for U.N. sanctions on Iran, the White House touted a big dividend from its "reset" in relations with Russia. Now the price for Moscow's cooperation is becoming clearer, and the only ones who should be cheering are the Russians and Iranians.

Three days after Secretary of State Hillary Clinton announced the deal on a diluted Security Council resolution, she quietly met an explicit demand from Russia's Foreign Minister Sergei Lavrov. Buried in last Friday's Federal Register, the State Department announced it was ending long-standing sanctions against four Russian entities that had helped Iran's nuclear weapons and missile programs.

The draft U.N. resolution also includes a loophole for Russia, which would be allowed to deliver the five S-300 surface-to-air missiles that Moscow agreed to sell Tehran in 2005. The S-300s can intercept missiles and aircraft but fall outside the U.N. resolution's ban on the sale of eight categories of conventional weapons to Iran. Mikhail Margelov, the head of the foreign affairs committee of Russia's upper house of parliament, crowed last Friday that sanctions "will not hit current contracts between Russia and Iran."

All of this came on top of the White House decision a week earlier to resubmit to Congress a civilian nuclear cooperation pact with Russia. This was another goodie for Moscow.

These so-called "123 agreements"—named after a section of the Atomic Energy Act of 1954—open the door to technology transfers, commerce in nuclear materials and joint research between the U.S. and select countries. The Bush Administration negotiated the deal with the Kremlin but shelved it after the Russians invaded Georgia in August 2008.

President Obama said that "the situation in Georgia need no longer be considered an obstacle" and that "the level and scope of U.S.-Russia cooperation on Iran are sufficient to justify" the deal. Unlike a treaty, Congress doesn't ratify the pact but has 90 days to act or the deal automatically goes into force. Democrat Edward Markey and Republican Jeff Fortenberry last week introduced a resolution in the House to stop the deal.

It's an uphill but worthy effort. Russia continues illegally to occupy Georgian territory, but the larger problem is its proliferation. Both Republican and Democratic Administration have turned a blind eye to Russian misbehavior. When the Bush Administration submitted the agreement for review, the Government Accountability Office criticized the mandatory accompanying "proliferation statement" on Russia as shoddy and incomplete.

Starting in the 1990s, Moscow sold Iran nuclear centrifuges and missile technology. One company sanctioned until last week, the state arms exporter Rosoboronexport, was put on the list as recently as 2008, while the Moscow Aviation Institute helped Iran develop ballistic missiles.

Nonetheless, the Obama Administration now says "Russia's approach to Iran has evolved," in the words of State spokesman P.J. Crowley. Gary Samore, the White House arms control coordinator, insists that "the Russians understand that the consequences [of shipping the S-300s] would be very severe."

These assurances don't square with Russian statements or actions. The week that President Obama sent the nuclear cooperation pact to Congress, Russian President Dmitry Medvedev was in Damascus touting future nuclear business with Iran's close ally in terrorism. "Cooperation [with Syria] on atomic energy could get a second wind," he said.

In return for all this, the Administration gets weak sanctions similar to the three sets the Bush Administration won without paying such a high tribute. If this represents what the Administration calls "smart diplomacy," we'd hate to see what we give up when we're dumb.

Press Briefing

May 27, 2010

Federal Prez: The Promise of Clean Energy
http://www.youtube.com/watch?v=ulyTh0VtZb8

The Ongoing Administration-Wide Response to the Deepwater BP Oil Spill: May 26, 2010
http://www.whitehouse.gov/blog/2010/05/26/ongoing-administration-wide-response-deepwater-bp-oil-spill-may-26-2010

'Death panels' were an overblown claim – until now
http://dailycaller.com/2010/05/27/death-panels-were-an-overblown-claim-until-now/

Applying the Tools of 21st Century Statecraft to Public Engagement
http://blogs.state.gov/index.php/entries/tools_public_engagement/

Europe-Bank Lenders? Coalition of Unwilling
http://online.wsj.com/article/SB10001424052748703341904575266722784462634.html
Few Step Up to Risk Their Money for Long; New SEC Rule Makes Money Funds Even Less Interested

US State Dept: Citizen Safety in the Western Hemisphere
http://www.state.gov/p/wha/rls/fs/2010/142263.htm

The House has violated PAYGO rules by nearly $1 trillion
http://blog.heritage.org/2010/05/27/morning-bell-this-congress-has-no-shame

The Recovery Starts With Sound Money - The willingness to work for the sake of future prosperity is a universal human quality, but people must believe there is a link between effort and reward
http://online.wsj.com/article/SB10001424052748704026204575266251915530206.html

Notable & Quotable - John Fund on Chris Christie's political toughness
http://online.wsj.com/article/SB10001424052748704717004575268630100057138.html

