Why Congress Will Kill the Bank Rescue. By Vincent Reinhart
What happens when the hedge funds make profits?
WSJ, Mar 25, 2009
Americans can be forgiven for experiencing a sense of deja vu as they digest the details of Treasury Secretary Timothy Geithner's Public-Private Investment Program (PPIP) for troubled bank assets. What was rolled out on the pages of newspapers this week read like press releases on the various plans over the past year from Mr. Geithner's predecessor, Hank Paulson.
The two Treasury secretaries share a touching faith in public-private cooperation to lift the value of troubled assets. This assumes, of course, that those assets are troubled because their true values are obscured by irrational self-doubt and market illiquidity, and not by fundamental problems in the prospects of repayment. It also assumes that the solution to problems created by excessive leverage is for government to encourage more leverage.
Notably absent in the Geithner plan is any progress on the barrier at which Mr. Paulson stumbled last year: What are the right prices for troubled assets? To believe that the solution lies in harnessing the public and private sectors in tandem shows a misunderstanding of these sectors' incentives.
Public officials want this problem to go away without being stuck with the smoldering wreckage of large and complicated financial institutions. That requires buying assets quickly from problematic firms at the highest prices possible.
Private investors want to make a profit. That can best be achieved by delaying purchases, thereby lowering prices and sticking the government with as much of the loss as possible.
The possibility of outsized profit, made possible by government guarantees and matching capital contributions, is the carrot government can offer to those with private capital willing to commit to the enterprise. The problem is that Congress has been demonizing the financial sector and considering ex post expropriation of bonuses.
For the PPIP to work, the government will have to use the expertise of much-vilified financial professionals, create massive expected profit opportunities to entice capital, and tap places where there are deep pools of money -- including sovereign wealth funds. If the PPIP is successful, is there any chance that Congress would not be holding hearings complaining about the massive rewards to those who took on the risk? Unless members of Congress cool the heat of their rhetoric, the potential profits Mr. Geithner is putting on the table will simply be left there.
When the government's carrot does not work, next will come the stick. Remember, 19 of the largest financial firms have been asked to submit to stress tests detailing the adequacy of their capital.
Talk about irony. Financial markets are in disarray today because leading firms chose to bury complicated instruments in their books. The results were opaque balance sheets that hid the considerable use of leverage, and proved misleading both to investors and examiners. These same firms are now being required by regulators to use these misshapen accounts to make far-ahead predictions.
But the objective of the stress test is not to get useful forecasts. Rather, it will provide the excuse for regulators, outside the usual process of examination and resolution, to open a discussion with major firms about the adequacy of their capital.
A dialogue, once started, can then proceed to capital infusions, forced mergers and other forms of balance-sheet relief. This will all be with an eye to creating strong incentives for bank managers to attract private capital. If necessary, the stress tests can be used to force fire sales that will attract private capital through the PPIP.
So the government, once again, has opted for a circuitous route to the goal of sorting out financial firms. This will take longer than necessary and sacrifice clarity. But obfuscation was probably a design principle. As yet, the American public does not appear ready to admit that its government will have to absorb large losses to restart financial markets. Until that day comes, government action will continue to be indirect and probably insufficient.
This circuitous route can work, provided that the branches of the government pull in the same direction. Politicians are going to have to understand that the longer-term good of the nation involves cooperating with, not castigating, financial professionals. And the Obama administration will have to understand that its approval rating is to be used to convince the public of hard choices.
Mr. Reinhart is a resident scholar at the American Enterprise Institute and former director of the division of monetary affairs at the Federal Reserve.
Wednesday, March 25, 2009
WSJ Editorial Page: Diplomacy with Iran has no chance without tougher energy sanctions
Pain Iran Can Believe In. WSJ Editorial
Diplomacy has no chance without tougher energy sanctions.
WSJ, Mar 25, 2009
As a general rule, economic sanctions are a poor foreign policy instrument: hard to enforce (think Burma), prone to corruption (think Oil for Food), rarely effective (think Cuba). But in the case of Iran, let's make an exception.
