US and China: Grappling Over Economic Rescue -- Part II. By Edward Gresser
The two nations must first coordinate stimulus plans, then engage in currency diplomacy
PPI Online, February 2, 2009
WASHINGTON: As the United States bails out banks and shoe-factories close their doors in China, should the two governments worry about exchange rates?
The question arose after Timothy Geithner, new US treasury secretary, suggested in a congressional hearing that China is "manipulating" the value of its currency. China then fired back, echoed by a chorus of financial-gallery alarm over potential trade conflicts. But a reading of Geithner's full comment should dispel fear of a looming trade war over exchange rates: What the US seeks is a coordinated approach to save both economies from sinking.
Geithner's argument was that Chinese currency rates are a topic that both governments need to address, but not the immediate issue. Noting
"We look forward to a productive economic dialogue with the Chinese government on a number of short- and long-tem issues. The Yuan is certainly an important piece of that discussion, but given the crisis the immediate focus needs to be on the broader issue of stabilizing domestic demand in China and the US.... Because China accounts for such a large fraction of the world economy, a further slowdown in China would lead to a substantial fall in world growth (and demand for US exports) and delay recovery from the crisis. Therefore, the immediate goal should be for us to convince China to adopt a more aggressive stimulus package as we do our part to try to pass a stimulus package here at home."
This is the right context. The world needs more balanced growth in the next decade. Change in Chinese currency policy is part of this. But the immediate problem is accelerating economic collapse, which confrontation between America and China could easily worsen. Meanwhile, the immediate reason for currency diplomacy -- the imbalances that can arise from currency misalignments -- is at least for the moment fading as America's imports and deficits shrink. So, though both countries need to address the causes of their illness, they can afford to wait until both patients feel better.
Why, an observer might ask, are currency rates relevant at all?
Fundamentally, currency rates are a way to moderate swings in global growth and trade flows. A high currency value makes exports expensive, imports cheap and can slow growth when inflation threatens. A low currency value helps countries escape from economic slumps through cheaper exports. The currencies of most big economies -- the dollar, the euro, yen and pound -- swing back and forth in this way, traded at rates of $3 trillion per day. China's yuan is the exception, set in a band by government policy.
This is not inherently unworkable. But if the setting does not change with economic conditions, it can lead to big surpluses, deficits and risks. Here, we have one source of the crisis.
Leaving office, Geithner's predecessor Henry Paulson pointed to international imbalances as one of the crisis' causes. He meant that Americans were borrowing and spending too much, and Asia -- China in particular -- was saving too much and spending too little.
This is not a new phenomenon. Americans shop a lot and save little, relying on the worth of home ownership to build wealth. They save 5 or 6 percent of GDP in normal times; Asians by contrast save 20 to 40 percent of GDP, and spend less time in malls. The result is an imbalance, with Americans buying more of what everyone makes and Asians selling more than buying.
These habits have fairly deep roots: Americans have run deficits with Asia not only since the 1970s, but throughout the 19th century and the first half of the 20th century. But the imbalances of this decade grew larger and faster than those of earlier periods. US government policy, through steady tax cuts and low interest rates, drove American savings rates to just above 1 percent of GDP, the lowest figures recorded since 1934. Chinese hyper-savings and low consumption, meanwhile, helped create an anomalously high pool of capital and a steadily growing trade surplus. By 2006, America maintained a current-account deficit -- the balance between spending and receiving trade revenue, investment income, charitable donations and foreign aid -- equivalent to almost 6 percent of American GDP -- an all-time record, and double the deficit of 2001. China's surplus, meanwhile, rose from rough balance in 2003 to a 10 percent of GDP surplus in 2007, with a mirroring increase in American manufacturing-trade deficits. A fixed currency rate for the Chinese RMB, at 8.28 to the dollar from 1994 to 2005, meant currency did not respond to these changing conditions.
Geithner is therefore right to say that the yuan level is an important issue. Nor is he alone -- in the high-growth period of 2004 to 2007, economists at the International Monetary Fund and universities politely protested both Chinese currency policy and America's low savings and tax-cut mania. Nobody in a position to do something did much because solving imbalances is painful. Americans would have to save more, shop less and live modestly. Chinese would need to export less, sell more at home and shift employment from apparently reliable export factories to new sources of prosperity and create domestic demand. Chinese currency did appreciate after 2005, and America's imbalance did begin to shrink, but only by a modest amount and China's surplus continued to grow.
At some point, which nobody can quite predict, a rising imbalance becomes a risk. Both countries are seeing the consequences -- trembling banks in America, shuttering factories in coastal China, and rising unemployment in both countries.
Over time, governments need to set their recovery on a more solid foundation than the one of 2003-2006. This will require a more flexible currency in China that can moderate any returning boom, as well as better regulation and more savings in America.
But as Geithner pointed out, timing is everything. For the moment, imbalances are not the world's big problem. Markets reduce them by force, as demand collapses. With unemployment up, American families no longer go to the mall each Saturday for clothes and TVs. Imports are therefore plunging, from $229 billion in July to $183 billion by November; imports from China fell from about $33 billion to $28 billion. This is the fastest US import drop since the Second World War. As imports fall, America's trade gap shrinks, from an annualized $720 billion in early 2008 to $530 billion by the winter. Across the Pacific, Chinese migrant workers from the coastal industrial zone head home as export orders dry up. China's surplus may accordingly drop.
This collapse in demand is now the big evil governments must meet. Rising imports and imbalances may return, but are not the problem today. A confrontation over these matters would do little to solve the day's big evils, but could make them worse.
Therefore, as Geithner pointed out, currency should not be the immediate concern. Instead the US and Chinese governments need to cooperate, coordinating stimulus policies to give maximum support to demand.
As they restore growth, though, they must find ways to make it balanced growth. Yes, as ordinary people worry about jobs and growth, governments should think about the foreign-exchange markets. But they should act at the right time. Geithner's comment about currency, taken in its full context, implies that the Obama team is thinking along these lines. If so, they suggest the intention to restore health first, then place the prosperity of the 2010s on a stronger foundation than this decade's expansion -- not a bad goal at all.
Edward Gresser is director of the Trade & Global Markets Project with the Progressive Policy Institute.
Wednesday, February 4, 2009
Tuesday, February 3, 2009
On the CCSP revised Global Climate Change Impacts in the US report
Here We Go Again, More Cherry Picking by the CCSP. By Roger Pielke, Jr
Prometheus, February 2nd, 2009
Excerpts:
The CCSP revised and re-released Synthesis Report is out. I have not had a chance to look at thoroughly, but my first look does not leave me impressed. In fact, I am once again amazed at the brazen and willful misrepresentation of an area of climate change that I have some expertise in. The selective presentation of research on disasters and climate change by various assessment bodies leaves me convinced that such selectivity is a matter of choice and not simply incompetence. Such behavior damages the credibility of the entire climate science enterprise. Read on for the details of this latest and now common misrepresentation of the state of science on disasters and climate change.
[...]
But wait there is more. The CCSP itself reported no climatological basis for increasing economic losses in the United States in its report on extremes.
The bottom line is that the CCSP report refuses to acknowledge the range of legitimate scientific discussion on the subject of disasters and climate change. It selectively cites research that supports conclusions that it would like to reach, and dismisses and ignores that which is inconvenient. This is not how assessments should be done. How can anyone trust the climate science community as long as such shenanigans are allowed to take place?
Prometheus, February 2nd, 2009
Excerpts:
The CCSP revised and re-released Synthesis Report is out. I have not had a chance to look at thoroughly, but my first look does not leave me impressed. In fact, I am once again amazed at the brazen and willful misrepresentation of an area of climate change that I have some expertise in. The selective presentation of research on disasters and climate change by various assessment bodies leaves me convinced that such selectivity is a matter of choice and not simply incompetence. Such behavior damages the credibility of the entire climate science enterprise. Read on for the details of this latest and now common misrepresentation of the state of science on disasters and climate change.
[...]
But wait there is more. The CCSP itself reported no climatological basis for increasing economic losses in the United States in its report on extremes.
The bottom line is that the CCSP report refuses to acknowledge the range of legitimate scientific discussion on the subject of disasters and climate change. It selectively cites research that supports conclusions that it would like to reach, and dismisses and ignores that which is inconvenient. This is not how assessments should be done. How can anyone trust the climate science community as long as such shenanigans are allowed to take place?
Cuba Plans New Offshore Drilling in Search for Big Oil Finds in the Gulf of Mexico
Cuba Plans New Offshore Drilling in Search for Big Oil Finds in the Gulf of Mexico. By Thomas Omestad
US News & World Report, February 3, 2009
HAVANA—Cuban officials say that exploratory drilling to assess the potential for oil reserves in the Gulf of Mexico is likely to resume in the second quarter of this year, a sign that lower world oil prices have not derailed efforts by the Cuban government and its foreign corporate partners to keep moving toward offshore oil production.
Cuba believes it has major oil reserves in its waters. But the prospect of exploratory drilling—followed by likely future commercial drilling—in the Florida Straits has fired controversy in the United States, with the expectation that someday, foreign oil firms could be drilling as close as about 50 miles from parts of Florida.
The exploratory drilling will take place about 20 miles north of Havana and will be conducted by a consortium led by the Spanish oil firm Repsol, working with India's state-run Oil & Natural Gas Co. and Norway's StatoilHydro. Other exploratory drilling in the portion of the Gulf under Cuba's economic control is anticipated in 2010 and 2011.
"Cuba has high potential from an exploratory point of view," said Rafael Tenreyro Perez, exploration manager for Cubapetroleo (Cupet), the Cuban state oil company, in an interview. Seismic tests suggesting possible oil deposits over the past two years in Gulf waters were "very encouraging," he said.
Other firms that have, to varying degrees, partnered with the Cuban oil company in the hunt for oil either on or offshore hail from Venezuela, Malaysia, Vietnam, China, Canada, and Brazil. U.S. companies are barred from participating under regulations flowing from the 48-year-old American embargo of Cuba's economy. That widely criticized policy was intended to pressure Cuba's communist government to move toward democracy, but other countries oppose the U.S. isolation strategy toward Cuba and do business anyway.
Foreign firms have signed exploration and production agreements for 21 of the 59 blocks Cuba has created for its Gulf waters, where the biggest oil finds are believed to be located. An additional 23 blocks are said to be the subject of discussions with foreign companies.
Cupet has estimated that there are 20 billion barrels of recoverable offshore oil in Cuban waters. If that bears out, Cuba, with 11 million people, would have reserves that come into the same range as those of the United States.
The U.S. Geological Survey, though, has issued more conservative estimates: under 5 billion barrels in Cuba's offshore fields. Furthermore, most of the oil is believed to lie under deep water, where extraction is difficult and expensive.
Some see the advent of Cuban offshore oil drilling as raising the costs of maintaining the embargo policy, with other countries taking a piece of the Cuban action that might otherwise fall to some American firms. Some Capitol Hill lawmakers have urged that an exception be made in the embargo to permit energy cooperation. Overall Cuba policy is now under review by the Obama administration.
Others are worried that a future oil spill, given Gulf currents, could spoil Florida beaches and shore areas. Tenreyro says that any drilling operations will follow "the highest" international environmental standards.
Some Cuba watchers argue that environmental coordination with Cuba ought to be one of the early results of any policy changes developed by the Obama administration.
US News & World Report, February 3, 2009
HAVANA—Cuban officials say that exploratory drilling to assess the potential for oil reserves in the Gulf of Mexico is likely to resume in the second quarter of this year, a sign that lower world oil prices have not derailed efforts by the Cuban government and its foreign corporate partners to keep moving toward offshore oil production.
Cuba believes it has major oil reserves in its waters. But the prospect of exploratory drilling—followed by likely future commercial drilling—in the Florida Straits has fired controversy in the United States, with the expectation that someday, foreign oil firms could be drilling as close as about 50 miles from parts of Florida.
The exploratory drilling will take place about 20 miles north of Havana and will be conducted by a consortium led by the Spanish oil firm Repsol, working with India's state-run Oil & Natural Gas Co. and Norway's StatoilHydro. Other exploratory drilling in the portion of the Gulf under Cuba's economic control is anticipated in 2010 and 2011.
"Cuba has high potential from an exploratory point of view," said Rafael Tenreyro Perez, exploration manager for Cubapetroleo (Cupet), the Cuban state oil company, in an interview. Seismic tests suggesting possible oil deposits over the past two years in Gulf waters were "very encouraging," he said.
Other firms that have, to varying degrees, partnered with the Cuban oil company in the hunt for oil either on or offshore hail from Venezuela, Malaysia, Vietnam, China, Canada, and Brazil. U.S. companies are barred from participating under regulations flowing from the 48-year-old American embargo of Cuba's economy. That widely criticized policy was intended to pressure Cuba's communist government to move toward democracy, but other countries oppose the U.S. isolation strategy toward Cuba and do business anyway.
Foreign firms have signed exploration and production agreements for 21 of the 59 blocks Cuba has created for its Gulf waters, where the biggest oil finds are believed to be located. An additional 23 blocks are said to be the subject of discussions with foreign companies.
Cupet has estimated that there are 20 billion barrels of recoverable offshore oil in Cuban waters. If that bears out, Cuba, with 11 million people, would have reserves that come into the same range as those of the United States.
The U.S. Geological Survey, though, has issued more conservative estimates: under 5 billion barrels in Cuba's offshore fields. Furthermore, most of the oil is believed to lie under deep water, where extraction is difficult and expensive.
Some see the advent of Cuban offshore oil drilling as raising the costs of maintaining the embargo policy, with other countries taking a piece of the Cuban action that might otherwise fall to some American firms. Some Capitol Hill lawmakers have urged that an exception be made in the embargo to permit energy cooperation. Overall Cuba policy is now under review by the Obama administration.
Others are worried that a future oil spill, given Gulf currents, could spoil Florida beaches and shore areas. Tenreyro says that any drilling operations will follow "the highest" international environmental standards.
Some Cuba watchers argue that environmental coordination with Cuba ought to be one of the early results of any policy changes developed by the Obama administration.
ACSH: Counterfeit Drugs Continue to Present a Growing Threat to Global Health
Counterfeit Drugs Continue to Present a Growing Threat to Global Health, Says New Report.
"estimated to be about 10% of the global drug supply"
American Council on Science and Health, Monday, February 2, 2009
New York, NY -- Counterfeit drugs remain a real and growing threat to global health, jeopardizing the security of the American drug supply, according to an updated report by the American Council on Science and Health (ACSH).
The 2009 edition of the booklet Counterfeit Drugs: Coming to a Pharmacy Near You was released today, following peer review by a panel of top experts in the field. It documents how increasingly sophisticated counterfeiting rings, some with connections to organized crime and even terrorist groups, have improved upon their methods of evading international police and investigative forces, slipping potentially dangerous counterfeit, substandard and adulterated drugs into legitimate drug supplies, including that of the United States.
Counterfeit drugs, a term that includes fake, substandard, adulterated, and mislabeled pharmaceuticals, were estimated by the World Health Organization to be about 10% of the global drug supply, and a much higher percentage in developing countries. For years, counterfeits have wreaked havoc in developing countries and have contributed to the increasing drug-resistance of diseases such as malaria, HIV/AIDS and tuberculosis. Hundreds of thousands of these counterfeits have been shipped to pharmacies and dispensed to unwitting American consumers.
•As recently as this past year, the first episode of fatalities from tainted drugs in the United States came to light when almost 100 people died from contaminated heparin, imported from China. Of course, this number pales in comparison to the toll of counterfeit drugs in the less developed world.
•The risk of fake, adulterated medicine is even greater when drugs are purchased from unregulated online sites. Some of these, ostensibly "Canadian," have been found to actually be located in China and other poorly-regulated regions.
The FDA has no ability to control the safety of drugs purchased through these channels, and studies have found that as much as 88% of drugs being imported into the United States violate FDA safety standards and are potentially dangerous. Such importation is illegal under current law, but the FDA lacks the resources to stop the practice.
•ACSH president Dr. Elizabeth Whelan warns that the legalization of drug importation, advocated by many in Congress as an easy way to obtain cheap drugs, "represents an unjustifiable breaching of our domestic drug supply that has the potential to erase even the minimal gains we have made in the fight against counterfeit drugs."
•Efforts to address the counterfeit problem through drug pedigrees, new anti-counterfeiting technology, and increased licensing of wholesalers hold promise but must be combined with aggressive enforcement.
What can individuals do to protect themselves? According to ACSH's report, "the American consumer must be aware of the dangers posed by counterfeit drugs and be vigilant." Consumers should pay attention to the appearance and packaging of their prescription drugs for any unusual changes in shape, size or color, or sudden changes in the effectiveness of a medicine.
The ACSH report advises: "Despite certain safety issues, prescription drugs bought from state-licensed pharmacies remain by far the safest choice available to consumers. Consumers should avoid imported drugs and those purchased from unregulated online drug stores, as these have a high risk of being substandard or counterfeit and could endanger your health."
Read the updated ACSH report on Counterfeit Drugs here
"estimated to be about 10% of the global drug supply"
American Council on Science and Health, Monday, February 2, 2009
New York, NY -- Counterfeit drugs remain a real and growing threat to global health, jeopardizing the security of the American drug supply, according to an updated report by the American Council on Science and Health (ACSH).
The 2009 edition of the booklet Counterfeit Drugs: Coming to a Pharmacy Near You was released today, following peer review by a panel of top experts in the field. It documents how increasingly sophisticated counterfeiting rings, some with connections to organized crime and even terrorist groups, have improved upon their methods of evading international police and investigative forces, slipping potentially dangerous counterfeit, substandard and adulterated drugs into legitimate drug supplies, including that of the United States.
Counterfeit drugs, a term that includes fake, substandard, adulterated, and mislabeled pharmaceuticals, were estimated by the World Health Organization to be about 10% of the global drug supply, and a much higher percentage in developing countries. For years, counterfeits have wreaked havoc in developing countries and have contributed to the increasing drug-resistance of diseases such as malaria, HIV/AIDS and tuberculosis. Hundreds of thousands of these counterfeits have been shipped to pharmacies and dispensed to unwitting American consumers.
•As recently as this past year, the first episode of fatalities from tainted drugs in the United States came to light when almost 100 people died from contaminated heparin, imported from China. Of course, this number pales in comparison to the toll of counterfeit drugs in the less developed world.
•The risk of fake, adulterated medicine is even greater when drugs are purchased from unregulated online sites. Some of these, ostensibly "Canadian," have been found to actually be located in China and other poorly-regulated regions.
The FDA has no ability to control the safety of drugs purchased through these channels, and studies have found that as much as 88% of drugs being imported into the United States violate FDA safety standards and are potentially dangerous. Such importation is illegal under current law, but the FDA lacks the resources to stop the practice.
•ACSH president Dr. Elizabeth Whelan warns that the legalization of drug importation, advocated by many in Congress as an easy way to obtain cheap drugs, "represents an unjustifiable breaching of our domestic drug supply that has the potential to erase even the minimal gains we have made in the fight against counterfeit drugs."
•Efforts to address the counterfeit problem through drug pedigrees, new anti-counterfeiting technology, and increased licensing of wholesalers hold promise but must be combined with aggressive enforcement.