Zero-Sum Earmarks - A new study finds that pork hurts at home
http://www.bipartisanalliance.com/2010/05/zero-sum-earmarks-new-study-finds-that.html

Congress Gets Mean - The Democratic tax bill's double whammy on carried interest firms
http://online.wsj.com/article/SB10001424052748704026204575266881281707488.html

How Democrats’ Government Takeover of Health Care Will Lead Employers to Drop Coverage
http://rpc.senate.gov/public/_files/ABitterPill.pdf

Rising Rate of Media Misrepresentation
http://www.acsh.org/factsfears/newsID.1468/news_detail.asp
MSNBC's Nightly News last night  devoted a short segment to an "Extreme  Eating" list of high-calorie restaurant meals compiled by the  Center for Science in the Public Interest (CSPI).

Remarks at the African Diplomatic Corp's Celebration of Africa Day. By Johnnie Carson, Assistant Secretary, Bureau of African Affairs
http://www.state.gov/p/af/rls/rm/2010/142261.htm

U.K. Prosecutors Will Drop AIG Financial Unit Probe
http://www.businessweek.com/news/2010-05-26/u-k-prosecutors-will-drop-aig-financial-unit-probe-update1-.html

Britain reveals extent of nuclear arsenal for first time
http://www.japantoday.com/category/world/view/britain-reveals-extent-of-nuclear-arsenal-for-first-time

The Sun is Shining on Solar Subsidies in California Today
http://www.instituteforenergyresearch.org/2010/05/26/the-sun-is-shining-on-solar-subsidies-in-california-today/

President Obama Talks Jobs in California
http://my.barackobama.com/page/community/post/elizabethchan/gGGj9k

Obama's Russia Tribute - What he gave away in return for watered-down Iran sanctions
http://www.bipartisanalliance.com/2010/05/obamas-russia-tribute-what-he-gave-away.html

A New Age of Reform - The mood in the country suggests the U.S. may be at the start of an era of political and economic reform
http://online.wsj.com/article/SB10001424052748704717004575268523673781674.html

The Ongoing Administration-Wide Response to the Deepwater BP Oil Spill: May 25, 2010
http://www.whitehouse.gov/blog/2010/05/25/ongoing-administration-wide-response-deepwater-bp-oil-spill-may-25-2010

Yes, the Gulf Spill Is Obama's Katrina - Where was the White House plan, and why has it been so slow to make decisions?
http://online.wsj.com/article/SB10001424052748704717004575268752362770856.html

ObamaCare vs. Small Business - Why the National Federation of Independent Business supports the constitutional challenge to the health-insurance mandate
http://online.wsj.com/article/SB10001424052748704113504575264802756326086.html

Press Briefing

May 26, 2010

How We Created the First Synthetic Cell - The assembled genome is the largest chemically defined structure ever synthesized in the laboratory.
http://online.wsj.com/article/SB10001424052748704026204575266460432676840.html

Estimated Impact of the American Recovery and Reinvestment Act on Employment and Economic Output
http://www.cbo.gov/doc.cfm?index=11525

A Crisis of Competence in the Gulf
http://blog.heritage.org/2010/05/26/morning-bell-a-crisis-of-competence-in-the-gulf/

The Greatest Myth of the George W. Bush Presidency
http://www.instituteforenergyresearch.org/2010/05/25/the-greatest-myth-of-the-george-w-bush-presidency/

The Case Against the Land-Mine Treaty - Without the DMZ minefield, nuclear weapons would be the main deterrent protecting South Korea
http://online.wsj.com/article/SB10001424052748704852004575258433073503318.html

Corporations Against Corporate Welfare. Note: At least when the political costs outweigh the political favors.
http://online.wsj.com/article/SB10001424052748704026204575266601413204676.html

Of Politics and Oil - The Washington panic, and the realities of the Gulf Coast spill
http://online.wsj.com/article/SB10001424052748704026204575266903446455896.html

The Panic, Round Two: What Would Reagan Do?
http://online.wsj.com/article/SB10001424052748704113504575264940533857802.html
Giant pools of capital are sitting idle in unproductive deposits or inflation hedges. They could easily fund job growth if real, after-tax prospects improved.