We say this after five years of futile diplomatic efforts -- spearheaded by the Europeans and backed by the Bush Administration -- to persuade Iran to abandon its nuclear programs and comply with binding U.N. Security Council resolutions. Now the only thing standing between the mullahs and a bomb is either punitive sanctions or a military strike, probably Israeli, which could engulf the Middle East in a regional war. Which option do you prefer?
So here's a fact: Despite being a leading oil exporter, Iran imports roughly 40% of its gasoline because it lacks adequate domestic refining capacity. Any cut-off in supply would do immediate damage to the fragile Iranian economy and could bring about social unrest, as happened in 2007 after the regime imposed gasoline rations. Here's another fact: Iran is supplied with gasoline by a mere handful of foreign companies, all of which do substantial business in the United States.
Final fact: There is a growing bipartisan consensus in favor of gasoline sanctions. As candidate Barack Obama put it in the second Presidential debate last October, "If we can prevent [Iran] from importing the gasoline they need and the refined petroleum products, that starts changing their cost-benefit analysis [about the advantages of a nuclear arsenal], that starts putting the squeeze on them."
Well, amen to that. So it's too bad that as President, Mr. Obama is now putting tougher sanctions off indefinitely in favor of pushing the rock of diplomacy up the mountain once again. He's likely to be strung along like George W. Bush and the Europeans were, allowing the mullahs to get closer to a bomb. Diplomacy will have no chance without the threat of sticks, so Congress could help by passing two significant pieces of legislation affecting Iran's energy supply.
One of them, an amendment to the Senate omnibus appropriations bill from Arizona Republican Jon Kyl, would forbid federal funds from going to companies involved in Iran's energy industry. On the House side, Republican Mark Kirk and Democrat Rob Andrews sponsored complementary legislation in 2007 that would have expanded the Iran Sanctions Act to companies selling refined petroleum to Iran. The value of this latter legislation is partly symbolic, since no company has ever actually been sanctioned under the Iran Sanctions Act. But symbolism can also have its practical uses: The mere existence of the act has helped persuade a number of energy multinationals, such as France's Total, to stop investing in Iran.
As for the Kyl Amendment, it takes aim at companies like the Swiss-Dutch oil trading firm Vitol, currently Iran's largest supplier, which has a contract with the U.S. Department of Energy to help fill the Strategic Petroleum Reserve. Vitol, which in 2007 pleaded guilty to grand larceny charges in New York state court for its role in Oil for Food, is also building a $100 million fuel-storage facility in Florida. Just by the way.
The good news is that Iran's suppliers are starting to get the message. Until recently, Indian giant Reliance Industries provided Iran with as much as 25% of its gasoline imports, even as it was building a giant refinery in India with over $500 million in loan guarantees from the U.S. Export-Import Bank. In December the guarantees came to the attention of Mr. Kirk and Democrats Howard Berman and Brad Sherman, who wrote a letter of protest to Ex-Im Bank President James Lambright. The letter later leaked to the Indian press, and, last month, Reliance did not supply Iran, according to the International Oil Daily.
Reliance's departure will likely not affect Iran's gasoline imports, since other suppliers can pick up the slack. But the number of firms willing to incur legal or reputational risks to supply Iran is limited, especially given the relatively small size of its domestic market. Would-be suppliers could also work through proxies, but again this raises costs and risks both for them and Iran, where the economy is already under severe strain from the collapse of oil prices and Mahmoud Ahmadinejad's inflationary economic policies.
Critics of gasoline sanctions argue that they amount to a game of whack-a-mole, and to some extent that's true. But the goal of the sanctions isn't to create an airtight regime so much as to sharply raise the costs to Iran for pursuing its nuclear programs. "This is no silver bullet but it may be silver shrapnel," says Mark Dubowitz of the Foundation for Defense of Democracies, a Washington, D.C.-based think tank that has brought the idea of gasoline sanctions to political attention.
With Iran now fast approaching the nuclear threshold, an Administration that doesn't want bullets to fly needs more than diplomacy. The only way Iran's regime is going to stop its nuclear program is if it feels some pain it can believe in.
Diplomacy has no chance without tougher energy sanctions.
WSJ, Mar 25, 2009
As a general rule, economic sanctions are a poor foreign policy instrument: hard to enforce (think Burma), prone to corruption (think Oil for Food), rarely effective (think Cuba). But in the case of Iran, let's make an exception.