What can individuals do to protect themselves? According to ACSH's report, "the American consumer must be aware of the dangers posed by counterfeit drugs and be vigilant." Consumers should pay attention to the appearance and packaging of their prescription drugs for any unusual changes in shape, size or color, or sudden changes in the effectiveness of a medicine.
The ACSH report advises: "Despite certain safety issues, prescription drugs bought from state-licensed pharmacies remain by far the safest choice available to consumers. Consumers should avoid imported drugs and those purchased from unregulated online drug stores, as these have a high risk of being substandard or counterfeit and could endanger your health."
Read the updated ACSH report on Counterfeit Drugs here
State Dept: "Zimbabwe: Unity Government"
Zimbabwe: Unity Government. By Robert Wood
US State Dept, Acting Department Spokesman, Public Affairs
Washington, DC, Feb 03, 2009
The Movement for Democratic Change (MDC) has agreed to join a unity government with Robert Mugabe under the conditions called for in the Southern African Development Community (SADC) January 27 Communiqué. The success or failure of such a government will depend on credible and inclusive power sharing by Robert Mugabe and his ZANU-PF party. The international community must remain engaged and continue to scrutinize actions by Mr. Mugabe to ensure adherence to the letter and spirit of this agreement, including respect for human rights and the rule of law. We urge SADC to fulfill its obligation to guarantee that Mr. Mugabe proceeds on a new path toward reconciliation and genuine partnership with the MDC.
The U.S. will only consider new development assistance and easing of targeted sanctions when we have seen evidence of true power sharing as well as inclusive and effective governance. We will continue to provide humanitarian assistance to the Zimbabwean people in their time of suffering.
PRN: 2009/098
US State Dept, Acting Department Spokesman, Public Affairs
Washington, DC, Feb 03, 2009
The Movement for Democratic Change (MDC) has agreed to join a unity government with Robert Mugabe under the conditions called for in the Southern African Development Community (SADC) January 27 Communiqué. The success or failure of such a government will depend on credible and inclusive power sharing by Robert Mugabe and his ZANU-PF party. The international community must remain engaged and continue to scrutinize actions by Mr. Mugabe to ensure adherence to the letter and spirit of this agreement, including respect for human rights and the rule of law. We urge SADC to fulfill its obligation to guarantee that Mr. Mugabe proceeds on a new path toward reconciliation and genuine partnership with the MDC.
The U.S. will only consider new development assistance and easing of targeted sanctions when we have seen evidence of true power sharing as well as inclusive and effective governance. We will continue to provide humanitarian assistance to the Zimbabwean people in their time of suffering.
PRN: 2009/098
Today's Message to Young Entrepreneurs: Get a Nice, Safe Government Job Instead
Today's Message to Young Entrepreneurs: Get a Nice, Safe Government Job Instead. By Newt Gingrich
Feb 03, 2009
Imagine you are a young Bill Gates. You’re smart. You’re ambitious. You’re thinking about starting a business to put your talents to their best use for you and for society.
Then you turn on the television and see President Obama say that “now is not the time” for entrepreneurs to make profits and get bonuses.
You hear Vice President Joe Biden say of corporate CEOs: “I’d like to throw these guys in the brig.”
You pick up the newspaper and read about a bill sponsored by Sen. Claire McCaskill (D-Mo.) to cap the salaries of top executives (“idiots” in her words) of firms that accept government bailout money.
And you read about another bill speeding through Congress that will allow judges to alter the terms of mortgage contracts after the fact; to unilaterally reduce the amount of principal borrowers agreed to pay back when they signed their mortgage contracts.
The Vice President is Threatening to Throw Businessmen in the Brig. Why Take the Chance?
What lessons does a young entrepreneur learn from listening carefully to the voices advocating more and more government regulation and intervention in our economy?
He learns that the President has more faith in government to save the economy than free enterprise. So why not get a nice, safe government job instead?
She learns that starting a business and creating jobs may put her in the cross hairs of the Vice President. Maybe he means that part about throwing her in the brig, maybe he doesn’t. Why take the chance?
He learns that when politicians like Claire McCaskill get involved in economic enterprises, politics -- not economics -- rules. Why risk everything to have your future controlled by Washington?
And she learns that contracts aren’t worth the paper they’re written on. When judges can unilaterally re-write contracts, lenders will charge more to lend. So why even try to get that small business loan?
Biden and McCaskill Should Be Outraged With Themselves
Vice President Biden, Sen. McCaskill and others who are advocating greater and greater government intervention into private business are rightly outraged at reports of corporate CEOs receiving billions in taxpayer bailout dollars and then turning around and awarding themselves and their cronies lavish corporate bonuses.
This outrage is entirely justified. Politicians are understandably looking for someone to blame for this breach of the public’s trust.
But they should be looking at themselves. Vice President Biden and Sen. McCaskill should be outraged with themselves.
The reason is simple: If there had been no big government bailout of these companies, their CEOs would have no fiduciary duty to the taxpayers. It wouldn’t be any of Sen. McCaskill’s business how they compensate themselves.
But government offered the money, and private companies took it. So now government is in charge.
The Rules for Spending Taxpayers Money Don’t Work in the Private Market
The great management guru Peter Drucker taught us that there is a set of rules for spending the taxpayers’ money that is antithetical to the proper functioning of a private business.
For instance, when taxpayers are footing the bill, it’s perfectly legitimate for the people, through their representatives in government, to set limits on compensation.
In the free market, however, if government sets arbitrary limits on compensation, the best minds and greatest talents will go to where there are no limits. Politicians will have set these companies up to fail.
And if government decides some contracts are no longer politically tolerable, they erode the value of all contracts. And in the case of home mortgage contracts, government abrogation only makes future mortgages more expensive.
Rent Seeking Capitalism: The Growth of “Fusion Enterprise”
The danger is not simply that government will hobble private enterprise with regulation once it has become a stakeholder.
The greater danger is that the act of going into business in America will come to mean simultaneously going into the government lobbying business. Future “entrepreneurs” will compete, not just for private capital, but for government investment to give them the edge over their competitors.
Former American Enterprise Institute President Chris DeMuth calls this “fusion enterprise” and warns that it’s catching on:
“He Who Does Not Work Does Not Eat”
Since the earliest American settlers at Jamestown in 1607 adopted Captain John Smith’s rule, “He who does not work does not eat,” America has thrived in a system of private enterprise and incentives for hard work and risk-taking.
Today, we are on the verge of repudiating 400 years of free market principle.
And the irony is that the $900 billion big government, big bureaucracy, big politician stimulus package that is being passed in the name of speeding our economic recovery may make emerging from the economic downturn that much harder.
What Began as an Economic Crisis is Becoming a Cultural Crisis
This crisis, which began as an economic crisis, is becoming a cultural crisis. And the lessons being learned by young entrepreneurs are precisely the wrong ones.
We are teaching young Americans to ignore American history and look to government first.
We are teaching young Americans not to start businesses when small businesses are the engine of job creation.
We are teaching young Americans not to compete on the level playing field of the free market, but to seek to co-op government in the pursuit of profit.
In his inaugural speech, President Obama singled out the “the risk-takers, the doers, the makers of things” as the source of American greatness. Does President Obama mean what he says? Or is this one more example of his moderate rhetoric not matching his liberal deeds?
Feb 03, 2009
Imagine you are a young Bill Gates. You’re smart. You’re ambitious. You’re thinking about starting a business to put your talents to their best use for you and for society.
Then you turn on the television and see President Obama say that “now is not the time” for entrepreneurs to make profits and get bonuses.
You hear Vice President Joe Biden say of corporate CEOs: “I’d like to throw these guys in the brig.”
You pick up the newspaper and read about a bill sponsored by Sen. Claire McCaskill (D-Mo.) to cap the salaries of top executives (“idiots” in her words) of firms that accept government bailout money.
And you read about another bill speeding through Congress that will allow judges to alter the terms of mortgage contracts after the fact; to unilaterally reduce the amount of principal borrowers agreed to pay back when they signed their mortgage contracts.
The Vice President is Threatening to Throw Businessmen in the Brig. Why Take the Chance?
What lessons does a young entrepreneur learn from listening carefully to the voices advocating more and more government regulation and intervention in our economy?
He learns that the President has more faith in government to save the economy than free enterprise. So why not get a nice, safe government job instead?
She learns that starting a business and creating jobs may put her in the cross hairs of the Vice President. Maybe he means that part about throwing her in the brig, maybe he doesn’t. Why take the chance?
He learns that when politicians like Claire McCaskill get involved in economic enterprises, politics -- not economics -- rules. Why risk everything to have your future controlled by Washington?
And she learns that contracts aren’t worth the paper they’re written on. When judges can unilaterally re-write contracts, lenders will charge more to lend. So why even try to get that small business loan?
Biden and McCaskill Should Be Outraged With Themselves
Vice President Biden, Sen. McCaskill and others who are advocating greater and greater government intervention into private business are rightly outraged at reports of corporate CEOs receiving billions in taxpayer bailout dollars and then turning around and awarding themselves and their cronies lavish corporate bonuses.
This outrage is entirely justified. Politicians are understandably looking for someone to blame for this breach of the public’s trust.
But they should be looking at themselves. Vice President Biden and Sen. McCaskill should be outraged with themselves.
The reason is simple: If there had been no big government bailout of these companies, their CEOs would have no fiduciary duty to the taxpayers. It wouldn’t be any of Sen. McCaskill’s business how they compensate themselves.
But government offered the money, and private companies took it. So now government is in charge.
The Rules for Spending Taxpayers Money Don’t Work in the Private Market
The great management guru Peter Drucker taught us that there is a set of rules for spending the taxpayers’ money that is antithetical to the proper functioning of a private business.
For instance, when taxpayers are footing the bill, it’s perfectly legitimate for the people, through their representatives in government, to set limits on compensation.
In the free market, however, if government sets arbitrary limits on compensation, the best minds and greatest talents will go to where there are no limits. Politicians will have set these companies up to fail.
And if government decides some contracts are no longer politically tolerable, they erode the value of all contracts. And in the case of home mortgage contracts, government abrogation only makes future mortgages more expensive.
Rent Seeking Capitalism: The Growth of “Fusion Enterprise”
The danger is not simply that government will hobble private enterprise with regulation once it has become a stakeholder.
The greater danger is that the act of going into business in America will come to mean simultaneously going into the government lobbying business. Future “entrepreneurs” will compete, not just for private capital, but for government investment to give them the edge over their competitors.
Former American Enterprise Institute President Chris DeMuth calls this “fusion enterprise” and warns that it’s catching on:
Already, the government-appointed chief executive of AIG is boasting to his
customers and others that his firm is much better capitalized (that is, by
Washington) than the mere private firms it competes with. Several of those
rivals see the point and are lining up for their shares. We have no economic
theory, and only fragmentary casual examples, to resist this halfway house
between comprehensive socialism on the one hand and conventional regulation on
the other …
“He Who Does Not Work Does Not Eat”
Since the earliest American settlers at Jamestown in 1607 adopted Captain John Smith’s rule, “He who does not work does not eat,” America has thrived in a system of private enterprise and incentives for hard work and risk-taking.
Today, we are on the verge of repudiating 400 years of free market principle.
And the irony is that the $900 billion big government, big bureaucracy, big politician stimulus package that is being passed in the name of speeding our economic recovery may make emerging from the economic downturn that much harder.
What Began as an Economic Crisis is Becoming a Cultural Crisis
This crisis, which began as an economic crisis, is becoming a cultural crisis. And the lessons being learned by young entrepreneurs are precisely the wrong ones.
We are teaching young Americans to ignore American history and look to government first.
We are teaching young Americans not to start businesses when small businesses are the engine of job creation.
We are teaching young Americans not to compete on the level playing field of the free market, but to seek to co-op government in the pursuit of profit.
In his inaugural speech, President Obama singled out the “the risk-takers, the doers, the makers of things” as the source of American greatness. Does President Obama mean what he says? Or is this one more example of his moderate rhetoric not matching his liberal deeds?
NATO in Afghanistan: Lazy Allies
Lazy Allies, by Ted Galen Carpenter
The National Interest, February 2, 2009
Media reports indicate that President Obama may abandon his plan to ask America’s NATO partners to provide more combat troops for the mission in Afghanistan. Given how militarily useless many of the existing European deployments have been, that may not prove to be a big loss. But the feckless conduct of some of the European members of NATO in Afghanistan is indicative of a larger problem. The reality is that Washington’s much-touted alliances now involve more symbolism and tokenism than any meaningful addition to America’s military power. Immediately following the terrorist attacks on 9/11, NATO governments invoked Article V—which states that an attack on one member is an attack on all—for the first time in the alliance’s history. American leaders welcomed the European pledges of support, and the U.S.-led military campaign in Afghanistan soon had a significant NATO component.
But early on, doubts arose about how serious the European allies were about their military commitments. Indeed, most of the NATO governments seemed to view their troop deployments as personnel for humanitarian relief and nation-building tasks rather than for combat operations. The military heavy lifting was by and large left to U.S. forces and those of a few other countries, primarily Canada, Britain and the Netherlands.
Most NATO members have placed various caveats on the use of their military personnel. Some are prohibited from night operations (which are inherently more dangerous). Others are prohibited from being deployed in certain areas of the country—specifically, those areas where significant combat is occurring and additional troops might actually prove useful.
Germany is one of the worst offenders in that regard. Berlin has restricted its troops to the northern regions of Afghanistan, where virtually no fighting is taking place. Despite Washington’s repeated requests, the German government has refused to lift that restriction. That might be just as well. A December 2008 German parliamentary report concluded that the country’s troops in Afghanistan spent most of their time lounging around and drinking beer, and that many were now too fat and out of condition to be of any use in combat operations.
The desire of U.S. allies to keep their troops out of harm’s way is not confined to the Afghanistan theater—or for that matter to the NATO allies. A similar pattern emerged with the deployments of both South Korean and Japanese forces in Iraq. Seoul insisted that its troops be stationed only in Iraqi Kurdistan, by far the safest area of the country. But the South Korean government was a profile in courage compared to the Japanese government. Although Tokyo sent units of its Self-Defense Force (SDF) to Iraq, it insisted that those forces must be confined to noncombat roles. Indeed, the SDF units had to be protected by the troops of other coalition countries. Thus, from a military standpoint, the Japanese contribution was not an asset to the occupation effort—it was a liability.
Such episodes indicate that many of America’s supposed military partners are more interested in engaging in tokenism and security symbolism than they are with playing a meaningful military role. The governments of those countries want to show that they are good allies and willing participants in U.S.-led missions, while incurring few, if any, battlefield risks. That sort of conduct may salve the consciences of political leaders in allied capitals, and it may appeal to U.S. policymakers for whom symbolism is more important than substance. It may even gull an otherwise suspicious American public. But it provides little useful addition to America’s own military power.
One wonders at times if U.S. leaders believe that this country should have allies for the sake of having allies, even if those military partners bring little of value to the table. Why else would American officials tolerate the tokenism evident with the allied contributions in both Iraq and Afghanistan? And why would those same officials be so enthusiastic about the addition of tiny, militarily insignificant members to the NATO alliance?
The last round of NATO expansion brought on board such military powerhouses as Estonia, Latvia, Lithuania and Slovenia. According to the 2008 edition of the widely respected publication The Military Balance, Estonia’s annual defense budget is $386 million, and the country fields 4,100 active-duty troops. The figures for Latvia are $471 million and 5,996 troops; Lithuania, $470 million and 13,850 troops; and Slovenia, $750 million and 5,973 troops. At NATO’s summit last year in Bucharest, alliance leaders gave the green light to membership for Croatia and Albania. Croatia’s accession would add $875 million and 17,660 troops, while Albania’s would add $208 million and 11,020 military personnel.
Collectively, such members spend less on their militaries in a year than the United States spends in Iraq in two weeks. How adding such military pygmies to NATO is supposed to enhance the security of the United States is a mystery. Indeed, since several of those countries have serious tensions with their neighbors, they are not just militarily irrelevant, but are outright security liabilities that could drag the United States into needless conflicts.
U.S. policymakers ought to be far more realistic about the utility of alliances. Allies are neither good nor bad, per se. But American officials should not pretend that allies are making meaningful military contributions when the evidence indicates otherwise. Security symbolism and tokenism is of little practical use, yet that is the level of assistance that has become all too common from America’s alliance partners.
The National Interest, February 2, 2009
Media reports indicate that President Obama may abandon his plan to ask America’s NATO partners to provide more combat troops for the mission in Afghanistan. Given how militarily useless many of the existing European deployments have been, that may not prove to be a big loss. But the feckless conduct of some of the European members of NATO in Afghanistan is indicative of a larger problem. The reality is that Washington’s much-touted alliances now involve more symbolism and tokenism than any meaningful addition to America’s military power. Immediately following the terrorist attacks on 9/11, NATO governments invoked Article V—which states that an attack on one member is an attack on all—for the first time in the alliance’s history. American leaders welcomed the European pledges of support, and the U.S.-led military campaign in Afghanistan soon had a significant NATO component.
But early on, doubts arose about how serious the European allies were about their military commitments. Indeed, most of the NATO governments seemed to view their troop deployments as personnel for humanitarian relief and nation-building tasks rather than for combat operations. The military heavy lifting was by and large left to U.S. forces and those of a few other countries, primarily Canada, Britain and the Netherlands.
Most NATO members have placed various caveats on the use of their military personnel. Some are prohibited from night operations (which are inherently more dangerous). Others are prohibited from being deployed in certain areas of the country—specifically, those areas where significant combat is occurring and additional troops might actually prove useful.
Germany is one of the worst offenders in that regard. Berlin has restricted its troops to the northern regions of Afghanistan, where virtually no fighting is taking place. Despite Washington’s repeated requests, the German government has refused to lift that restriction. That might be just as well. A December 2008 German parliamentary report concluded that the country’s troops in Afghanistan spent most of their time lounging around and drinking beer, and that many were now too fat and out of condition to be of any use in combat operations.
The desire of U.S. allies to keep their troops out of harm’s way is not confined to the Afghanistan theater—or for that matter to the NATO allies. A similar pattern emerged with the deployments of both South Korean and Japanese forces in Iraq. Seoul insisted that its troops be stationed only in Iraqi Kurdistan, by far the safest area of the country. But the South Korean government was a profile in courage compared to the Japanese government. Although Tokyo sent units of its Self-Defense Force (SDF) to Iraq, it insisted that those forces must be confined to noncombat roles. Indeed, the SDF units had to be protected by the troops of other coalition countries. Thus, from a military standpoint, the Japanese contribution was not an asset to the occupation effort—it was a liability.
Such episodes indicate that many of America’s supposed military partners are more interested in engaging in tokenism and security symbolism than they are with playing a meaningful military role. The governments of those countries want to show that they are good allies and willing participants in U.S.-led missions, while incurring few, if any, battlefield risks. That sort of conduct may salve the consciences of political leaders in allied capitals, and it may appeal to U.S. policymakers for whom symbolism is more important than substance. It may even gull an otherwise suspicious American public. But it provides little useful addition to America’s own military power.