The Subjects of the Constitution. By Nicholas Quinn Rosenkranz, Georgetown University Law Center
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1611210
Stanford Law Review, Vol. 62, No. 5, 2010

Reclaiming the Northern Border: The Future of Plan Ecuador
http://blogs.state.gov/index.php/entries/ecuador_future

John Paul Stevens, leader of the Resistance
http://www.scotusblog.com/2010/05/john-paul-stevens-leader-of-the-resistance

President Obama Needs More Legal Tactics Against Terrorists, by Benjamin Wittes, Senior Fellow, Governance Studies
http://www.brookings.edu/opinions/2010/0514_miranda_wittes.aspx

Remarks at Colby College Commencement, by Judith A. McHale, Under Secretary for Public Diplomacy and Public Affairs
Waterville, ME, May 23, 2010
http://www.state.gov/r/remarks/142197.htm

Stimulus by Spending Cuts: Lessons from 1946
http://www.cato.org/pubs/policy_report/v32n3/cp32n3-1.html

International Energy Outlook 2010-Highlights
http://www.eia.doe.gov/oiaf/ieo/index.html

Seniors Will Lose Big Under Obamacare
http://fixhealthcarepolicy.com/in-the-news/side-effects-seniors-will-lose-big-under-obamacare

American Jobbery Act - Dissecting this week's stimulus bill

American Jobbery Act. WSJ Editorial
Dissecting this week's stimulus billWSJ, May 25, 2010

President Obama and Democrats on Capitol Hill are publicly fretting about the dangers of spending and debt, which can mean only one thing: Another big spending "stimulus" bill is in the works. And sure enough, the House plans to vote this week on $190 billion in new spending, $134 billion of which it won't even pretend to pay for.

Sander Levin, the new Ways and Means Chairman, calls this exercise the American Jobs and Closing Tax Loopholes Act. Mr. Levin has waited 28 years to ascend to this throne and this is the best he can do? "Jobs" were also the justification in February 2009 for the $862 billion stimulus that has managed to hold the jobless rate down to a mere 9.9%. Maybe Mr. Levin's spending can hold it down to even greater heights.

The nearby table gives a flavor of what's in this grab bag of political payoffs, corporate welfare and transfer payments. There's $24 billion to help states pay the exploding tab for Medicaid, the same program that ObamaCare expands by some 16 million new recipients. The bill also offers $1 billion for summer jobs for teens, whose jobless rate is 25.4%. Congress could do far more to create teen jobs if it merely suspended last year's minimum wage increase to $7.25 an hour, which priced millions of young workers out of the labor market. But that would be too rational.

The biggest item is $65 billion to prevent a 21% cut in Medicare physician reimbursements. Democrats promised this to the American Medical Association in return for its ObamaCare support, but they left the $65 billion out of the health-care law to make it look less expensive. Now they're pushing it through under separate cover when they assume the press corps won't notice.

The $47 billion to extend unemployment insurance to nearly two full years will bring the total spent on this program to $137 billion during this recession—five times more than in either of the prior two recessions. That's nearly as much as the federal corporate income raised in 2009.
The sages in Congress continue to claim that these payments for not working will lead to more work. Representative Jim McDermott recently declared on the House floor that jobless payments are "one of the most effective forms of economic stimulus" because "every unemployment dollar spent returns $1.64 of economic benefits." So let's lay off everybody, pay them for not working, and watch the economy really boom. Where do they teach this stuff?

This bill is also one of the most expensive corporate welfare giveaways in recent years with subsidies for municipal bond traders, cotton farmers, yarn producers, sheep growers, Hawaiian sugar cane cooperatives, motor sports businesses, renewable energy firms, the steel lobby, and so on. Any industry that doesn't get a tax credit or other handout in this bill should fire its lobbyist.
All of this is "paid for," in the Beltway lingo, with a net tax increase on business of about $40 billion and at least $134 billion of new debt. There's a new 24 cent a barrel tax on oil companies, which would flow to consumers in higher gas prices, because Congress says the industry's profits are excessive.

U.S. multinational companies would pay a higher tax rate on their overseas income, which will not help them create more jobs here. The better way to discourage job outsourcing is to cut the corporate income tax rate, but Mr. Levin and his union allies will have none of that.
Managers of private equity and venture capital firms that provide the start-up and expansion funding to businesses would see their tax rate rise to as high as 35% from 15% today—a huge tax increase when businesses are starved for capital. And small, often family-owned Subchapter S companies that provide professional services would be required to subject more of their profits to the self-employment tax. These firms already pay up to 35% tax on these profits, so under the Democratic plan their tax rate could reach 50%.

Perhaps you're wondering what happened to the "pay as you go" budget rules that Mr. Obama announced to great media fanfare as recently as February. Democrats now say "paygo" doesn't apply because this spending qualifies as an "emergency." But while the new spending isn't paid for, Democrats are insisting that the bill's extension of the R&D tax credit and small business depreciation allowance must be offset by the tax increases.

Oh, and by the way, the President is unveiling a new line-item veto proposal this week to "rein in wasteful spending and hold Congress accountable," as Senator John Kerry put it yesterday in a press release. If any of them were remotely serious, they'd start by line-item vetoing this entire bill.