We say this after five years of futile diplomatic efforts -- spearheaded by the Europeans and backed by the Bush Administration -- to persuade Iran to abandon its nuclear programs and comply with binding U.N. Security Council resolutions. Now the only thing standing between the mullahs and a bomb is either punitive sanctions or a military strike, probably Israeli, which could engulf the Middle East in a regional war. Which option do you prefer?
So here's a fact: Despite being a leading oil exporter, Iran imports roughly 40% of its gasoline because it lacks adequate domestic refining capacity. Any cut-off in supply would do immediate damage to the fragile Iranian economy and could bring about social unrest, as happened in 2007 after the regime imposed gasoline rations. Here's another fact: Iran is supplied with gasoline by a mere handful of foreign companies, all of which do substantial business in the United States.
Final fact: There is a growing bipartisan consensus in favor of gasoline sanctions. As candidate Barack Obama put it in the second Presidential debate last October, "If we can prevent [Iran] from importing the gasoline they need and the refined petroleum products, that starts changing their cost-benefit analysis [about the advantages of a nuclear arsenal], that starts putting the squeeze on them."
Well, amen to that. So it's too bad that as President, Mr. Obama is now putting tougher sanctions off indefinitely in favor of pushing the rock of diplomacy up the mountain once again. He's likely to be strung along like George W. Bush and the Europeans were, allowing the mullahs to get closer to a bomb. Diplomacy will have no chance without the threat of sticks, so Congress could help by passing two significant pieces of legislation affecting Iran's energy supply.
One of them, an amendment to the Senate omnibus appropriations bill from Arizona Republican Jon Kyl, would forbid federal funds from going to companies involved in Iran's energy industry. On the House side, Republican Mark Kirk and Democrat Rob Andrews sponsored complementary legislation in 2007 that would have expanded the Iran Sanctions Act to companies selling refined petroleum to Iran. The value of this latter legislation is partly symbolic, since no company has ever actually been sanctioned under the Iran Sanctions Act. But symbolism can also have its practical uses: The mere existence of the act has helped persuade a number of energy multinationals, such as France's Total, to stop investing in Iran.
As for the Kyl Amendment, it takes aim at companies like the Swiss-Dutch oil trading firm Vitol, currently Iran's largest supplier, which has a contract with the U.S. Department of Energy to help fill the Strategic Petroleum Reserve. Vitol, which in 2007 pleaded guilty to grand larceny charges in New York state court for its role in Oil for Food, is also building a $100 million fuel-storage facility in Florida. Just by the way.
The good news is that Iran's suppliers are starting to get the message. Until recently, Indian giant Reliance Industries provided Iran with as much as 25% of its gasoline imports, even as it was building a giant refinery in India with over $500 million in loan guarantees from the U.S. Export-Import Bank. In December the guarantees came to the attention of Mr. Kirk and Democrats Howard Berman and Brad Sherman, who wrote a letter of protest to Ex-Im Bank President James Lambright. The letter later leaked to the Indian press, and, last month, Reliance did not supply Iran, according to the International Oil Daily.
Reliance's departure will likely not affect Iran's gasoline imports, since other suppliers can pick up the slack. But the number of firms willing to incur legal or reputational risks to supply Iran is limited, especially given the relatively small size of its domestic market. Would-be suppliers could also work through proxies, but again this raises costs and risks both for them and Iran, where the economy is already under severe strain from the collapse of oil prices and Mahmoud Ahmadinejad's inflationary economic policies.
Critics of gasoline sanctions argue that they amount to a game of whack-a-mole, and to some extent that's true. But the goal of the sanctions isn't to create an airtight regime so much as to sharply raise the costs to Iran for pursuing its nuclear programs. "This is no silver bullet but it may be silver shrapnel," says Mark Dubowitz of the Foundation for Defense of Democracies, a Washington, D.C.-based think tank that has brought the idea of gasoline sanctions to political attention.
With Iran now fast approaching the nuclear threshold, an Administration that doesn't want bullets to fly needs more than diplomacy. The only way Iran's regime is going to stop its nuclear program is if it feels some pain it can believe in.