One wonders at times if U.S. leaders believe that this country should have allies for the sake of having allies, even if those military partners bring little of value to the table. Why else would American officials tolerate the tokenism evident with the allied contributions in both Iraq and Afghanistan? And why would those same officials be so enthusiastic about the addition of tiny, militarily insignificant members to the NATO alliance?
The last round of NATO expansion brought on board such military powerhouses as Estonia, Latvia, Lithuania and Slovenia. According to the 2008 edition of the widely respected publication The Military Balance, Estonia’s annual defense budget is $386 million, and the country fields 4,100 active-duty troops. The figures for Latvia are $471 million and 5,996 troops; Lithuania, $470 million and 13,850 troops; and Slovenia, $750 million and 5,973 troops. At NATO’s summit last year in Bucharest, alliance leaders gave the green light to membership for Croatia and Albania. Croatia’s accession would add $875 million and 17,660 troops, while Albania’s would add $208 million and 11,020 military personnel.
Collectively, such members spend less on their militaries in a year than the United States spends in Iraq in two weeks. How adding such military pygmies to NATO is supposed to enhance the security of the United States is a mystery. Indeed, since several of those countries have serious tensions with their neighbors, they are not just militarily irrelevant, but are outright security liabilities that could drag the United States into needless conflicts.
U.S. policymakers ought to be far more realistic about the utility of alliances. Allies are neither good nor bad, per se. But American officials should not pretend that allies are making meaningful military contributions when the evidence indicates otherwise. Security symbolism and tokenism is of little practical use, yet that is the level of assistance that has become all too common from America’s alliance partners.
Brookings' Rivlin on Budget Policy Challenges
Budget Policy Challenges, by Alice M. Rivlin, Senior Fellow, Metropolitan Policy Program, Economic Studies, Brookings Institution
House Committee on the Budget, Jan 27, 2009
Mr. Chairman and members of the Committee: It is a pleasure for me to be back at the House Budget Committee. I am especially gratified to follow my former colleague, Douglas Elmendorf, as he makes the first of many appearances before this Committee as Director of the Congressional Budget Office.
I will say a few words about the uncertainties of the economic outlook and then turn to the question of how to deal with the immediate and longer-run challenges of fiscal policy. The challenge of budget-making has never been greater. Indeed, I believe that the future viability of the United States economy depends very heavily on budget policy-makers’ ability to focus on two seemingly contradictory imperatives at the same time:
The immediate need to take actions which will mitigate the impact of the recession and help the economy recover—actions that necessarily require big increases in the budget deficit The equally urgent need to take actions that will restore fiscal responsibility and reassure our creditors that we are getting our fiscal house in order—actions to bring future deficits down.I stress two sets of actions because I do not believe it will be sufficient to pay lip service to the long run challenge, while acting only on deficit-increasing responses to the current financial and economic crisis. Congress and the Administration must work together on actual solutions to both problems at the same time.
The Economic Outlook
We meet at a time of extraordinary uncertainty about how deep the recession will be and how long it will last. Forecasters all admit that they have little confidence in their ability to predict how consumers, producers, and investors at home and abroad will react to the cataclysmic economic events that have occurred. But people in the forecasting business still have to produce forecasts, so they do the best they can. The Congressional Budget Office (CBO) forecasts that the recession will “last well into 2009” and that the economy will begin to recover, albeit slowly, in 2010. CBO expects unemployment to peak at about 9 percent. The CBO is a bit more pessimistic than the Blue Chip average of commercial forecasters, because the rules of CBO forecasting do not allow them to take account of likely congressional actions to stimulate the economy and enhance recovery.
Right now I think we should be skeptical of all forecasts and especially conscious of the risk that things may continue to go worse than expected. The current CBO forecast is much more pessimistic than the one released just last September, and the Blue Chip consensus has been going steadily south for many months. Additional revelations of weakness in the financial services sector could further impede credit flows and produce a continued slide in all forecasters’ expectations.
Indeed, uncertainty about the health of the financial sector compromises all current forecasting efforts. The economic models used by forecasters are based on the experience of the post World War II period, especially the last several decades. Not since the 1930’s, however, have we experienced a downturn caused by crisis in the financial sector. Despite aggressive efforts of the Treasury and the Federal Reserve to stabilize the financial sector, credit is not flowing normally, even to credit- worthy borrowers. Continued instability in the financial sector and credit tightness could deepen the recession and delay recovery.
Also adding to the uncertainty and increasing the chance that recovery will be unusually slow is the fact that is that returning to the pre-crisis economy is not desirable. Before the current crisis Americans were consuming and borrowing too much, while saving too little. We had become an over-mortgaged, over-leveraged society dependent on the inflow of foreign credit. If recovery from this recession is to be solid and sustainable, we must stop living beyond our means. We must transform ourselves into a society that consumes less, saves more and finances a larger fraction of its investment with domestic saving, rather than foreign borrowing. This transformation is necessary, but it will put recovery on a slower track.
Indeed, not since we were a developing country have we been so dependent on foreign creditors. We are lucky that, even though this world-wide financial crisis started in the United States, the response of world investors has been to flock to the safety of U.S. Treasuries, which makes it possible for our government to borrow short-term at astonishingly low rates. But we cannot count on these favorable borrowing conditions continuing forever. Especially if we fail to take serious steps to bring down future budget deficits, the United States Government could lose the confidence of its foreign creditors and be forced to pay much higher interest rates on to finance both public debt and private debt. Rapid increases in interest rates and a plummeting dollar could deepen the recession and slow recovery.
An “Anti-Recession Package” and Investment in Future Growth
Despite the uncertainty of forecasts it is already clear that this recession is bad and that worse is yet to come. Recessions always increase budget deficits as revenues drop and recession-related spending increases. These automatic deficits help stabilize the economy. In addition, since an unusually severe downturn in the economy is threatening, the government should act quickly to mitigate the downslide with spending increases and revenue cuts that will stimulate consumer and investor spending, create jobs and protect the most vulnerable from the ravages of recession.
What we used to call “stimulus” (temporary spending or tax relief designed to jump-start the economy) has been merged into a broader concept of “recovery” and investment in future growth. However, I believe an important distinction should be made between a short-term “anti-recession package” (aka “stimulus”) and a more permanent shift of resources into public investment in future growth. We need both. The first priority is an “anti-recession package” that can be both enacted and spent quickly, will create and preserve jobs in the near-term, and not add significantly to long run deficits. It should include temporary aid to states in the form of an increased Medicaid match and block grants for education and other purposes. Aiding states will prevent them from taking actions to balance their budgets--cutting spending and raising taxes--that will make the recession worse. The package should also include temporary funding for state and local governments to enable them to move ahead quickly with genuinely “shovel ready” infrastructure projects (including repairs) that will employ workers soon and improve public facilities. Another important element of the anti-recession package should be substantial transfers to lower and middle income people, because they need the money and will spend it quickly. This objective would be served by increasing the Supplemental Nutrition Assistance Program (SNAP), unemployment compensation, and the Earned Income Tax Credit. Helping people who lose their jobs to keep their health insurance and aiding distressed homeowners also belong in this “anti-recession” package. On the tax side, my favorite vehicle would be a payroll tax holiday, because payroll tax is paid by all workers and is far more significant than the income tax for people in the lower half of the income distribution. Moreover, a payroll tax holiday would be relatively easy to reverse when tax relief was no longer appropriate. This anti-recession package should move forward quickly. Because its components would be temporary, there would be little reason for concern about its impact on the deficit three or four years down the road.
The anti recession package should be distinguished from longer-run investments needed to enhance the future growth and productivity of the economy. The distinction is not that these longer-run investments are less needed or less urgent. We have neglected our public infrastructure for far too long and invested too little in the skills of the future workforce. If our economy is to grow sustainably in the future we need to modernize our transportation system to make it more efficient and less reliant on fossil fuels. We need to assure access to modern communications across the country and invest in the information technology and data analysis needed to make medical care delivery more efficient and effective. We need a well thought-out program of investment in workforce skills, early childhood education, post-secondary education, science and technology. Such a long-term investment program should not be put together hastily and lumped in with the anti-recession package. The elements of the investment program must be carefully planned and will not create many jobs right away.
Since a sustained program of public investment in productivity-enhancing skills and infrastructure will add to federal spending for many years, it must be paid for and not simply added to already huge projected long-term deficits. That means either shifting spending from less productive uses or finding more revenue. Overtime, Congress could reduce commitments to defense programs and weapons systems that reflect outmoded thinking about threats to U.S. security, reduce agricultural subsidies, and eliminate many small programs that have outlived their original priorities. Reform of the tax system--including making the income tax simpler and fairer or increasing reliance on consumer taxation—could produce more revenue with less drag on economic growth. None of these policies would be easy, but the resources to pay for large permanent increases in federal spending must be shifted from somewhere else as the economy returns to full employment. Congress will only be able to accomplish this reallocation of resources if it reinstates some form of long run (say, ten year) PAYGO and caps on discretionary spending.
I understand the reasons for lumping together the anti-recession and investment packages into one big bill that can pass quickly in this emergency. A large combined package will get attention and help restore confidence that the federal government is taking action—even if part the money spends out slowly. But there are two kinds of risks in combining the two objectives. One is that money will be wasted because the investment elements were not carefully crafted. The other is that it will be harder to return to fiscal discipline as the economy recovers if the longer run spending is not offset by reductions or new revenues.
Immediate Action to Bring Down Future Deficits
As this Committee knows well, projections of the federal budget show rapidly rising spending over the next several decades attributable to three major entitlement programs; namely, Medicare, Medicaid and Social Security. Under current rules, Social Security spending will rise rapidly over the next two decades, but level off after the Baby Boom generation passes through the system. The health care entitlements are expected to rise even faster. Moreover, they are expected to keep on rising because they are dominated by continued increases in the spending for health care in both the public and private sectors. If policies are not changed Medicare and Medicaid—and to a lesser extent Social Security—will drive federal spending up considerably faster than the rate at which the economy is likely to grow. Unless Americans consent to tax burdens that rise as fast as spending, a widening gap will open up. We will not be able to finance these continuously growing deficits.
Because rapidly rising debt threaten our credibility as sound fiscal managers, we do not have the luxury of waiting until the economy recovers before taking actions to bring down projected future deficits. Congress and the Administration should take actual steps this year to reduce those deficits in order to demonstrate clearly that we are capable of putting our fiscal house in order. This can be done without endangering economic recovery.
The crisis may have made Social Security less of a political “third rail” and provided an opportunity to put the system on a sound fiscal basis for the foreseeable future. Fixing Social Security is a relatively easy technical problem. It will take some combination of several much-discussed marginal changes: raising the retirement age gradually in the future (and then indexing it to longevity), raising the cap on the payroll tax, fixing the COLA, and modifying the indexing of initial benefits so they grow more slowly for more affluent people. In view of the collapse of market values, no one is likely to argue seriously for diverting existing revenues to private accounts, so the opportunity to craft a compromise is much greater than it was a few years ago. Fixing Social Security would be a confidence building achievement for bi-partisan cooperation and would enhance our reputation for fiscal prudence.
Vigorous action should also be taken to make Medicare more cost effective and slow the rate of growth of Medicare spending, which contributes so much to projected deficits. While restraining health spending growth should be a major feature of comprehensive health reform, Medicare is an ideal place to start the effort. Medicare is the largest payer for health services and should play a leadership role in collecting information on the cost and effectiveness of alternative treatments and ways of delivering services, and designing reimbursement incentives to reward effectiveness and discourage waste. Congress has a history of allowing pressure from providers and suppliers (for example, suppliers of durable medical equipment or pharmaceutical companies) to thwart efforts to contain Medicare costs. The government has also not been adequately attentive to punishing and preventing Medicare fraud. The United States will not stand a chance of restoring fiscal responsibility at the federal level unless Congress develops the political will to hold health providers accountable—whether in the context of existing federal programs or comprehensive health reform--for delivering more cost effective care. A good place to start is Medicare.
Process Reform
This Committee does not need to be convinced that deficits matter and that the deficits looming in the federal budget--exacerbated by the rapid increases in debt associated with recession and financial bailout—must be dealt with sooner rather than later. You know that procrastination will make the hard choices harder and make us increasingly dependent on our foreign creditors and exposed to their policy priorities. The question is: should you take actual steps now to reduce future deficits or design process reforms that will force you to confront viable options and make choices in the future? My answer is: do both.
Fixing Social Security and taking aggressive steps to control the growth of Medicare costs would be visible evidence that Congress and the new Administration have the courage to rein in future deficits. But the Congress also needs to restore discipline to the budget process—not use recession or the financial meltdown as excuses for throwing fiscal responsibility to the winds just when we are going to need it more than ever. A large temporary anti-recession package is the right fiscal policy in the face of severe recession and should not be subject to offsets—that would defeat the purpose. But more permanent investments in future growth—also good policy—should be paid for and not allowed to add to future deficits. Caps on discretionary spending and PAYGO for revenues and mandatory spending should be reinstated and seriously enforced.
Moreover, PAYGO is not enough, because it only guarantees that congressional actions with respect to entitlements and revenues will not make projected deficits worse than they would be under current policies. But, we all know that deficits projected under current policy will rise at unsustainable rates. Spending required by Medicare, Medicaid and Social Security will rise substantially faster than revenues at any feasible set of tax rates. We will not be able to borrow that much money—even if we thought it desirable to do so.
The current budget process subjects a declining—discretionary spending—to annual scrutiny by leaves entitlement programs and revenues on automatic pilot outside the budget process. Fiscal responsibility requires that all long-term spending commitments be subject to periodic review along with taxes and tax expenditures. There is no compelling logic for applying caps and intense annual scrutiny to discretionary spending, while leaving huge spending commitments, such as Medicare or the home mortgage deduction entirely outside the budget process and not subject to review on a regular basis. I am a member of a bipartisan group called the Fiscal Seminar (sponsored by The Brookings Institution and the Heritage Foundation) that addressed this problem in a paper entitled, Taking back our Fiscal Future, in 2008. We may not have come up with the right solution, but we certainly identified a serious problem that stands in the way of getting the federal budget on a sustainable long run track.
Not a Partisan Matter
The challenges that face this Committee—mitigating the recession, enhancing future growth, restoring sustainable fiscal responsibility—cannot be solved by one political party, but require non partisan analysis and bipartisan cooperation. Many budget analysts with quite disparate views on particular policies share the conviction that Congress and the Administration must meet the double challenge of reviving the economy and restoring fiscal responsibility at the same time. I attach a memo to President Obama signed by twelve experienced budget analysts (including myself) that emphasizes these points.
Thank you, Mr. Chairman and members of the Committee.
House Committee on the Budget, Jan 27, 2009
Mr. Chairman and members of the Committee: It is a pleasure for me to be back at the House Budget Committee. I am especially gratified to follow my former colleague, Douglas Elmendorf, as he makes the first of many appearances before this Committee as Director of the Congressional Budget Office.
I will say a few words about the uncertainties of the economic outlook and then turn to the question of how to deal with the immediate and longer-run challenges of fiscal policy. The challenge of budget-making has never been greater. Indeed, I believe that the future viability of the United States economy depends very heavily on budget policy-makers’ ability to focus on two seemingly contradictory imperatives at the same time:
The immediate need to take actions which will mitigate the impact of the recession and help the economy recover—actions that necessarily require big increases in the budget deficit The equally urgent need to take actions that will restore fiscal responsibility and reassure our creditors that we are getting our fiscal house in order—actions to bring future deficits down.I stress two sets of actions because I do not believe it will be sufficient to pay lip service to the long run challenge, while acting only on deficit-increasing responses to the current financial and economic crisis. Congress and the Administration must work together on actual solutions to both problems at the same time.
The Economic Outlook
We meet at a time of extraordinary uncertainty about how deep the recession will be and how long it will last. Forecasters all admit that they have little confidence in their ability to predict how consumers, producers, and investors at home and abroad will react to the cataclysmic economic events that have occurred. But people in the forecasting business still have to produce forecasts, so they do the best they can. The Congressional Budget Office (CBO) forecasts that the recession will “last well into 2009” and that the economy will begin to recover, albeit slowly, in 2010. CBO expects unemployment to peak at about 9 percent. The CBO is a bit more pessimistic than the Blue Chip average of commercial forecasters, because the rules of CBO forecasting do not allow them to take account of likely congressional actions to stimulate the economy and enhance recovery.
Right now I think we should be skeptical of all forecasts and especially conscious of the risk that things may continue to go worse than expected. The current CBO forecast is much more pessimistic than the one released just last September, and the Blue Chip consensus has been going steadily south for many months. Additional revelations of weakness in the financial services sector could further impede credit flows and produce a continued slide in all forecasters’ expectations.
Indeed, uncertainty about the health of the financial sector compromises all current forecasting efforts. The economic models used by forecasters are based on the experience of the post World War II period, especially the last several decades. Not since the 1930’s, however, have we experienced a downturn caused by crisis in the financial sector. Despite aggressive efforts of the Treasury and the Federal Reserve to stabilize the financial sector, credit is not flowing normally, even to credit- worthy borrowers. Continued instability in the financial sector and credit tightness could deepen the recession and delay recovery.
Also adding to the uncertainty and increasing the chance that recovery will be unusually slow is the fact that is that returning to the pre-crisis economy is not desirable. Before the current crisis Americans were consuming and borrowing too much, while saving too little. We had become an over-mortgaged, over-leveraged society dependent on the inflow of foreign credit. If recovery from this recession is to be solid and sustainable, we must stop living beyond our means. We must transform ourselves into a society that consumes less, saves more and finances a larger fraction of its investment with domestic saving, rather than foreign borrowing. This transformation is necessary, but it will put recovery on a slower track.
Indeed, not since we were a developing country have we been so dependent on foreign creditors. We are lucky that, even though this world-wide financial crisis started in the United States, the response of world investors has been to flock to the safety of U.S. Treasuries, which makes it possible for our government to borrow short-term at astonishingly low rates. But we cannot count on these favorable borrowing conditions continuing forever. Especially if we fail to take serious steps to bring down future budget deficits, the United States Government could lose the confidence of its foreign creditors and be forced to pay much higher interest rates on to finance both public debt and private debt. Rapid increases in interest rates and a plummeting dollar could deepen the recession and slow recovery.
An “Anti-Recession Package” and Investment in Future Growth
Despite the uncertainty of forecasts it is already clear that this recession is bad and that worse is yet to come. Recessions always increase budget deficits as revenues drop and recession-related spending increases. These automatic deficits help stabilize the economy. In addition, since an unusually severe downturn in the economy is threatening, the government should act quickly to mitigate the downslide with spending increases and revenue cuts that will stimulate consumer and investor spending, create jobs and protect the most vulnerable from the ravages of recession.
What we used to call “stimulus” (temporary spending or tax relief designed to jump-start the economy) has been merged into a broader concept of “recovery” and investment in future growth. However, I believe an important distinction should be made between a short-term “anti-recession package” (aka “stimulus”) and a more permanent shift of resources into public investment in future growth. We need both. The first priority is an “anti-recession package” that can be both enacted and spent quickly, will create and preserve jobs in the near-term, and not add significantly to long run deficits. It should include temporary aid to states in the form of an increased Medicaid match and block grants for education and other purposes. Aiding states will prevent them from taking actions to balance their budgets--cutting spending and raising taxes--that will make the recession worse. The package should also include temporary funding for state and local governments to enable them to move ahead quickly with genuinely “shovel ready” infrastructure projects (including repairs) that will employ workers soon and improve public facilities. Another important element of the anti-recession package should be substantial transfers to lower and middle income people, because they need the money and will spend it quickly. This objective would be served by increasing the Supplemental Nutrition Assistance Program (SNAP), unemployment compensation, and the Earned Income Tax Credit. Helping people who lose their jobs to keep their health insurance and aiding distressed homeowners also belong in this “anti-recession” package. On the tax side, my favorite vehicle would be a payroll tax holiday, because payroll tax is paid by all workers and is far more significant than the income tax for people in the lower half of the income distribution. Moreover, a payroll tax holiday would be relatively easy to reverse when tax relief was no longer appropriate. This anti-recession package should move forward quickly. Because its components would be temporary, there would be little reason for concern about its impact on the deficit three or four years down the road.
The anti recession package should be distinguished from longer-run investments needed to enhance the future growth and productivity of the economy. The distinction is not that these longer-run investments are less needed or less urgent. We have neglected our public infrastructure for far too long and invested too little in the skills of the future workforce. If our economy is to grow sustainably in the future we need to modernize our transportation system to make it more efficient and less reliant on fossil fuels. We need to assure access to modern communications across the country and invest in the information technology and data analysis needed to make medical care delivery more efficient and effective. We need a well thought-out program of investment in workforce skills, early childhood education, post-secondary education, science and technology. Such a long-term investment program should not be put together hastily and lumped in with the anti-recession package. The elements of the investment program must be carefully planned and will not create many jobs right away.
Since a sustained program of public investment in productivity-enhancing skills and infrastructure will add to federal spending for many years, it must be paid for and not simply added to already huge projected long-term deficits. That means either shifting spending from less productive uses or finding more revenue. Overtime, Congress could reduce commitments to defense programs and weapons systems that reflect outmoded thinking about threats to U.S. security, reduce agricultural subsidies, and eliminate many small programs that have outlived their original priorities. Reform of the tax system--including making the income tax simpler and fairer or increasing reliance on consumer taxation—could produce more revenue with less drag on economic growth. None of these policies would be easy, but the resources to pay for large permanent increases in federal spending must be shifted from somewhere else as the economy returns to full employment. Congress will only be able to accomplish this reallocation of resources if it reinstates some form of long run (say, ten year) PAYGO and caps on discretionary spending.
I understand the reasons for lumping together the anti-recession and investment packages into one big bill that can pass quickly in this emergency. A large combined package will get attention and help restore confidence that the federal government is taking action—even if part the money spends out slowly. But there are two kinds of risks in combining the two objectives. One is that money will be wasted because the investment elements were not carefully crafted. The other is that it will be harder to return to fiscal discipline as the economy recovers if the longer run spending is not offset by reductions or new revenues.
Immediate Action to Bring Down Future Deficits
As this Committee knows well, projections of the federal budget show rapidly rising spending over the next several decades attributable to three major entitlement programs; namely, Medicare, Medicaid and Social Security. Under current rules, Social Security spending will rise rapidly over the next two decades, but level off after the Baby Boom generation passes through the system. The health care entitlements are expected to rise even faster. Moreover, they are expected to keep on rising because they are dominated by continued increases in the spending for health care in both the public and private sectors. If policies are not changed Medicare and Medicaid—and to a lesser extent Social Security—will drive federal spending up considerably faster than the rate at which the economy is likely to grow. Unless Americans consent to tax burdens that rise as fast as spending, a widening gap will open up. We will not be able to finance these continuously growing deficits.
Because rapidly rising debt threaten our credibility as sound fiscal managers, we do not have the luxury of waiting until the economy recovers before taking actions to bring down projected future deficits. Congress and the Administration should take actual steps this year to reduce those deficits in order to demonstrate clearly that we are capable of putting our fiscal house in order. This can be done without endangering economic recovery.
The crisis may have made Social Security less of a political “third rail” and provided an opportunity to put the system on a sound fiscal basis for the foreseeable future. Fixing Social Security is a relatively easy technical problem. It will take some combination of several much-discussed marginal changes: raising the retirement age gradually in the future (and then indexing it to longevity), raising the cap on the payroll tax, fixing the COLA, and modifying the indexing of initial benefits so they grow more slowly for more affluent people. In view of the collapse of market values, no one is likely to argue seriously for diverting existing revenues to private accounts, so the opportunity to craft a compromise is much greater than it was a few years ago. Fixing Social Security would be a confidence building achievement for bi-partisan cooperation and would enhance our reputation for fiscal prudence.
Vigorous action should also be taken to make Medicare more cost effective and slow the rate of growth of Medicare spending, which contributes so much to projected deficits. While restraining health spending growth should be a major feature of comprehensive health reform, Medicare is an ideal place to start the effort. Medicare is the largest payer for health services and should play a leadership role in collecting information on the cost and effectiveness of alternative treatments and ways of delivering services, and designing reimbursement incentives to reward effectiveness and discourage waste. Congress has a history of allowing pressure from providers and suppliers (for example, suppliers of durable medical equipment or pharmaceutical companies) to thwart efforts to contain Medicare costs. The government has also not been adequately attentive to punishing and preventing Medicare fraud. The United States will not stand a chance of restoring fiscal responsibility at the federal level unless Congress develops the political will to hold health providers accountable—whether in the context of existing federal programs or comprehensive health reform--for delivering more cost effective care. A good place to start is Medicare.
Process Reform
This Committee does not need to be convinced that deficits matter and that the deficits looming in the federal budget--exacerbated by the rapid increases in debt associated with recession and financial bailout—must be dealt with sooner rather than later. You know that procrastination will make the hard choices harder and make us increasingly dependent on our foreign creditors and exposed to their policy priorities. The question is: should you take actual steps now to reduce future deficits or design process reforms that will force you to confront viable options and make choices in the future? My answer is: do both.
Fixing Social Security and taking aggressive steps to control the growth of Medicare costs would be visible evidence that Congress and the new Administration have the courage to rein in future deficits. But the Congress also needs to restore discipline to the budget process—not use recession or the financial meltdown as excuses for throwing fiscal responsibility to the winds just when we are going to need it more than ever. A large temporary anti-recession package is the right fiscal policy in the face of severe recession and should not be subject to offsets—that would defeat the purpose. But more permanent investments in future growth—also good policy—should be paid for and not allowed to add to future deficits. Caps on discretionary spending and PAYGO for revenues and mandatory spending should be reinstated and seriously enforced.
Moreover, PAYGO is not enough, because it only guarantees that congressional actions with respect to entitlements and revenues will not make projected deficits worse than they would be under current policies. But, we all know that deficits projected under current policy will rise at unsustainable rates. Spending required by Medicare, Medicaid and Social Security will rise substantially faster than revenues at any feasible set of tax rates. We will not be able to borrow that much money—even if we thought it desirable to do so.
The current budget process subjects a declining—discretionary spending—to annual scrutiny by leaves entitlement programs and revenues on automatic pilot outside the budget process. Fiscal responsibility requires that all long-term spending commitments be subject to periodic review along with taxes and tax expenditures. There is no compelling logic for applying caps and intense annual scrutiny to discretionary spending, while leaving huge spending commitments, such as Medicare or the home mortgage deduction entirely outside the budget process and not subject to review on a regular basis. I am a member of a bipartisan group called the Fiscal Seminar (sponsored by The Brookings Institution and the Heritage Foundation) that addressed this problem in a paper entitled, Taking back our Fiscal Future, in 2008. We may not have come up with the right solution, but we certainly identified a serious problem that stands in the way of getting the federal budget on a sustainable long run track.
Not a Partisan Matter
The challenges that face this Committee—mitigating the recession, enhancing future growth, restoring sustainable fiscal responsibility—cannot be solved by one political party, but require non partisan analysis and bipartisan cooperation. Many budget analysts with quite disparate views on particular policies share the conviction that Congress and the Administration must meet the double challenge of reviving the economy and restoring fiscal responsibility at the same time. I attach a memo to President Obama signed by twelve experienced budget analysts (including myself) that emphasizes these points.
Thank you, Mr. Chairman and members of the Committee.
Commentary on US News and World Report on Vouchers
US News and World Report Gets it Wrong, by Andrew J. Coulson
Cato at Liberty, Feb 02, 2009
US News and World Report contributing editor Bonnie Erbe writes that “school vouchers… have already drained federal tax coffers of hundreds of millions of dollars.” With all due respect, this is not true.
There is only one federal school voucher program, in Washington, DC. That program is serving fewer than 2,000 children with an average voucher amount below $6,000, for an annual price tag under $12 million. It is in its fifth year of operation. Perhaps Ms. Erbe can explain to her readers how 5 * $12 million can be made to exceed $100 million?
Of course, even if the value of the vouchers to date did exceed $100 million, that wouldn’t mean it had “drained federal coffers” as Erbe claims. That’s because, as I wrote in the Washington Post and on this website, DC’s public schools spent $24,600 per pupil in 2007-08 — more than four times the average voucher cost. Much of the DC school system’s budget comes from the federal government, and the DC voucher program is saving taxpayers a great deal of money for every child it serves in place of the exorbitant district schools.
Ms. Erbe’s misrepresentation of the cost of federal vouchers calls into question the reliability of the US News and World Report. A correction is in order.
Cato at Liberty, Feb 02, 2009
US News and World Report contributing editor Bonnie Erbe writes that “school vouchers… have already drained federal tax coffers of hundreds of millions of dollars.” With all due respect, this is not true.
There is only one federal school voucher program, in Washington, DC. That program is serving fewer than 2,000 children with an average voucher amount below $6,000, for an annual price tag under $12 million. It is in its fifth year of operation. Perhaps Ms. Erbe can explain to her readers how 5 * $12 million can be made to exceed $100 million?
Of course, even if the value of the vouchers to date did exceed $100 million, that wouldn’t mean it had “drained federal coffers” as Erbe claims. That’s because, as I wrote in the Washington Post and on this website, DC’s public schools spent $24,600 per pupil in 2007-08 — more than four times the average voucher cost. Much of the DC school system’s budget comes from the federal government, and the DC voucher program is saving taxpayers a great deal of money for every child it serves in place of the exorbitant district schools.
Ms. Erbe’s misrepresentation of the cost of federal vouchers calls into question the reliability of the US News and World Report. A correction is in order.
Who is the Indian Mujahideen?
Who is the Indian Mujahideen? Namrata Goswami
IDSA, Feb 3, 2009
In 2008, India faced multiple terror attacks on its cities across several states. These attacks resulted mostly in civilian deaths. The May 13, 2008 Jaipur bombings killed 80 civilians and injured more than 200, the Ahmedabad terrorist bombings of July 26, 2008, killed nearly 45 civilians and wounded 160, while the Bangalore bombs the previous day killed one person and wounded six. The Delhi bombings of September 13, 2008 killed 30 civilians and injured nearly 90 while the Guwahati blasts of October 30 the same year killed 83 civilians and injured nearly 300. In the Guwahati attacks, a group, identifying itself as Islamic Security Force (Indian Mujahideen), originally claimed responsibility via an email. Significantly, in all the other attacks, a hitherto unknown group calling itself the Indian Mujahideen (IM) claimed responsibility, thereby shifting the blame from more established terror groups like the Lashkar-e-Taiba (LeT) and the Hizbul Mujahideen (HM). In an email sent five minutes before the Ahmedabad bombings, the IM requested the LeT not to claim responsibility for the bombings. A deeper scrutiny into such behaviour by terrorist outfits reveal that newly established terror groups carry out attacks at short intervals not only to establish their deadly credibility in the world of terror networks but also to attract sponsors at home and abroad for their activities.
The IM’s frequent bomb blasts in Indian cities except perhaps Mumbai where the direct involvement of the LeT is established, begs answers to the question: who is the IM, what are their motives and where do they actually come from?
The Indian Mujahideen: Tracing the Roots and the Causes
According to Indian intelligence, the IM is not a well knit organization with a hierarchical structure like other more established groups like the LeT. Rather, it is a loose network of Islamic organizations which includes the Students’ Islamic Movement of India (SIMI), certain individuals from the state of Uttar Pradesh with alleged links with the Harkat ul-Jihad-e-Islami (HuJI), and the terror cartel of Aftab Ansari. Key SIMI members like Qayamuddin Kapadia, Usman Agarbattiwala and Sajid Mansuri started supporting the idea of the formation of the IM as early as December 2007 with 50 SIMI cadres participating in a jihadi training camp in Aluva, Kerala1. The plausible reason for men forming the IM could be many. First could be their personal experiences during the Gujarat riot of 2002. Other reasons could be the availability of funds for such activities in abundance in an underground network of terror financiers. Young men especially from UP also join these activities because of the availability of money in it vis-Ã -vis the absence of alternate employment opportunities. Terror activities also do not require too much of education or knowledge of the English language and yet the monetary benefit could be tremendous. Most of the arrested IM cadres were ill versed in English yet fluent in Hindi or Urdu.
Radical Ideology
Another important reason for young men taking up such subversive activities is the teaching of radical Islam which is easily available these days in the internet in any language. It is also a fact that the ideological roots of Islamic fundamentalism started in South Asia. History reveals that the founder of the Jamaat-e-Islami in Pakistan was Maulana Maududi (1903-1979), who in turn inspired men like Sayyid Qutb (1906-1966) of Egypt to further spread it. Maududi’s Islamic liberation theology was an anti-thesis to the West attracting several young alienated Muslims to take up arms. Maududi in fact called for a universal jihad by all Muslims to fight Western barbarism providing an ideological framework for many Sunni Islamic fundamentalist groups.2 The SIMI narratives also reveal the influence of Maududi’s teachings and can be very influential on younger people.
Anger at mainstream media biased reporting is also cited as one of the causes by most IM arrested cadres. It is argued that the mainstream media turns a blind eye to Hindu fundamentalist groups while mostly depicting the fundamental nature of Islam.
Politics is seen as another cause of the radicalization of communities along religious lines. Political parties deliberately play on the religious nerve of communities in order to garner votes. This results in social fragmentation and a polarized politics which in turn leads to young men and women from the minority community viewing the Indian state as been non-representative of all its communities. Experts like B. Raman also argue that “Over the last few years, [Indian Islamist terrorists] have expanded the ambit of their grievances from purely domestic issues to global issues like the U.S.-led war in Iraq”.
Leadership and Cadres
The leadership of the IM is mainly traced to a man from Mumbai named Abdul Subhan Usman Qureshi, code name “Kasim” or “al-arbi” who signed the email manifestos sent by the IM before and after the multiple blasts last year. Qureshi’s background however refutes the theory that most IM cadres come from a deprived background or was schooled in a radical Madrassa. Qureshi studied at the Antonio DeSouza High School ran by a Christian missionary in Byculla, Mumbai and came from an economically privileged background. Qureshi was studying at Bharatiya Vidyapeeth in Navi Mumbai in 1992 when the Mumbai riots took place followed by the demolition of the Babri Masjid. In 1995, he obtained a diploma in industrial electronics and in 1996, a specialised software maintenance qualification from the CMS Institute in Marol. After obtaining these degrees, he joined Radical Solutions, an independent computer firm operating out of the Fort area in south Mumbai in November, 1996. In 1999, he changed jobs and joined Datamatics, a major computer firm in Mumbai. However, somewhere in these years, Qureshi was also harbouring more radical ideologies and in 2001, he left his job at the firm stating in his resignation letter that “I have decided to devote one complete year to pursue religious and spiritual matters.”3
According to Mumbai police intelligence, by 1998, Qureshi was one of the most committed SIMI activists going on to edit one of SIMI’s house-magazines, Islamic Voice, from New Delhi. By then, SIMI’s growing links with global Islamic movements like the Egyptian Brotherhood and Hamas were clear. Links with Bangladesh based HuJI and Pakistan based LeT were also coming to the fore. The radicalization process of SIMI became clearer by its 1999 Aurangabad convention when SIMI activists Mohammad Amir Shakeel Ahmad stated that “Islam is our nation, not India”. Qureshi was one of the principal organisers of SIMI’s last public conference in 2001 in which 25, 000 young people participated. He also succeeded in training hundreds of SIMI-IM cadres since 2007 and was the mastermind of the Delhi blasts undertaken by Mohammad Bashir, Mohammad Fakruddin and Saif Ahmad in September 2008.4 The main assault members of the IM include Atif Amin, who belongs to UP, and responsible for the Ahmedabad bombings, and Aftab Ansari’s lieutenant, Riaz Bhatkal, who is mainly responsible for the IM’s finance coming mostly from West Asia.5 Recently, an arrest in Pune of Anwar Ali Bagwaan, a MBBS graduate who was practicing in Hyderabad, revealed that he trained IM members on how to administer sedatives on persons they were planning to kidnap. According to another UP based IM cadre, Sadiq Shaikh, hailing from Azamgarh district and who was arrested on September 23, 2008, IM modules exist in Uttar Pradesh, Karnataka, Pune and Mumbai. Shaikh is a software professional who lived in Central Mumbai. Most arrested IM cadres are computer professionals and bomb makers. Among those arrested are Pune-based Mohammed Mansoor Asgar Peerbhoy and Mubin Kadar Shaikh, who jointly designed the IM logo and hacked into unsecured Wi-fi connections.
Another significant intelligence input from the UP police indicates that UP based IM cadre Fahim Arshad Ansari who was arrested in UP in February 2008 was in direct contact with the LeT in masterminding the Mumbai attacks of November 2008. Ansari studied at the Malad Municipal Secondary School in Mumbai, from where he graduated in 1989 but later on went onto Dubai. In 2005, another Hyderabadi, Sami Ahmad who was arrested by the police in 2006 revealed that he agreed to put Ansari in touch with the LeT then. The narrative of Ansari is equally revealing. He got in touch with LeT in Dubai and reached Pakistan in 2005 itself. In the LeT’s Muzzafarabad base, Ansari was put under Muzammil, the LeT commander in charge of operations in India. Ansari revealed during interrogation that he went through a 21-day Daura Aam (basic combat course), followed by a rigorous three-month advanced Daura Khaas (specialized guerrilla tactics) as a precursor to the Fidayeen attack on Mumbai6. He also learnt the use of maps, compasses and Global Positioning Systems (GPS). Mumbai was traced in the Google Earth maps and chillingly, Mumbai stock exchange, the Taj Mahal Hotel, railway station and airport were identified as target areas. Ansari arrived in India in 2007 and from November 28 to December 10, 2007, he stayed at the Sunlight Guest House in Mumbai, photographing and mapping the targets he had been shown prominent amongst them being the Chattrapati Shivaji Terminus and the Taj Mahal Hotel.7
Game Plan
The game plan of the IM is rather obvious. Despite its obvious LeT connections and training in Pakistan in sophisticated weaponry and guerrilla warfare, the IM wants to establish itself as an Indian based terror outfit. This is done for three reasons.
First, when the blame for terror attacks in India is pinned on the IM, then Indian security forces will have to concentrate their resources within India instead. This is done deliberately as Indian intelligence on the IM cellular networks is rather weak at present and most of the intelligence inputs are gathered from arrested IM cadres who might mislead the police.