The 'Populists' Are Right About Wall Street. What's wrong with well-directed anger?
The 'Populists' Are Right About Wall Street. By Thomas Frank
What's wrong with well-directed anger?
WSJ, Mar 25, 2009
How has a popular Democratic president with a convincing electoral mandate failed to translate the opportunities of recent events into the "change" for which voters clamored? What kind of miscalculation allowed his administration to stir up such a wave of populist fury in such a short time?
The short answer, of course, is AIG. Why did the Treasury Department allow the payout of many millions in bonuses to executives of the unit that sank the company? Every answer the president's brain trust offered made them look more feckless, at the very moment they were rolling out a bank plan designed to spare stakeholders of our troubled financial institutions the haircut they so richly deserve.
This lapse of common sense arises from a deeper problem: the reflexive contempt for populism that is felt by the dominant faction of the Democratic Party -- the faction that regards itself as the responsible guardian of financial civilization, and that thinks of populism as crackpot economics and senseless proletarian rage.
I was reminded of the party's long-simmering debate over populism a little while ago when I read an essay by Al From, the founder of the centrist Democratic Leadership Council (DLC), announcing his retirement as that group's "CEO" and recounting his many successes over the years in building a "political brand." A short while later I read in Roll Call an account of Mr. From's career as "one of the 20th century's most successful political entrepreneurs," a man whose adventures in shifting the Democratic Party to the right formed a neat analogy to Mr. From's father's accomplishments in the suburban garage-building biz.
In Washington, where the need to treat government like a business is a no-brainer, thinking about politics in this way -- as though it were a matter of branding, entrepreneurship and CEOs -- is thought to be highly advanced stuff.
But I don't agree. Surely we have learned the hazards of turning business models loose on the state, after all our experiences with the "MBA president" and his "market-based" government, all the "K Street Projects" and "superlobbyists" of the last 20 years, all the regulatory agencies that understood the regulated as their "customers," all the bailouts engineered by friends of the bailed-out, all the faith placed in "voluntary compliance" on the grounds that business would naturally self-regulate.
Still, none can doubt the DLC's success at pushing "third way" humbug in elite Democratic circles. Many of the rhetorical gestures we associate with centrism -- for example, the habit of dismissing liberal policies as "industrial age" relics -- got their start in Mr. From's shop.
The theme that matters most these days, though, is the DLC's war with populism, a term that is supposed to summarize everything that is wrong with class-based discontent. Not only is populism mulishly wrong-headed, according to the DLC, but it is a sure-fire electoral loser -- a whiff of populism, the group once concluded, is what cost Al Gore the 2000 election.
The group's attacks on populism resonate in D.C., I suspect, because the commentariat has always thought "populism" to be faintly ridiculous, a thing of mobs and pitchforks and windbag leaders more demagogue than CEO. (For an illustration of what I mean, look at the cover of the latest issue of Newsweek.)
This way of thinking has not served the Obama administration well in recent weeks. Think of Larry Summers repeating, on program after program, his outrage with the AIG bonuses, but then immediately moving, as you would with a naughty child, into a discussion of the rule of law -- which I guess is what you call the years of de facto de-supervision that allowed this disaster.
One of these days it may dawn on our leaders that the public, in this case, is right; that this time the mountebanks and charlatans are not the populists but the responsible-looking CEOs who ran the country's financial institutions into the ground -- and who the administration apparently wants to leave in charge of many of those institutions. The public outrage about performance bonuses isn't just mindless resentment; it is directed at exactly the instruments that steered the economy into the ditch and the executives who built the system -- and who will demand to do business the old way as long as they have breath to bellow.
What's more, it is only thanks to populist members of Congress that we know our bailout of AIG sluiced billions to foreign banks, and it's only thanks to public outrage that the administration feels any pressure at all to exert a firmer hand on the institutions it has rescued from bankruptcy.
There are many, I am sure, who wish that this whole bailout business could be settled as an affair between political entrepreneurs and the interests that fund them, as in days of yore. But I hope President Obama has a better strategy than that planned for the time when his Treasury Department has to ask Congress for another helping of TARP.