Second, the LeT then can go blameless despite its obvious hand in training and providing weaponry. That will also offset any diplomatic pressure from India and the international community on Pakistan to act against the LeT in its territory.
Third, once its credibility is established, the IM can also easily target vulnerable minority youth base within India for direct recruitment into terror outfits in India and abroad.
Linkages
Though the IM cadres mostly come from India, their linkages with a global jihad are worrisome. Links to the LeT and the HuJi also portends the fact that cross border movement of cadres and arms appears rather easy with the help of false names and passports mostly of Pakistani origin. Ansari entered India in 2007 from Nepal with a false Pakistani passport no. BM 6809341, issued on November 1, 2007 in Pakistan with the pseudonym Hammad Hasan. The connection to HuJI is also alarming given the porous nature of India’s international border with Bangladesh. Hence, despite India increasing surveillance and border security at the Line of Control (LoC) with Pakistan in its Western border, motivated IM-LeT cadres like Qureshi or Ansari can easily enter India via Nepal and Bangladesh with the help of HuJI who is active in these areas. Insurgent groups from Assam like the United Liberation Front of Asom (ULFA) also run camps in Bangladesh with covert connections with HuJI and could end up transporting terror cells into India. This calls for very strict fencing of India’s eastern borders and steep increase in border patrolling.
Countering the IM
A review of India’s ground forces for law enforcement and intelligence gathering last year reveal that India's police strength comes to 126 officers per 100,000 people while the standard United Nations norm is 222.9 The Intelligence Bureau (IB) has only 3,500 field operatives to monitor a country of 1.1 billion. Thereby, a boost in India’s security forces is a must along with modernization of the police forces and speedy undertaking of vital security sector reforms. Terror activities can be deterred if specific intelligence can zero in on different actors within a terror network. According to two distinguished terror experts, Paul Davies and Brian Jenkins, terror groups comprise of “leaders, lieutenants, financiers, logisticians, and other facilitators, foot soldiers, supporting population segments, and religious and otherwise ideological figures”10. Hence, it’s a long drawn process of planning and coordination before the final act of terror is unleashed. Terror activity is a process rather than the single final act that we see in terms of violence. The 9/11 terror process started in 1996 when Muhammad Atta began planning for the attack in Hamburg.11 Keeping this insight in mind, the IM terror process can be easily deterred if the state forces concentrate on finding the financiers, usually the least motivated amongst the other actors.
A counter against the IM ideology can also be undertaken at the social level. In February, 2008, theologians from 6,000 religious schools met at the Darul-Uloom Deoband, an influential, 150-year-old Islamic school in UP, to denounce terrorism as an activity against Islam. Deoband’s cooperation in fighting terror is a very positive way of handling the spread of radical ideologies within India. Also, vulnerable areas like Azamgarh in UP must be closely monitored and the local civil society encouraged to talk against terror activities. India has to construct a counter-narrative against terror which should have cooperation from all the nation’s stakeholders if the fight against terror is to be a unified and successful effort.
References
1. Pravin Swami, “New Insights into Indian Mujahideen Network”, The Hindu, October 08, 2008 at http://www.hindu.com/2008/10/02/stories/2008100256021200.htm (Accessed on October 09, 2008).2. Saba Naqvi, “Delhi Blasts: Mind of Terror” at http://www.outlookindia.com/full.asp?fodname=20080929&fname=Cover+Story&sid=1&pn=2 (Accessed on October 17, 2008). 3. Pravin Swami, “The Hunt for the Indian Mujahideen’s al-arbi”, The Hindu, September 13, 2008 at http://www.hindu.com/2008/09/13/stories/2008091355761100.htm (Accessed on September 15, 2008). Also see Jeremy Page, “Abdul Subhan Qureshi, known as India’s Bin Laden named as bombing suspect” at http://www.timesonline.co.uk/tol/news/world/asia/article4759825.ece (Accessed on January 19, 2009).4. Namrata Goswami, “Averting Terror Attacks”, IDSA Strategic Comments, September 25, 2008 at http://www.idsa.in/publications/stratcomments/NamrataGoswami250908.htm (Accessed on September 29, 2008). 5. Pravin Swami, no.3. 6. Praveen Swami, “ Abortive Lashkar plot hold clues to Mumbai massacres”, The Hindu, December 08, 2008 at http://www.hindu.com/2008/12/08/stories/2008120859431000.htm (Accessed on December 10, 2008). 7. Ibid. 8. Tejinder Singh, “Lashkar-e-Taiba’s audacious siege of Mumbai” at http://www.neurope.eu/articles/90887.php (Accessed on December 29, 2008). 9. Madhur Singh, “India: The Terrorist Within”, July 27, 2008 at http://www.time.com/time/world/article/0,8599,1826950,00.html (Accessed on January 19, 2009).10. As quoted in Robert F. Trager, Dessislava P. Zagorcheva, “Deterring Terrorism: It Can be Done”, International Security, 30/3, Winter 2005-06, p. 9611. Ibid, pp. 87-123.
IDSA, Feb 3, 2009
In 2008, India faced multiple terror attacks on its cities across several states. These attacks resulted mostly in civilian deaths. The May 13, 2008 Jaipur bombings killed 80 civilians and injured more than 200, the Ahmedabad terrorist bombings of July 26, 2008, killed nearly 45 civilians and wounded 160, while the Bangalore bombs the previous day killed one person and wounded six. The Delhi bombings of September 13, 2008 killed 30 civilians and injured nearly 90 while the Guwahati blasts of October 30 the same year killed 83 civilians and injured nearly 300. In the Guwahati attacks, a group, identifying itself as Islamic Security Force (Indian Mujahideen), originally claimed responsibility via an email. Significantly, in all the other attacks, a hitherto unknown group calling itself the Indian Mujahideen (IM) claimed responsibility, thereby shifting the blame from more established terror groups like the Lashkar-e-Taiba (LeT) and the Hizbul Mujahideen (HM). In an email sent five minutes before the Ahmedabad bombings, the IM requested the LeT not to claim responsibility for the bombings. A deeper scrutiny into such behaviour by terrorist outfits reveal that newly established terror groups carry out attacks at short intervals not only to establish their deadly credibility in the world of terror networks but also to attract sponsors at home and abroad for their activities.
The IM’s frequent bomb blasts in Indian cities except perhaps Mumbai where the direct involvement of the LeT is established, begs answers to the question: who is the IM, what are their motives and where do they actually come from?
The Indian Mujahideen: Tracing the Roots and the Causes
According to Indian intelligence, the IM is not a well knit organization with a hierarchical structure like other more established groups like the LeT. Rather, it is a loose network of Islamic organizations which includes the Students’ Islamic Movement of India (SIMI), certain individuals from the state of Uttar Pradesh with alleged links with the Harkat ul-Jihad-e-Islami (HuJI), and the terror cartel of Aftab Ansari. Key SIMI members like Qayamuddin Kapadia, Usman Agarbattiwala and Sajid Mansuri started supporting the idea of the formation of the IM as early as December 2007 with 50 SIMI cadres participating in a jihadi training camp in Aluva, Kerala1. The plausible reason for men forming the IM could be many. First could be their personal experiences during the Gujarat riot of 2002. Other reasons could be the availability of funds for such activities in abundance in an underground network of terror financiers. Young men especially from UP also join these activities because of the availability of money in it vis-Ã -vis the absence of alternate employment opportunities. Terror activities also do not require too much of education or knowledge of the English language and yet the monetary benefit could be tremendous. Most of the arrested IM cadres were ill versed in English yet fluent in Hindi or Urdu.
Radical Ideology
Another important reason for young men taking up such subversive activities is the teaching of radical Islam which is easily available these days in the internet in any language. It is also a fact that the ideological roots of Islamic fundamentalism started in South Asia. History reveals that the founder of the Jamaat-e-Islami in Pakistan was Maulana Maududi (1903-1979), who in turn inspired men like Sayyid Qutb (1906-1966) of Egypt to further spread it. Maududi’s Islamic liberation theology was an anti-thesis to the West attracting several young alienated Muslims to take up arms. Maududi in fact called for a universal jihad by all Muslims to fight Western barbarism providing an ideological framework for many Sunni Islamic fundamentalist groups.2 The SIMI narratives also reveal the influence of Maududi’s teachings and can be very influential on younger people.
Anger at mainstream media biased reporting is also cited as one of the causes by most IM arrested cadres. It is argued that the mainstream media turns a blind eye to Hindu fundamentalist groups while mostly depicting the fundamental nature of Islam.
Politics is seen as another cause of the radicalization of communities along religious lines. Political parties deliberately play on the religious nerve of communities in order to garner votes. This results in social fragmentation and a polarized politics which in turn leads to young men and women from the minority community viewing the Indian state as been non-representative of all its communities. Experts like B. Raman also argue that “Over the last few years, [Indian Islamist terrorists] have expanded the ambit of their grievances from purely domestic issues to global issues like the U.S.-led war in Iraq”.
Leadership and Cadres
The leadership of the IM is mainly traced to a man from Mumbai named Abdul Subhan Usman Qureshi, code name “Kasim” or “al-arbi” who signed the email manifestos sent by the IM before and after the multiple blasts last year. Qureshi’s background however refutes the theory that most IM cadres come from a deprived background or was schooled in a radical Madrassa. Qureshi studied at the Antonio DeSouza High School ran by a Christian missionary in Byculla, Mumbai and came from an economically privileged background. Qureshi was studying at Bharatiya Vidyapeeth in Navi Mumbai in 1992 when the Mumbai riots took place followed by the demolition of the Babri Masjid. In 1995, he obtained a diploma in industrial electronics and in 1996, a specialised software maintenance qualification from the CMS Institute in Marol. After obtaining these degrees, he joined Radical Solutions, an independent computer firm operating out of the Fort area in south Mumbai in November, 1996. In 1999, he changed jobs and joined Datamatics, a major computer firm in Mumbai. However, somewhere in these years, Qureshi was also harbouring more radical ideologies and in 2001, he left his job at the firm stating in his resignation letter that “I have decided to devote one complete year to pursue religious and spiritual matters.”3
According to Mumbai police intelligence, by 1998, Qureshi was one of the most committed SIMI activists going on to edit one of SIMI’s house-magazines, Islamic Voice, from New Delhi. By then, SIMI’s growing links with global Islamic movements like the Egyptian Brotherhood and Hamas were clear. Links with Bangladesh based HuJI and Pakistan based LeT were also coming to the fore. The radicalization process of SIMI became clearer by its 1999 Aurangabad convention when SIMI activists Mohammad Amir Shakeel Ahmad stated that “Islam is our nation, not India”. Qureshi was one of the principal organisers of SIMI’s last public conference in 2001 in which 25, 000 young people participated. He also succeeded in training hundreds of SIMI-IM cadres since 2007 and was the mastermind of the Delhi blasts undertaken by Mohammad Bashir, Mohammad Fakruddin and Saif Ahmad in September 2008.4 The main assault members of the IM include Atif Amin, who belongs to UP, and responsible for the Ahmedabad bombings, and Aftab Ansari’s lieutenant, Riaz Bhatkal, who is mainly responsible for the IM’s finance coming mostly from West Asia.5 Recently, an arrest in Pune of Anwar Ali Bagwaan, a MBBS graduate who was practicing in Hyderabad, revealed that he trained IM members on how to administer sedatives on persons they were planning to kidnap. According to another UP based IM cadre, Sadiq Shaikh, hailing from Azamgarh district and who was arrested on September 23, 2008, IM modules exist in Uttar Pradesh, Karnataka, Pune and Mumbai. Shaikh is a software professional who lived in Central Mumbai. Most arrested IM cadres are computer professionals and bomb makers. Among those arrested are Pune-based Mohammed Mansoor Asgar Peerbhoy and Mubin Kadar Shaikh, who jointly designed the IM logo and hacked into unsecured Wi-fi connections.
Another significant intelligence input from the UP police indicates that UP based IM cadre Fahim Arshad Ansari who was arrested in UP in February 2008 was in direct contact with the LeT in masterminding the Mumbai attacks of November 2008. Ansari studied at the Malad Municipal Secondary School in Mumbai, from where he graduated in 1989 but later on went onto Dubai. In 2005, another Hyderabadi, Sami Ahmad who was arrested by the police in 2006 revealed that he agreed to put Ansari in touch with the LeT then. The narrative of Ansari is equally revealing. He got in touch with LeT in Dubai and reached Pakistan in 2005 itself. In the LeT’s Muzzafarabad base, Ansari was put under Muzammil, the LeT commander in charge of operations in India. Ansari revealed during interrogation that he went through a 21-day Daura Aam (basic combat course), followed by a rigorous three-month advanced Daura Khaas (specialized guerrilla tactics) as a precursor to the Fidayeen attack on Mumbai6. He also learnt the use of maps, compasses and Global Positioning Systems (GPS). Mumbai was traced in the Google Earth maps and chillingly, Mumbai stock exchange, the Taj Mahal Hotel, railway station and airport were identified as target areas. Ansari arrived in India in 2007 and from November 28 to December 10, 2007, he stayed at the Sunlight Guest House in Mumbai, photographing and mapping the targets he had been shown prominent amongst them being the Chattrapati Shivaji Terminus and the Taj Mahal Hotel.7
Game Plan
The game plan of the IM is rather obvious. Despite its obvious LeT connections and training in Pakistan in sophisticated weaponry and guerrilla warfare, the IM wants to establish itself as an Indian based terror outfit. This is done for three reasons.
First, when the blame for terror attacks in India is pinned on the IM, then Indian security forces will have to concentrate their resources within India instead. This is done deliberately as Indian intelligence on the IM cellular networks is rather weak at present and most of the intelligence inputs are gathered from arrested IM cadres who might mislead the police.
Second, the LeT then can go blameless despite its obvious hand in training and providing weaponry. That will also offset any diplomatic pressure from India and the international community on Pakistan to act against the LeT in its territory.
Third, once its credibility is established, the IM can also easily target vulnerable minority youth base within India for direct recruitment into terror outfits in India and abroad.
Linkages
Though the IM cadres mostly come from India, their linkages with a global jihad are worrisome. Links to the LeT and the HuJi also portends the fact that cross border movement of cadres and arms appears rather easy with the help of false names and passports mostly of Pakistani origin. Ansari entered India in 2007 from Nepal with a false Pakistani passport no. BM 6809341, issued on November 1, 2007 in Pakistan with the pseudonym Hammad Hasan. The connection to HuJI is also alarming given the porous nature of India’s international border with Bangladesh. Hence, despite India increasing surveillance and border security at the Line of Control (LoC) with Pakistan in its Western border, motivated IM-LeT cadres like Qureshi or Ansari can easily enter India via Nepal and Bangladesh with the help of HuJI who is active in these areas. Insurgent groups from Assam like the United Liberation Front of Asom (ULFA) also run camps in Bangladesh with covert connections with HuJI and could end up transporting terror cells into India. This calls for very strict fencing of India’s eastern borders and steep increase in border patrolling.
Countering the IM
A review of India’s ground forces for law enforcement and intelligence gathering last year reveal that India's police strength comes to 126 officers per 100,000 people while the standard United Nations norm is 222.9 The Intelligence Bureau (IB) has only 3,500 field operatives to monitor a country of 1.1 billion. Thereby, a boost in India’s security forces is a must along with modernization of the police forces and speedy undertaking of vital security sector reforms. Terror activities can be deterred if specific intelligence can zero in on different actors within a terror network. According to two distinguished terror experts, Paul Davies and Brian Jenkins, terror groups comprise of “leaders, lieutenants, financiers, logisticians, and other facilitators, foot soldiers, supporting population segments, and religious and otherwise ideological figures”10. Hence, it’s a long drawn process of planning and coordination before the final act of terror is unleashed. Terror activity is a process rather than the single final act that we see in terms of violence. The 9/11 terror process started in 1996 when Muhammad Atta began planning for the attack in Hamburg.11 Keeping this insight in mind, the IM terror process can be easily deterred if the state forces concentrate on finding the financiers, usually the least motivated amongst the other actors.
A counter against the IM ideology can also be undertaken at the social level. In February, 2008, theologians from 6,000 religious schools met at the Darul-Uloom Deoband, an influential, 150-year-old Islamic school in UP, to denounce terrorism as an activity against Islam. Deoband’s cooperation in fighting terror is a very positive way of handling the spread of radical ideologies within India. Also, vulnerable areas like Azamgarh in UP must be closely monitored and the local civil society encouraged to talk against terror activities. India has to construct a counter-narrative against terror which should have cooperation from all the nation’s stakeholders if the fight against terror is to be a unified and successful effort.
References
1. Pravin Swami, “New Insights into Indian Mujahideen Network”, The Hindu, October 08, 2008 at http://www.hindu.com/2008/10/02/stories/2008100256021200.htm (Accessed on October 09, 2008).2. Saba Naqvi, “Delhi Blasts: Mind of Terror” at http://www.outlookindia.com/full.asp?fodname=20080929&fname=Cover+Story&sid=1&pn=2 (Accessed on October 17, 2008). 3. Pravin Swami, “The Hunt for the Indian Mujahideen’s al-arbi”, The Hindu, September 13, 2008 at http://www.hindu.com/2008/09/13/stories/2008091355761100.htm (Accessed on September 15, 2008). Also see Jeremy Page, “Abdul Subhan Qureshi, known as India’s Bin Laden named as bombing suspect” at http://www.timesonline.co.uk/tol/news/world/asia/article4759825.ece (Accessed on January 19, 2009).4. Namrata Goswami, “Averting Terror Attacks”, IDSA Strategic Comments, September 25, 2008 at http://www.idsa.in/publications/stratcomments/NamrataGoswami250908.htm (Accessed on September 29, 2008). 5. Pravin Swami, no.3. 6. Praveen Swami, “ Abortive Lashkar plot hold clues to Mumbai massacres”, The Hindu, December 08, 2008 at http://www.hindu.com/2008/12/08/stories/2008120859431000.htm (Accessed on December 10, 2008). 7. Ibid. 8. Tejinder Singh, “Lashkar-e-Taiba’s audacious siege of Mumbai” at http://www.neurope.eu/articles/90887.php (Accessed on December 29, 2008). 9. Madhur Singh, “India: The Terrorist Within”, July 27, 2008 at http://www.time.com/time/world/article/0,8599,1826950,00.html (Accessed on January 19, 2009).10. As quoted in Robert F. Trager, Dessislava P. Zagorcheva, “Deterring Terrorism: It Can be Done”, International Security, 30/3, Winter 2005-06, p. 9611. Ibid, pp. 87-123.
China Policy Change?
China Policy Change? By Dan Blumenthal
AEI, Tuesday, February 3, 2009
As the first U.S. president to come of age after the Cold War, Barack Obama has an opportunity to dispose of the Cold War baggage that has guided U.S.-Chinese relations for the past thirty years. He should pursue a renewed policy that places increased emphasis on reforming China's human rights record, trade practices, and military pursuits, while strengthening relationships with Asia's diverse democracies.
Regarding China policy, President Obama may really offer change we can believe in. Treasury Secretary Timothy Geithner's tough words about China's manipulation of its currency may be a harbinger of change in America's increasingly sclerotic approach to the People's Republic.
President Obama is not part of the generation that shaped our current China policy. He was graduating high school when Washington and Beijing finalized the terms of diplomatic normalization in 1979. Much of the deal had been worked out in secret, and set Washington on a 30-year path that would subordinate concerns about Taiwan, political reform in China, unfair trading practices and even China's military ambitions to diplomatic engagement at any cost. While the architects of China policy saw China through a Cold War prism, Mr. Obama is the first American president who came of age as the Cold War was receding. For many in Obama's generation, the massacre of Chinese protesters at Tiananmen Square is a more powerful symbol of Chinese leadership than President Nixon's breakthrough visit to Beijing.
It may have been reasonable for Cold Warriors to overlook Washington's many differences with Beijing when both countries were trying to contain the Soviet Union, but that rationale has obviously disappeared. Since the Soviet Union collapsed, the Sino-U.S. relationship has been a partnership in search of a purpose. Americans of Mr. Obama's generation wonder why Washington looks askance at China's poor human-rights record, intimidation of democratic Taiwan, irresponsible trade practices, and alarming military build-up.
Moreover, the president's experience in another Asian country, Indonesia, will undoubtedly help him understand that Asia is more than just China, and that Asians are quite capable of governing themselves under democratic rule. The young president will be less beholden to past legacies that define our China policy. He could start by questioning a policy that gives China a pass on its human-rights practices at home and irresponsible polices abroad. He can also puzzle over why China so often sets the policy agenda in a region made up of so many diverse and successful democratic countries.
A less Sino-centric Asia policy would be good for the United States, the rest of Asia and ultimately the Chinese people themselves. China is the only Asian power that is not a democracy. The United States benefits from deep and enduring cooperation with Australia, Japan, South Korea, India, Indonesia and Taiwan, precisely because these relationships are embedded in common values and interests.
China is more than capable of joining this club. Many Chinese people yearn for a more just and open system that acts responsibly on the world stage. If Mr. Obama changes America's "engagement at any price" policy, he will help the Chinese people fulfill their own aspirations at the same time as he advances American interests.
Obviously the president should not end America's engagement with China--that would be both imprudent and impossible. But he can change the way Washington engages. Mr. Obama can directly speak to the tech-savvy Chinese people--among whom he is very popular--about universal notions of liberty, justice and transparency.
At the same time, he can carry out America's official business with the Chinese Communist Party, urging a more balanced trade policy, cooperation on energy and the environment and cooperation on nonproliferation.
But he need not indulge in ritualized happy talk about a Sino-American relationship that is still fraught with problems. Neither should he repeat his predecessors' practice of overstating the relationship's modest successes. Speaking truthfully about a relationship characterized by economic interdependence on the one hand, and concerns about China's polices on the other, will set the relationship on a firmer course.
Meanwhile, Mr. Obama could strengthen relationships with Asia's diverse democracies from Jakarta to Taipei to Delhi. All of Washington's allies want to benefit from trade with China, but at the same time all are worried that an autocratic China will one day dominate Asia. In turn, as China sees Washington net together a web of Asia's democracies, China's many reformers could hold their government to the same standards of behavior as their democratic neighbors.
As our first president who came of age after the Cold War, Mr. Obama has an opportunity to dispose of the Cold War baggage that still guides our China policy. If Mr. Obama sides with the Chinese people pushing for a just and open society he will hear a billion more "yes we cans."
AEI, Tuesday, February 3, 2009
As the first U.S. president to come of age after the Cold War, Barack Obama has an opportunity to dispose of the Cold War baggage that has guided U.S.-Chinese relations for the past thirty years. He should pursue a renewed policy that places increased emphasis on reforming China's human rights record, trade practices, and military pursuits, while strengthening relationships with Asia's diverse democracies.
Regarding China policy, President Obama may really offer change we can believe in. Treasury Secretary Timothy Geithner's tough words about China's manipulation of its currency may be a harbinger of change in America's increasingly sclerotic approach to the People's Republic.
President Obama is not part of the generation that shaped our current China policy. He was graduating high school when Washington and Beijing finalized the terms of diplomatic normalization in 1979. Much of the deal had been worked out in secret, and set Washington on a 30-year path that would subordinate concerns about Taiwan, political reform in China, unfair trading practices and even China's military ambitions to diplomatic engagement at any cost. While the architects of China policy saw China through a Cold War prism, Mr. Obama is the first American president who came of age as the Cold War was receding. For many in Obama's generation, the massacre of Chinese protesters at Tiananmen Square is a more powerful symbol of Chinese leadership than President Nixon's breakthrough visit to Beijing.
It may have been reasonable for Cold Warriors to overlook Washington's many differences with Beijing when both countries were trying to contain the Soviet Union, but that rationale has obviously disappeared. Since the Soviet Union collapsed, the Sino-U.S. relationship has been a partnership in search of a purpose. Americans of Mr. Obama's generation wonder why Washington looks askance at China's poor human-rights record, intimidation of democratic Taiwan, irresponsible trade practices, and alarming military build-up.
Moreover, the president's experience in another Asian country, Indonesia, will undoubtedly help him understand that Asia is more than just China, and that Asians are quite capable of governing themselves under democratic rule. The young president will be less beholden to past legacies that define our China policy. He could start by questioning a policy that gives China a pass on its human-rights practices at home and irresponsible polices abroad. He can also puzzle over why China so often sets the policy agenda in a region made up of so many diverse and successful democratic countries.
A less Sino-centric Asia policy would be good for the United States, the rest of Asia and ultimately the Chinese people themselves. China is the only Asian power that is not a democracy. The United States benefits from deep and enduring cooperation with Australia, Japan, South Korea, India, Indonesia and Taiwan, precisely because these relationships are embedded in common values and interests.
China is more than capable of joining this club. Many Chinese people yearn for a more just and open system that acts responsibly on the world stage. If Mr. Obama changes America's "engagement at any price" policy, he will help the Chinese people fulfill their own aspirations at the same time as he advances American interests.
Obviously the president should not end America's engagement with China--that would be both imprudent and impossible. But he can change the way Washington engages. Mr. Obama can directly speak to the tech-savvy Chinese people--among whom he is very popular--about universal notions of liberty, justice and transparency.
At the same time, he can carry out America's official business with the Chinese Communist Party, urging a more balanced trade policy, cooperation on energy and the environment and cooperation on nonproliferation.
But he need not indulge in ritualized happy talk about a Sino-American relationship that is still fraught with problems. Neither should he repeat his predecessors' practice of overstating the relationship's modest successes. Speaking truthfully about a relationship characterized by economic interdependence on the one hand, and concerns about China's polices on the other, will set the relationship on a firmer course.
Meanwhile, Mr. Obama could strengthen relationships with Asia's diverse democracies from Jakarta to Taipei to Delhi. All of Washington's allies want to benefit from trade with China, but at the same time all are worried that an autocratic China will one day dominate Asia. In turn, as China sees Washington net together a web of Asia's democracies, China's many reformers could hold their government to the same standards of behavior as their democratic neighbors.
As our first president who came of age after the Cold War, Mr. Obama has an opportunity to dispose of the Cold War baggage that still guides our China policy. If Mr. Obama sides with the Chinese people pushing for a just and open society he will hear a billion more "yes we cans."
Iraq Is Obama's Mideast Pillar
Iraq Is Obama's Mideast Pillar, by Bret Stephens
As an Arab democracy, it's a model for what we would like the rest of the Arab world to become.
WSJ, Feb 03, 2009
Imagine yourself as Barack Obama, gazing at a map of the greater Middle East and wondering how, and where, the United States can best make a fresh start in the region.
Your gaze wanders rightward to Pakistan, where preventing war with India, economic collapse or the Talibanization of half the country would be achievement enough. Next door is Afghanistan, where you are committing more troops, all so you can prop up a government that is by turns hapless and corrupt.
Next there is Iran, drawing ever closer to its bomb. You're mulling the shape of a grand bargain, but Israel is talking pre-emption. Speaking of Israel, you're girding for a contentious relationship with the hawkish Benjamin Netanyahu, the all-but certain next prime minister.
What about Israel's neighbors? Palestine is riven between feckless moderates and pitiless fanatics. Lebanon and Hezbollah are nearly synonyms. You'd love to nudge Syria out of Iran's orbit, but Bashar Assad isn't inclined. In Egypt, a succession crisis looms the moment its octogenarian president retires to his grave.
And then there is Iraq, the country in the middle that you would have just as soon banished from sight. How's it doing? Perplexingly well.
The final tallies for Saturday's provincial elections aren't in yet. But a few conclusions are warranted. This time, the election seems to have been mostly free of fraud; four years ago, it was beset by fraud. This time, there was almost no violence; four years ago, there were 299 terrorist attacks. This time, 40% of voters in the overwhelmingly Sunni province of Anbar went to the polls; four years ago, turnout was 2%.
In 2005, Iraqis voted their sectarian preferences. Now sectarian parties are out of fashion. "Those candidates who campaigned under the banner of religion should be rejected," Abdul Kareem told Al Jazeera. "They corrupted the name of religion because they are notorious for being thieves. Religion is not politics." Mr. Kareem is a Shiite cleric.
Also out of fashion: Iran, previously thought to be the jolly inheritor of our Iraq misadventure. In 2005, Tehran's political minions in the Iranian-funded Supreme Council for Islamic Revolution in Iraq -- itself the funder of the dreaded Badr brigade -- swept the field. Candidates loyal to anti-American fire-breather Moqtada al-Sadr also did well. This time, Sadr didn't even dare to field his own slate, and early reports are that the Supreme Council was trounced.
What's in fashion, electorally speaking, are secular parties, as well as the moderately religious Dawa Party of Prime Minister Nouri al-Maliki. This wasn't supposed to happen. The Palestinian parliamentary election of 2006 that put Hamas in power was taken in the West as proof that Arab democracy was destined to yield illiberal results. Saturday's election suggests otherwise, assuming there is a structure that guarantees that Islamists must stand for election more than once.
What about security? A month ago, Gen. Ray Odierno predicted that "al Qaeda will try to exploit the elections because they don't want them to happen. So I think they will attempt to create some violence and uncertainty in the population." But al Qaeda was a no-show on Saturday. Meanwhile, more U.S. soldiers died in accidents (12) than in combat (4) for the month of January. The war is over.
So what are you going to do about the one bright spot on your map -- an Arab country that is genuinely democratic, increasingly secular and secure, anti-Iranian and, all-in-all, on your side? So far, your only idea seems to bid to it good luck and bring most of the troops home in time for Super Bowl Sunday, 2010.
That's a campaign promise, but it isn't a foreign policy. Foreign policy begins with the recognition that Iraq has now moved from the liability side of the U.S. ledger to the asset side. As an Arab democracy, it is a model for what we would like the rest of the Arab world to become. As a Shiite democracy, it is a reproach to Iranian theocracy. As the country at the heart of the Middle East, it is ideally located to be a bulwark against Tehran's encroachments.
There was a time when American strategists understood the role countries could play as "pillars" of a regional strategy. Israel has been a pillar since at least 1967; Iran was one until 1979. Turkey, too, is a pillar, but it is fast slipping away, as is Egypt.
Within the Arab world, Iraq is the only country that can now fulfill that role. For that it will need military and economic aid, and lots of it. Better it than futile causes like Palestine, or missions impossible like winning over the mullahs. With Saturday's poll, Iraq has earned a powerful claim to our friendship.
Yes, you'd rather look elsewhere on the map for a Mideast legacy. But Iraq is where you'll find it. Don't miss your chance.
As an Arab democracy, it's a model for what we would like the rest of the Arab world to become.
WSJ, Feb 03, 2009
Imagine yourself as Barack Obama, gazing at a map of the greater Middle East and wondering how, and where, the United States can best make a fresh start in the region.
Your gaze wanders rightward to Pakistan, where preventing war with India, economic collapse or the Talibanization of half the country would be achievement enough. Next door is Afghanistan, where you are committing more troops, all so you can prop up a government that is by turns hapless and corrupt.
Next there is Iran, drawing ever closer to its bomb. You're mulling the shape of a grand bargain, but Israel is talking pre-emption. Speaking of Israel, you're girding for a contentious relationship with the hawkish Benjamin Netanyahu, the all-but certain next prime minister.
What about Israel's neighbors? Palestine is riven between feckless moderates and pitiless fanatics. Lebanon and Hezbollah are nearly synonyms. You'd love to nudge Syria out of Iran's orbit, but Bashar Assad isn't inclined. In Egypt, a succession crisis looms the moment its octogenarian president retires to his grave.
And then there is Iraq, the country in the middle that you would have just as soon banished from sight. How's it doing? Perplexingly well.
The final tallies for Saturday's provincial elections aren't in yet. But a few conclusions are warranted. This time, the election seems to have been mostly free of fraud; four years ago, it was beset by fraud. This time, there was almost no violence; four years ago, there were 299 terrorist attacks. This time, 40% of voters in the overwhelmingly Sunni province of Anbar went to the polls; four years ago, turnout was 2%.
In 2005, Iraqis voted their sectarian preferences. Now sectarian parties are out of fashion. "Those candidates who campaigned under the banner of religion should be rejected," Abdul Kareem told Al Jazeera. "They corrupted the name of religion because they are notorious for being thieves. Religion is not politics." Mr. Kareem is a Shiite cleric.
Also out of fashion: Iran, previously thought to be the jolly inheritor of our Iraq misadventure. In 2005, Tehran's political minions in the Iranian-funded Supreme Council for Islamic Revolution in Iraq -- itself the funder of the dreaded Badr brigade -- swept the field. Candidates loyal to anti-American fire-breather Moqtada al-Sadr also did well. This time, Sadr didn't even dare to field his own slate, and early reports are that the Supreme Council was trounced.
What's in fashion, electorally speaking, are secular parties, as well as the moderately religious Dawa Party of Prime Minister Nouri al-Maliki. This wasn't supposed to happen. The Palestinian parliamentary election of 2006 that put Hamas in power was taken in the West as proof that Arab democracy was destined to yield illiberal results. Saturday's election suggests otherwise, assuming there is a structure that guarantees that Islamists must stand for election more than once.
What about security? A month ago, Gen. Ray Odierno predicted that "al Qaeda will try to exploit the elections because they don't want them to happen. So I think they will attempt to create some violence and uncertainty in the population." But al Qaeda was a no-show on Saturday. Meanwhile, more U.S. soldiers died in accidents (12) than in combat (4) for the month of January. The war is over.
So what are you going to do about the one bright spot on your map -- an Arab country that is genuinely democratic, increasingly secular and secure, anti-Iranian and, all-in-all, on your side? So far, your only idea seems to bid to it good luck and bring most of the troops home in time for Super Bowl Sunday, 2010.
That's a campaign promise, but it isn't a foreign policy. Foreign policy begins with the recognition that Iraq has now moved from the liability side of the U.S. ledger to the asset side. As an Arab democracy, it is a model for what we would like the rest of the Arab world to become. As a Shiite democracy, it is a reproach to Iranian theocracy. As the country at the heart of the Middle East, it is ideally located to be a bulwark against Tehran's encroachments.
There was a time when American strategists understood the role countries could play as "pillars" of a regional strategy. Israel has been a pillar since at least 1967; Iran was one until 1979. Turkey, too, is a pillar, but it is fast slipping away, as is Egypt.
Within the Arab world, Iraq is the only country that can now fulfill that role. For that it will need military and economic aid, and lots of it. Better it than futile causes like Palestine, or missions impossible like winning over the mullahs. With Saturday's poll, Iraq has earned a powerful claim to our friendship.
Yes, you'd rather look elsewhere on the map for a Mideast legacy. But Iraq is where you'll find it. Don't miss your chance.
Monday, February 2, 2009
Offshore energy development moves forward - for now
We were the change! Offshore energy development moves forward.
IER, February 2, 2009
With all of the news about the inauguration of President Obama, you probably missed a very good piece of energy news—the Department of Interior is working to open up 31 offshore areas for energy exploration and development. This is the first time in over 25 years that many of these areas will be opened for energy development. Your efforts were instrumental in pushing the Federal government to open up more areas for energy exploration!
Last summer IER was the first group to call on President Bush to end the moratorium on offshore energy exploration and development. IER’s efforts, the high price of oil, coupled with the will of the American people led President Bush to tear up the moratorium on offshore energy development and start the process for increased energy access.
After Bush’s actions, the drop in oil prices was immediate and dramatic. The Bush Administration put out the proposed rule and over 30,000 people used IER’s website to send comments to the Administration in favor of increased energy development. Your comments gave the Administration the support it needed to propose the new plan for offshore energy exploration.
Unlike many of the economic “stimulus” proposals being considered by Washington politicians, energy jobs are real jobs. Responsibly developing America’s abundant but off-limits domestic energy supply would create 160,000 new jobs alone, generating $1.7 trillion for local, state and federal tax revenue, and providing a major shot in the arm to a flagging national economy.
But the Obama Administration does not necessarily have to allow increased access to America’s vast domestic energy resources. Supporters of President Obama are already lining up against increased domestic energy access. Environmental groups have already sued to stop energy exploration in the Atlantic.
President Obama in his inaugural address stated that “We will not apologize for our way of life.” We completely agree. We hope President Obama will fully embrace American energy, produced by Americans, for Americans. Many of his supporters will continue to oppose the use of America’s energy resources, but as Obama noted in his inaugural address, “the time has come to set aside childish things.”
If you support increased domestic energy production, please click here and send a message to the Administration that you support America and America’s energy resources.
IER, February 2, 2009
With all of the news about the inauguration of President Obama, you probably missed a very good piece of energy news—the Department of Interior is working to open up 31 offshore areas for energy exploration and development. This is the first time in over 25 years that many of these areas will be opened for energy development. Your efforts were instrumental in pushing the Federal government to open up more areas for energy exploration!
Last summer IER was the first group to call on President Bush to end the moratorium on offshore energy exploration and development. IER’s efforts, the high price of oil, coupled with the will of the American people led President Bush to tear up the moratorium on offshore energy development and start the process for increased energy access.
After Bush’s actions, the drop in oil prices was immediate and dramatic. The Bush Administration put out the proposed rule and over 30,000 people used IER’s website to send comments to the Administration in favor of increased energy development. Your comments gave the Administration the support it needed to propose the new plan for offshore energy exploration.
Unlike many of the economic “stimulus” proposals being considered by Washington politicians, energy jobs are real jobs. Responsibly developing America’s abundant but off-limits domestic energy supply would create 160,000 new jobs alone, generating $1.7 trillion for local, state and federal tax revenue, and providing a major shot in the arm to a flagging national economy.
But the Obama Administration does not necessarily have to allow increased access to America’s vast domestic energy resources. Supporters of President Obama are already lining up against increased domestic energy access. Environmental groups have already sued to stop energy exploration in the Atlantic.
President Obama in his inaugural address stated that “We will not apologize for our way of life.” We completely agree. We hope President Obama will fully embrace American energy, produced by Americans, for Americans. Many of his supporters will continue to oppose the use of America’s energy resources, but as Obama noted in his inaugural address, “the time has come to set aside childish things.”
If you support increased domestic energy production, please click here and send a message to the Administration that you support America and America’s energy resources.
Ban Congratulates Iraqis on Violence-Free Provincial Elections
Ban Congratulates Iraqis on Violence-Free Provincial Elections
UN, New York, Feb 2 2009 3:10PM
Secretary-General Ban Ki-moon today congratulated the people of Iraq for “strongly exercising” their right to vote in provincial elections that took place over the weekend, in an atmosphere that he called “admirably free of violence.”
“He was deeply impressed by their resolve to participate in a process that should strengthen Iraq’s democracy and further the cause of national reconciliation,” according to a <"statement'>http://www.un.org/apps/sg/sgstats.asp?nid=3694">statement issued by Mr. Ban’s spokesperson, which added that the Secretary-General also commended Iraqi’s determination to ensure a credible electoral process.
Saturday’s provincial, or governate, elections – the first polls held in the strife-torn country in four years – took place in 14 of Iraq’s 18 provinces, with elections for the provinces of the Kurdistan Region and the Kirkuk Governorate to take place at a later stage.
Some 14,467 candidates vied for posts in 6,471 polling centres. In addition, there were 84,000 Iraqi observers, 420,000 party agents and around 400 international observers.
In his statement, Mr. Ban commended Iraqi’s determination to ensure a transparent and credible process through such massive monitoring and other measures, praising the work of the Independent High Electoral Commission (IHEC) and the staff involved at each step of the process.
He also expressed satisfaction that the UN Assistance Mission in Iraq (<"http://www.uniraq.org/">UNAMI) was “able to make helpful contributions to the process, including through its technical assistance,” and pledged UN support for further stages of the process.
The next stage of the election process includes the adjudication of formal complaints before results can be certified.
While noting that provisional results have yet to be announced, Staffan de Mistura, Mr. Ban’s Special Representative in Iraq, said that the UN is satisfied that the elections were conducted smoothly both procedurally and in terms of security
The polls “mark another important step in Iraq’s recovery,” he added.
“The United Nations was present in all 14 governorates and I myself visited polling centres in Anbar, Najaf and Baghdad,” he said. “I was very pleased to see Iraqis from all communities exercising their right to vote, particularly Iraqi women who turned out in large numbers.”
UNAMI, which Mr. de Mistura heads, has provided the Commission with advice and assistance on a broad range of electoral issues, including a nationwide revamping of the voter registry in order to increase accuracy and reduce the potential for multiple voting.
In a <"Newsmaker'>http://www.un.org/apps/news/newsmakers.asp?NewsID=9">Newsmaker interview with the UN News Centre released today, the Special Representative said that these elections were an important test for Iraq, since they are the first conducted by the Iraqis themselves, with UN assistance, and they are the first in which Sunnis voted in substantial numbers, among other factors.
In addition, he said, they are the first elections that will affect the day-to-day lives of Iraqi voters.
“These elections are about real power, in the sense that they are going to nominate the people who are on the ground, in the various district councils, and will be deciding on electricity, water, budget and jobs,” he said.
Feb 2 2009 3:10PM
________________
For more details go to UN News Centre at http://www.un.org/news
UN, New York, Feb 2 2009 3:10PM
Secretary-General Ban Ki-moon today congratulated the people of Iraq for “strongly exercising” their right to vote in provincial elections that took place over the weekend, in an atmosphere that he called “admirably free of violence.”
“He was deeply impressed by their resolve to participate in a process that should strengthen Iraq’s democracy and further the cause of national reconciliation,” according to a <"statement'>http://www.un.org/apps/sg/sgstats.asp?nid=3694">statement issued by Mr. Ban’s spokesperson, which added that the Secretary-General also commended Iraqi’s determination to ensure a credible electoral process.
Saturday’s provincial, or governate, elections – the first polls held in the strife-torn country in four years – took place in 14 of Iraq’s 18 provinces, with elections for the provinces of the Kurdistan Region and the Kirkuk Governorate to take place at a later stage.
Some 14,467 candidates vied for posts in 6,471 polling centres. In addition, there were 84,000 Iraqi observers, 420,000 party agents and around 400 international observers.
In his statement, Mr. Ban commended Iraqi’s determination to ensure a transparent and credible process through such massive monitoring and other measures, praising the work of the Independent High Electoral Commission (IHEC) and the staff involved at each step of the process.
He also expressed satisfaction that the UN Assistance Mission in Iraq (<"http://www.uniraq.org/">UNAMI) was “able to make helpful contributions to the process, including through its technical assistance,” and pledged UN support for further stages of the process.
The next stage of the election process includes the adjudication of formal complaints before results can be certified.
While noting that provisional results have yet to be announced, Staffan de Mistura, Mr. Ban’s Special Representative in Iraq, said that the UN is satisfied that the elections were conducted smoothly both procedurally and in terms of security
The polls “mark another important step in Iraq’s recovery,” he added.
“The United Nations was present in all 14 governorates and I myself visited polling centres in Anbar, Najaf and Baghdad,” he said. “I was very pleased to see Iraqis from all communities exercising their right to vote, particularly Iraqi women who turned out in large numbers.”
UNAMI, which Mr. de Mistura heads, has provided the Commission with advice and assistance on a broad range of electoral issues, including a nationwide revamping of the voter registry in order to increase accuracy and reduce the potential for multiple voting.
In a <"Newsmaker'>http://www.un.org/apps/news/newsmakers.asp?NewsID=9">Newsmaker interview with the UN News Centre released today, the Special Representative said that these elections were an important test for Iraq, since they are the first conducted by the Iraqis themselves, with UN assistance, and they are the first in which Sunnis voted in substantial numbers, among other factors.
In addition, he said, they are the first elections that will affect the day-to-day lives of Iraqi voters.
“These elections are about real power, in the sense that they are going to nominate the people who are on the ground, in the various district councils, and will be deciding on electricity, water, budget and jobs,” he said.
Feb 2 2009 3:10PM
________________
For more details go to UN News Centre at http://www.un.org/news
Great Depression: Policies that decreased competition in product and labor markets were especially destructive
How Government Prolonged the Depression, by Harold L Cole and Lee E Ohanian
Policies that decreased competition in product and labor markets were especially destructive.
WSJ, Feb 02, 2009
The New Deal is widely perceived to have ended the Great Depression, and this has led many to support a "new" New Deal to address the current crisis. But the facts do not support the perception that FDR's policies shortened the Depression, or that similar policies will pull our nation out of its current economic downturn.
The goal of the New Deal was to get Americans back to work. But the New Deal didn't restore employment. In fact, there was even less work on average during the New Deal than before FDR took office. Total hours worked per adult, including government employees, were 18% below their 1929 level between 1930-32, but were 23% lower on average during the New Deal (1933-39). Private hours worked were even lower after FDR took office, averaging 27% below their 1929 level, compared to 18% lower between in 1930-32.
Even comparing hours worked at the end of 1930s to those at the beginning of FDR's presidency doesn't paint a picture of recovery. Total hours worked per adult in 1939 remained about 21% below their 1929 level, compared to a decline of 27% in 1933. And it wasn't just work that remained scarce during the New Deal. Per capita consumption did not recover at all, remaining 25% below its trend level throughout the New Deal, and per-capita nonresidential investment averaged about 60% below trend. The Great Depression clearly continued long after FDR took office.
Why wasn't the Depression followed by a vigorous recovery, like every other cycle? It should have been. The economic fundamentals that drive all expansions were very favorable during the New Deal. Productivity grew very rapidly after 1933, the price level was stable, real interest rates were low, and liquidity was plentiful. We have calculated on the basis of just productivity growth that employment and investment should have been back to normal levels by 1936. Similarly, Nobel Laureate Robert Lucas and Leonard Rapping calculated on the basis of just expansionary Federal Reserve policy that the economy should have been back to normal by 1935.
So what stopped a blockbuster recovery from ever starting? The New Deal. Some New Deal policies certainly benefited the economy by establishing a basic social safety net through Social Security and unemployment benefits, and by stabilizing the financial system through deposit insurance and the Securities Exchange Commission. But others violated the most basic economic principles by suppressing competition, and setting prices and wages in many sectors well above their normal levels. All told, these antimarket policies choked off powerful recovery forces that would have plausibly returned the economy back to trend by the mid-1930s.
The most damaging policies were those at the heart of the recovery plan, including The National Industrial Recovery Act (NIRA), which tossed aside the nation's antitrust acts and permitted industries to collusively raise prices provided that they shared their newfound monopoly rents with workers by substantially raising wages well above underlying productivity growth. The NIRA covered over 500 industries, ranging from autos and steel, to ladies hosiery and poultry production. Each industry created a code of "fair competition" which spelled out what producers could and could not do, and which were designed to eliminate "excessive competition" that FDR believed to be the source of the Depression.
These codes distorted the economy by artificially raising wages and prices, restricting output, and reducing productive capacity by placing quotas on industry investment in new plants and equipment. Following government approval of each industry code, industry prices and wages increased substantially, while prices and wages in sectors that weren't covered by the NIRA, such as agriculture, did not. We have calculated that manufacturing wages were as much as 25% above the level that would have prevailed without the New Deal. And while the artificially high wages created by the NIRA benefited the few that were fortunate to have a job in those industries, they significantly depressed production and employment, as the growth in wage costs far exceeded productivity growth.
These policies continued even after the NIRA was declared unconstitutional in 1935. There was no antitrust activity after the NIRA, despite overwhelming FTC evidence of price-fixing and production limits in many industries, and the National Labor Relations Act of 1935 gave unions substantial collective-bargaining power. While not permitted under federal law, the sit-down strike, in which workers were occupied factories and shut down production, was tolerated by governors in a number of states and was used with great success against major employers, including General Motors in 1937.
The downturn of 1937-38 was preceded by large wage hikes that pushed wages well above their NIRA levels, following the Supreme Court's 1937 decision that upheld the constitutionality of the National Labor Relations Act. These wage hikes led to further job loss, particularly in manufacturing. The "recession in a depression" thus was not the result of a reversal of New Deal policies, as argued by some, but rather a deepening of New Deal polices that raised wages even further above their competitive levels, and which further prevented the normal forces of supply and demand from restoring full employment. Our research indicates that New Deal labor and industrial policies prolonged the Depression by seven years.
By the late 1930s, New Deal policies did begin to reverse, which coincided with the beginning of the recovery. In a 1938 speech, FDR acknowledged that the American economy had become a "concealed cartel system like Europe," which led the Justice Department to reinitiate antitrust prosecution. And union bargaining power was significantly reduced, first by the Supreme Court's ruling that the sit-down strike was illegal, and further reduced during World War II by the National War Labor Board (NWLB), in which large union wage settlements were limited by the NWLB to cost-of-living increases. The wartime economic boom reflected not only the enormous resource drain of military spending, but also the erosion of New Deal labor and industrial policies.
By 1947, through a combination of NWLB wage restrictions and rapid productivity growth, we have calculated that the large gap between manufacturing wages and productivity that emerged during the New Deal had nearly been eliminated. And since that time, wages have never approached the severely distorted levels that prevailed under the New Deal, nor has the country suffered from such abysmally low employment.
The main lesson we have learned from the New Deal is that wholesale government intervention can -- and does -- deliver the most unintended of consequences. This was true in the 1930s, when artificially high wages and prices kept us depressed for more than a decade, it was true in the 1970s when price controls were used to combat inflation but just produced shortages. It is true today, when poorly designed regulation produced a banking system that took on too much risk.
President Barack Obama and Congress have a great opportunity to produce reforms that do return Americans to work, and that provide a foundation for sustained long-run economic growth and the opportunity for all Americans to succeed. These reforms should include very specific plans that update banking regulations and address a manufacturing sector in which several large industries -- including autos and steel -- are no longer internationally competitive. Tax reform that broadens rather than narrows the tax base and that increases incentives to work, save and invest is also needed. We must also confront an educational system that fails many of its constituents. A large fiscal stimulus plan that doesn't directly address the specific impediments that our economy faces is unlikely to achieve either the country's short-term or long-term goals.
Mr. Cole is professor of economics at the University of Pennsylvania. Mr. Ohanian is professor of economics and director of the Ettinger Family Program in Macroeconomic Research at UCLA.
Policies that decreased competition in product and labor markets were especially destructive.
WSJ, Feb 02, 2009
The New Deal is widely perceived to have ended the Great Depression, and this has led many to support a "new" New Deal to address the current crisis. But the facts do not support the perception that FDR's policies shortened the Depression, or that similar policies will pull our nation out of its current economic downturn.
The goal of the New Deal was to get Americans back to work. But the New Deal didn't restore employment. In fact, there was even less work on average during the New Deal than before FDR took office. Total hours worked per adult, including government employees, were 18% below their 1929 level between 1930-32, but were 23% lower on average during the New Deal (1933-39). Private hours worked were even lower after FDR took office, averaging 27% below their 1929 level, compared to 18% lower between in 1930-32.
Even comparing hours worked at the end of 1930s to those at the beginning of FDR's presidency doesn't paint a picture of recovery. Total hours worked per adult in 1939 remained about 21% below their 1929 level, compared to a decline of 27% in 1933. And it wasn't just work that remained scarce during the New Deal. Per capita consumption did not recover at all, remaining 25% below its trend level throughout the New Deal, and per-capita nonresidential investment averaged about 60% below trend. The Great Depression clearly continued long after FDR took office.
Why wasn't the Depression followed by a vigorous recovery, like every other cycle? It should have been. The economic fundamentals that drive all expansions were very favorable during the New Deal. Productivity grew very rapidly after 1933, the price level was stable, real interest rates were low, and liquidity was plentiful. We have calculated on the basis of just productivity growth that employment and investment should have been back to normal levels by 1936. Similarly, Nobel Laureate Robert Lucas and Leonard Rapping calculated on the basis of just expansionary Federal Reserve policy that the economy should have been back to normal by 1935.
So what stopped a blockbuster recovery from ever starting? The New Deal. Some New Deal policies certainly benefited the economy by establishing a basic social safety net through Social Security and unemployment benefits, and by stabilizing the financial system through deposit insurance and the Securities Exchange Commission. But others violated the most basic economic principles by suppressing competition, and setting prices and wages in many sectors well above their normal levels. All told, these antimarket policies choked off powerful recovery forces that would have plausibly returned the economy back to trend by the mid-1930s.
The most damaging policies were those at the heart of the recovery plan, including The National Industrial Recovery Act (NIRA), which tossed aside the nation's antitrust acts and permitted industries to collusively raise prices provided that they shared their newfound monopoly rents with workers by substantially raising wages well above underlying productivity growth. The NIRA covered over 500 industries, ranging from autos and steel, to ladies hosiery and poultry production. Each industry created a code of "fair competition" which spelled out what producers could and could not do, and which were designed to eliminate "excessive competition" that FDR believed to be the source of the Depression.
These codes distorted the economy by artificially raising wages and prices, restricting output, and reducing productive capacity by placing quotas on industry investment in new plants and equipment. Following government approval of each industry code, industry prices and wages increased substantially, while prices and wages in sectors that weren't covered by the NIRA, such as agriculture, did not. We have calculated that manufacturing wages were as much as 25% above the level that would have prevailed without the New Deal. And while the artificially high wages created by the NIRA benefited the few that were fortunate to have a job in those industries, they significantly depressed production and employment, as the growth in wage costs far exceeded productivity growth.
These policies continued even after the NIRA was declared unconstitutional in 1935. There was no antitrust activity after the NIRA, despite overwhelming FTC evidence of price-fixing and production limits in many industries, and the National Labor Relations Act of 1935 gave unions substantial collective-bargaining power. While not permitted under federal law, the sit-down strike, in which workers were occupied factories and shut down production, was tolerated by governors in a number of states and was used with great success against major employers, including General Motors in 1937.
The downturn of 1937-38 was preceded by large wage hikes that pushed wages well above their NIRA levels, following the Supreme Court's 1937 decision that upheld the constitutionality of the National Labor Relations Act. These wage hikes led to further job loss, particularly in manufacturing. The "recession in a depression" thus was not the result of a reversal of New Deal policies, as argued by some, but rather a deepening of New Deal polices that raised wages even further above their competitive levels, and which further prevented the normal forces of supply and demand from restoring full employment. Our research indicates that New Deal labor and industrial policies prolonged the Depression by seven years.
By the late 1930s, New Deal policies did begin to reverse, which coincided with the beginning of the recovery. In a 1938 speech, FDR acknowledged that the American economy had become a "concealed cartel system like Europe," which led the Justice Department to reinitiate antitrust prosecution. And union bargaining power was significantly reduced, first by the Supreme Court's ruling that the sit-down strike was illegal, and further reduced during World War II by the National War Labor Board (NWLB), in which large union wage settlements were limited by the NWLB to cost-of-living increases. The wartime economic boom reflected not only the enormous resource drain of military spending, but also the erosion of New Deal labor and industrial policies.
By 1947, through a combination of NWLB wage restrictions and rapid productivity growth, we have calculated that the large gap between manufacturing wages and productivity that emerged during the New Deal had nearly been eliminated. And since that time, wages have never approached the severely distorted levels that prevailed under the New Deal, nor has the country suffered from such abysmally low employment.
The main lesson we have learned from the New Deal is that wholesale government intervention can -- and does -- deliver the most unintended of consequences. This was true in the 1930s, when artificially high wages and prices kept us depressed for more than a decade, it was true in the 1970s when price controls were used to combat inflation but just produced shortages. It is true today, when poorly designed regulation produced a banking system that took on too much risk.
President Barack Obama and Congress have a great opportunity to produce reforms that do return Americans to work, and that provide a foundation for sustained long-run economic growth and the opportunity for all Americans to succeed. These reforms should include very specific plans that update banking regulations and address a manufacturing sector in which several large industries -- including autos and steel -- are no longer internationally competitive. Tax reform that broadens rather than narrows the tax base and that increases incentives to work, save and invest is also needed. We must also confront an educational system that fails many of its constituents. A large fiscal stimulus plan that doesn't directly address the specific impediments that our economy faces is unlikely to achieve either the country's short-term or long-term goals.
Mr. Cole is professor of economics at the University of Pennsylvania. Mr. Ohanian is professor of economics and director of the Ettinger Family Program in Macroeconomic Research at UCLA.
WSJ Editorial Page: Tax avoidance and Democratic Party standards
Driving Mr. Daschle. WSJ Editorial
Tax avoidance and Democratic Party standards.
WSJ, Feb 02, 2009
So Tom Daschle, the erstwhile prairie populist and scourge of multiple Presidential nominees, failed to disclose and pay taxes on hundreds of thousands of dollars of income. He also waited months to pay up and told the Obama transition team about his tax oversights only days before his Senate confirmation hearing to become Secretary of Health and Human Services.
This one is going to be fascinating to watch, less for what it says about Mr. Daschle than what it will reveal about Democratic standards. Every Republican in America knows that if Mr. Daschle were a Reagan or Bush nominee he'd now be headed back to private life faster than you can say John Tower. That's the way Democrats have treated GOP nominees who were accused of far lesser transgressions than Mr. Daschle's tax, er, avoidance. The question is whether Democrats are going to treat Mr. Daschle according to the standard that Mr. Daschle set when he was running the Senate.
And what standard was that? Well, on taxes, you may recall that Mr. Daschle's Senate Democrats led the campaign against "Benedict Arnold corporations" that earn too much income overseas. The companies do this legally, in part to avoid a U.S. corporate tax rate (35%) that is the developed world's second highest, but that hasn't stopped the Daschle Democrats from comparing them to traitors.
Then there was the assault on legal tax shelters, led in the Daschle Senate by Democrat Carl Levin. The Levin hearings encouraged the Justice Department to prosecute employees who sold tax shelters for KPMG, though no tax court had found them illegal. Most of the KPMG charges were later thrown out of court, but not before careers were ruined and life savings spent on legal defense fees. Under political pressure in 2002, the IRS disclosed the names of users of a KPMG shelter, including William Simon Jr., a Republican candidate for California Governor. Democrats cried that Mr. Simon was a tax cheat, and he had to release years of tax returns to show otherwise.
Now we learn that Mr. Daschle failed to report some $255,000 in income from 2005 through 2007 for a car and driver supplied to him for personal use. The chauffeur service was provided by Leo Hindery, a big Democratic donor who also made Mr. Daschle a bundle by making him a limited partner in InterMedia Partners, a private equity shop.
As a legal tax matter, this isn't even a close call. Mr. Daschle says he used the car service about 80% for personal use, and 20% for business. But his spokeswoman says it only dawned on the Senator last June that this might be taxable income. Mr. Daschle's excuse? According to a Journal report Friday, "he told committee staff he had grown used to having a car and driver as majority leader and did not think to report the perk on his taxes, according to staff members." How's that for a Leona Helmsley moment: Doesn't everyone have a car and chauffeur, dear?
The Senate Finance Committee is also reviewing whether certain "travel and entertainment services" provided to Mr. Daschle and his wife Linda, an aviation lobbyist, should also be reported as income. The Washington Post reports that Mr. Daschle has earned more than $5 million over the past two years, including $220,000 from the health-care industry he's been nominated to regulate. Capitalism is wonderful, but at the very least Mr. Daschle's record strips the veneer from President Obama's moralizing that lobbying and special interest pleading are the root of all evil in Washington. In appointing Mr. Daschle, Mr. Obama is showing that lobbying is fine as long as it is done by people who agree with him.
Some Democrats said on the weekend that Mr. Daschle deserves to be confirmed because they "know" he is "honest." But that isn't the standard Mr. Daschle set for GOP appointees who had no ethical taint. In 2001, he established a new, 60-vote confirmation standard for Eugene Scalia to be Labor Department Solicitor, though Mr. Scalia had been approved in committee and would have won on the Senate floor. He also filibustered Miguel Estrada, a judicial nominee of wide renown, on the trivial grounds that the Bush Administration wouldn't release internal memos when Mr. Estrada had worked as a Justice Department staff lawyer.
We'll be watching in particular to see how Democrats Max Baucus and Kent Conrad handle the Daschle tax mess. Finance Chairman Baucus gave a pass to Treasury Secretary Tim Geithner, albeit for a lesser offense, and Mr. Conrad also voted to confirm Mr. Geithner though not without saying he wouldn't have done so in "normal" times. We assume by "normal" he doesn't mean when nominees are Republican. If nothing else, a vote to confirm Mr. Daschle will expose the insincerity of Democratic tax populism.
If Mr. Daschle were the stand-up guy his fellow Democrats say he is, he'd withdraw his nomination and spare them the embarrassment of confirming someone who thinks the tax laws apply only to other people.
Tax avoidance and Democratic Party standards.
WSJ, Feb 02, 2009
So Tom Daschle, the erstwhile prairie populist and scourge of multiple Presidential nominees, failed to disclose and pay taxes on hundreds of thousands of dollars of income. He also waited months to pay up and told the Obama transition team about his tax oversights only days before his Senate confirmation hearing to become Secretary of Health and Human Services.
This one is going to be fascinating to watch, less for what it says about Mr. Daschle than what it will reveal about Democratic standards. Every Republican in America knows that if Mr. Daschle were a Reagan or Bush nominee he'd now be headed back to private life faster than you can say John Tower. That's the way Democrats have treated GOP nominees who were accused of far lesser transgressions than Mr. Daschle's tax, er, avoidance. The question is whether Democrats are going to treat Mr. Daschle according to the standard that Mr. Daschle set when he was running the Senate.
And what standard was that? Well, on taxes, you may recall that Mr. Daschle's Senate Democrats led the campaign against "Benedict Arnold corporations" that earn too much income overseas. The companies do this legally, in part to avoid a U.S. corporate tax rate (35%) that is the developed world's second highest, but that hasn't stopped the Daschle Democrats from comparing them to traitors.
Then there was the assault on legal tax shelters, led in the Daschle Senate by Democrat Carl Levin. The Levin hearings encouraged the Justice Department to prosecute employees who sold tax shelters for KPMG, though no tax court had found them illegal. Most of the KPMG charges were later thrown out of court, but not before careers were ruined and life savings spent on legal defense fees. Under political pressure in 2002, the IRS disclosed the names of users of a KPMG shelter, including William Simon Jr., a Republican candidate for California Governor. Democrats cried that Mr. Simon was a tax cheat, and he had to release years of tax returns to show otherwise.
Now we learn that Mr. Daschle failed to report some $255,000 in income from 2005 through 2007 for a car and driver supplied to him for personal use. The chauffeur service was provided by Leo Hindery, a big Democratic donor who also made Mr. Daschle a bundle by making him a limited partner in InterMedia Partners, a private equity shop.
As a legal tax matter, this isn't even a close call. Mr. Daschle says he used the car service about 80% for personal use, and 20% for business. But his spokeswoman says it only dawned on the Senator last June that this might be taxable income. Mr. Daschle's excuse? According to a Journal report Friday, "he told committee staff he had grown used to having a car and driver as majority leader and did not think to report the perk on his taxes, according to staff members." How's that for a Leona Helmsley moment: Doesn't everyone have a car and chauffeur, dear?
The Senate Finance Committee is also reviewing whether certain "travel and entertainment services" provided to Mr. Daschle and his wife Linda, an aviation lobbyist, should also be reported as income. The Washington Post reports that Mr. Daschle has earned more than $5 million over the past two years, including $220,000 from the health-care industry he's been nominated to regulate. Capitalism is wonderful, but at the very least Mr. Daschle's record strips the veneer from President Obama's moralizing that lobbying and special interest pleading are the root of all evil in Washington. In appointing Mr. Daschle, Mr. Obama is showing that lobbying is fine as long as it is done by people who agree with him.
Some Democrats said on the weekend that Mr. Daschle deserves to be confirmed because they "know" he is "honest." But that isn't the standard Mr. Daschle set for GOP appointees who had no ethical taint. In 2001, he established a new, 60-vote confirmation standard for Eugene Scalia to be Labor Department Solicitor, though Mr. Scalia had been approved in committee and would have won on the Senate floor. He also filibustered Miguel Estrada, a judicial nominee of wide renown, on the trivial grounds that the Bush Administration wouldn't release internal memos when Mr. Estrada had worked as a Justice Department staff lawyer.
We'll be watching in particular to see how Democrats Max Baucus and Kent Conrad handle the Daschle tax mess. Finance Chairman Baucus gave a pass to Treasury Secretary Tim Geithner, albeit for a lesser offense, and Mr. Conrad also voted to confirm Mr. Geithner though not without saying he wouldn't have done so in "normal" times. We assume by "normal" he doesn't mean when nominees are Republican. If nothing else, a vote to confirm Mr. Daschle will expose the insincerity of Democratic tax populism.
If Mr. Daschle were the stand-up guy his fellow Democrats say he is, he'd withdraw his nomination and spare them the embarrassment of confirming someone who thinks the tax laws apply only to other people.
WaPo: The latest salmonella outbreak highlights gaps in the nation's food supply
Peanut Bummer. WaPo Editorial
The latest salmonella outbreak highlights gaps in the nation's food supply.
Monday, February 2, 2009; Page A12
EVEN THOUGH he's not caught up in this mess, Mr. Peanut must want to clobber the geniuses at Peanut Corporation of America (PCA) with his cane. The Food and Drug Administration revealed last week that the company's Blakely, Ga., facility knowingly shipped salmonella-tainted peanut products 12 times between 2007 and 2008 to locations in the United States and abroad. The company, based in Lynchburg, Va., has urged anyone in possession of its products made in the past two years to throw them out.
This is one of the biggest recalls in U.S. history and another example of vulnerability in the nation's food supply. None of PCA's peanut products are sold directly to consumers. But the FDA says that more than 70 firms used the company's goods in all manner of foods, from cookies and pet food to ice cream and cereal. Since the salmonella outbreak was discovered last summer, the Centers for Disease Control and Prevention believes that eight deaths and 501 illnesses spread across 43 states and Canada may be linked to the Georgia plant. The FDA alleges that not only did PCA knowingly ship bad merchandise but it went to another testing facility to get a clean bill of health after initially getting test results that were positive for salmonella. The company denies this allegation. The FDA said that the problems that led to the contamination were not fixed.
The FDA uncovered the problems by securing inspection reports done by the state of Georgia, using a special 2002 law meant to prevent bioterrorism. The agency last inspected the Blakely plant in 2001 and then contracted out the inspections to the Georgia Department of Agriculture. While this practice is not uncommon for the FDA, it speaks volumes about the lack of resources the agency has to protect the nation's food supply. According to Caroline Smith DeWaal, director of food safety at the Center for Science in the Public Interest, the FDA has lost more than 600 inspectors since 2004. "The fewer inspectors the FDA has, the more it relies on state inspectors," she told us.
Rep. John D. Dingell (D-Mich.) has reintroduced legislation that would give the FDA more money and authority over food safety, including the power to issue mandatory recalls of contaminated food. Rep. Diana DeGette (D-Colo.) will try again to get a bill passed that would require the FDA to devise a system that would make it possible to trace food and produce from the farm to the dinner table. Rep. Bart Stupak (D-Mich.) has a bill that would give the FDA more money and authority to conduct inspections. As we have learned over the past year, much of the food safety system in this country is based on the trust that manufacturers are introducing products into the food supply that are clean and safe. President Ronald Reagan had a mantra for dealing with Russia that is apt here: "Trust but verify." Congress must give the FDA and other relevant agencies the power to do it.
The latest salmonella outbreak highlights gaps in the nation's food supply.
Monday, February 2, 2009; Page A12
EVEN THOUGH he's not caught up in this mess, Mr. Peanut must want to clobber the geniuses at Peanut Corporation of America (PCA) with his cane. The Food and Drug Administration revealed last week that the company's Blakely, Ga., facility knowingly shipped salmonella-tainted peanut products 12 times between 2007 and 2008 to locations in the United States and abroad. The company, based in Lynchburg, Va., has urged anyone in possession of its products made in the past two years to throw them out.
This is one of the biggest recalls in U.S. history and another example of vulnerability in the nation's food supply. None of PCA's peanut products are sold directly to consumers. But the FDA says that more than 70 firms used the company's goods in all manner of foods, from cookies and pet food to ice cream and cereal. Since the salmonella outbreak was discovered last summer, the Centers for Disease Control and Prevention believes that eight deaths and 501 illnesses spread across 43 states and Canada may be linked to the Georgia plant. The FDA alleges that not only did PCA knowingly ship bad merchandise but it went to another testing facility to get a clean bill of health after initially getting test results that were positive for salmonella. The company denies this allegation. The FDA said that the problems that led to the contamination were not fixed.
The FDA uncovered the problems by securing inspection reports done by the state of Georgia, using a special 2002 law meant to prevent bioterrorism. The agency last inspected the Blakely plant in 2001 and then contracted out the inspections to the Georgia Department of Agriculture. While this practice is not uncommon for the FDA, it speaks volumes about the lack of resources the agency has to protect the nation's food supply. According to Caroline Smith DeWaal, director of food safety at the Center for Science in the Public Interest, the FDA has lost more than 600 inspectors since 2004. "The fewer inspectors the FDA has, the more it relies on state inspectors," she told us.
Rep. John D. Dingell (D-Mich.) has reintroduced legislation that would give the FDA more money and authority over food safety, including the power to issue mandatory recalls of contaminated food. Rep. Diana DeGette (D-Colo.) will try again to get a bill passed that would require the FDA to devise a system that would make it possible to trace food and produce from the farm to the dinner table. Rep. Bart Stupak (D-Mich.) has a bill that would give the FDA more money and authority to conduct inspections. As we have learned over the past year, much of the food safety system in this country is based on the trust that manufacturers are introducing products into the food supply that are clean and safe. President Ronald Reagan had a mantra for dealing with Russia that is apt here: "Trust but verify." Congress must give the FDA and other relevant agencies the power to do it.
Don't Push Banks to Make Bad Loans: Contrary to myth, commercial bank lending is up
Don't Push Banks to Make Bad Loans. By Vert Ely
Contrary to myth, commercial bank lending is up. So are standards.
WSJ, Feb 02, 2009
There is a widespread belief that banks are now refusing to lend as much as they should, and that Congress should pressure them to extend more credit to consumers and businesses.
In reality, banks as a whole increased their lending during 2008 -- the notion they haven't is based on a misunderstanding of U.S. credit markets. Pressuring banks to lend more could backfire.
Lost in too many discussions of the financial sector is that banks and other depository institutions account for only 22% of the credit supplied to the U.S. economy (down from 40% in 1982). "Shadow banking" -- notably asset securitization and money-market mutual funds -- now supplies 33% (up from 14%). Insurance companies, other financial intermediaries, nonfinancial firms and the rest of the world provide the balance.
As far as commercial banks go, Federal Reserve data released last week show that their lending increased 2.36% during the last quarter of 2008. For all of 2008, commercial-bank lending rose by $386 billion, or 5.63%, even as the economy slid into recession. Over that 12-month period, business lending jumped $152 billion, or 10.6%, real-estate loans were up $213 billion, or 5.9%, and consumer lending rose $73.5 billion, or 9%. Other categories of bank lending such as loans to farmers, broker-dealers and governments, declined $53.2 billion, or 5.4%.
Fed data also show that during the first three quarters of 2008, the total amount of credit supplied to the economy increased $1.91 trillion, or 3.8%, with $540 billion of that amount coming from foreign lenders.
Nevertheless, Treasury recently demanded that the 20 largest recipients of government capital investments start providing detailed monthly reports about their lending and investment activities. This new requirement could lead to government lending mandates. That would not be a good idea.
In the first place, the drop in stock-market and house prices has made millions of families feel poorer and led them to save more than in recent years. It has also encouraged them (especially Baby Boomers approaching retirement) to pay off debt. They don't need more debt.
More broadly, many of the most creditworthy neither need to nor want to borrow right now. Richard Davis, CEO of U.S. Bancorp, recently said that he is seeing the demand for loans diminish at his and other banks "from people and businesses spending less and traveling less and watching their nickels and dimes."
Lenders moreover have tightened lending standards, correcting an excessive laxness that contributed to our financial mess. Zero or very low down-payment mortgages are out, as are "covenant light" corporate loans. Likewise, lenders have trimmed credit-card limits and cut the amount of money available under home equity lines of credit as home values have declined.
And contrary to the "lend more" message broadcast from inside the Washington Beltway, bank examiners are criticizing weak loans and forcing banks to tighten lending standards. Bankers are caught in a vise between politicians and examiners.
A lot of the credit tightness is a reflection of the near-collapse of loan securitization. Recent Fed plans to buy asset-backed securities may help revive asset securitization, but bankers have no control over the fate of that initiative.
The economy is in recession and working off the consequences of a housing bubble fed by excessive mortgage credit. Given that loan demand typically falls during a recession, it's amazing that bank lending increased as much as it did last year. It was essentially flat during the 2001 recession.
Bankers should always lend prudently, as they are now doing. If they are jawboned or worse by Washington into reckless lending, the U.S. will set itself up for another debt crisis, even before the present mess has been cleaned up.
Mr. Ely, the principal in Ely & Co. Inc., is a financial institutions and monetary policy consultant.
Contrary to myth, commercial bank lending is up. So are standards.
WSJ, Feb 02, 2009
There is a widespread belief that banks are now refusing to lend as much as they should, and that Congress should pressure them to extend more credit to consumers and businesses.
In reality, banks as a whole increased their lending during 2008 -- the notion they haven't is based on a misunderstanding of U.S. credit markets. Pressuring banks to lend more could backfire.
Lost in too many discussions of the financial sector is that banks and other depository institutions account for only 22% of the credit supplied to the U.S. economy (down from 40% in 1982). "Shadow banking" -- notably asset securitization and money-market mutual funds -- now supplies 33% (up from 14%). Insurance companies, other financial intermediaries, nonfinancial firms and the rest of the world provide the balance.
As far as commercial banks go, Federal Reserve data released last week show that their lending increased 2.36% during the last quarter of 2008. For all of 2008, commercial-bank lending rose by $386 billion, or 5.63%, even as the economy slid into recession. Over that 12-month period, business lending jumped $152 billion, or 10.6%, real-estate loans were up $213 billion, or 5.9%, and consumer lending rose $73.5 billion, or 9%. Other categories of bank lending such as loans to farmers, broker-dealers and governments, declined $53.2 billion, or 5.4%.
Fed data also show that during the first three quarters of 2008, the total amount of credit supplied to the economy increased $1.91 trillion, or 3.8%, with $540 billion of that amount coming from foreign lenders.
Nevertheless, Treasury recently demanded that the 20 largest recipients of government capital investments start providing detailed monthly reports about their lending and investment activities. This new requirement could lead to government lending mandates. That would not be a good idea.
In the first place, the drop in stock-market and house prices has made millions of families feel poorer and led them to save more than in recent years. It has also encouraged them (especially Baby Boomers approaching retirement) to pay off debt. They don't need more debt.
More broadly, many of the most creditworthy neither need to nor want to borrow right now. Richard Davis, CEO of U.S. Bancorp, recently said that he is seeing the demand for loans diminish at his and other banks "from people and businesses spending less and traveling less and watching their nickels and dimes."
Lenders moreover have tightened lending standards, correcting an excessive laxness that contributed to our financial mess. Zero or very low down-payment mortgages are out, as are "covenant light" corporate loans. Likewise, lenders have trimmed credit-card limits and cut the amount of money available under home equity lines of credit as home values have declined.
And contrary to the "lend more" message broadcast from inside the Washington Beltway, bank examiners are criticizing weak loans and forcing banks to tighten lending standards. Bankers are caught in a vise between politicians and examiners.
A lot of the credit tightness is a reflection of the near-collapse of loan securitization. Recent Fed plans to buy asset-backed securities may help revive asset securitization, but bankers have no control over the fate of that initiative.
The economy is in recession and working off the consequences of a housing bubble fed by excessive mortgage credit. Given that loan demand typically falls during a recession, it's amazing that bank lending increased as much as it did last year. It was essentially flat during the 2001 recession.
Bankers should always lend prudently, as they are now doing. If they are jawboned or worse by Washington into reckless lending, the U.S. will set itself up for another debt crisis, even before the present mess has been cleaned up.
Mr. Ely, the principal in Ely & Co. Inc., is a financial institutions and monetary policy consultant.
Subscribe to:
Posts (Atom)
Posts