What's wrong with well-directed anger?
WSJ, Mar 25, 2009
How has a popular Democratic president with a convincing electoral mandate failed to translate the opportunities of recent events into the "change" for which voters clamored? What kind of miscalculation allowed his administration to stir up such a wave of populist fury in such a short time?
The short answer, of course, is AIG. Why did the Treasury Department allow the payout of many millions in bonuses to executives of the unit that sank the company? Every answer the president's brain trust offered made them look more feckless, at the very moment they were rolling out a bank plan designed to spare stakeholders of our troubled financial institutions the haircut they so richly deserve.
This lapse of common sense arises from a deeper problem: the reflexive contempt for populism that is felt by the dominant faction of the Democratic Party -- the faction that regards itself as the responsible guardian of financial civilization, and that thinks of populism as crackpot economics and senseless proletarian rage.
I was reminded of the party's long-simmering debate over populism a little while ago when I read an essay by Al From, the founder of the centrist Democratic Leadership Council (DLC), announcing his retirement as that group's "CEO" and recounting his many successes over the years in building a "political brand." A short while later I read in Roll Call an account of Mr. From's career as "one of the 20th century's most successful political entrepreneurs," a man whose adventures in shifting the Democratic Party to the right formed a neat analogy to Mr. From's father's accomplishments in the suburban garage-building biz.
In Washington, where the need to treat government like a business is a no-brainer, thinking about politics in this way -- as though it were a matter of branding, entrepreneurship and CEOs -- is thought to be highly advanced stuff.
But I don't agree. Surely we have learned the hazards of turning business models loose on the state, after all our experiences with the "MBA president" and his "market-based" government, all the "K Street Projects" and "superlobbyists" of the last 20 years, all the regulatory agencies that understood the regulated as their "customers," all the bailouts engineered by friends of the bailed-out, all the faith placed in "voluntary compliance" on the grounds that business would naturally self-regulate.
Still, none can doubt the DLC's success at pushing "third way" humbug in elite Democratic circles. Many of the rhetorical gestures we associate with centrism -- for example, the habit of dismissing liberal policies as "industrial age" relics -- got their start in Mr. From's shop.
The theme that matters most these days, though, is the DLC's war with populism, a term that is supposed to summarize everything that is wrong with class-based discontent. Not only is populism mulishly wrong-headed, according to the DLC, but it is a sure-fire electoral loser -- a whiff of populism, the group once concluded, is what cost Al Gore the 2000 election.
The group's attacks on populism resonate in D.C., I suspect, because the commentariat has always thought "populism" to be faintly ridiculous, a thing of mobs and pitchforks and windbag leaders more demagogue than CEO. (For an illustration of what I mean, look at the cover of the latest issue of Newsweek.)
This way of thinking has not served the Obama administration well in recent weeks. Think of Larry Summers repeating, on program after program, his outrage with the AIG bonuses, but then immediately moving, as you would with a naughty child, into a discussion of the rule of law -- which I guess is what you call the years of de facto de-supervision that allowed this disaster.
One of these days it may dawn on our leaders that the public, in this case, is right; that this time the mountebanks and charlatans are not the populists but the responsible-looking CEOs who ran the country's financial institutions into the ground -- and who the administration apparently wants to leave in charge of many of those institutions. The public outrage about performance bonuses isn't just mindless resentment; it is directed at exactly the instruments that steered the economy into the ditch and the executives who built the system -- and who will demand to do business the old way as long as they have breath to bellow.
What's more, it is only thanks to populist members of Congress that we know our bailout of AIG sluiced billions to foreign banks, and it's only thanks to public outrage that the administration feels any pressure at all to exert a firmer hand on the institutions it has rescued from bankruptcy.
There are many, I am sure, who wish that this whole bailout business could be settled as an affair between political entrepreneurs and the interests that fund them, as in days of yore. But I hope President Obama has a better strategy than that planned for the time when his Treasury Department has to ask Congress for another helping of TARP.
Hernando de Soto on toxic assets: We can't afford to allow shadow economies to grow this big
Toxic Assets Were Hidden Assets. By Hernando de Soto
We can't afford to allow shadow economies to grow this big.
WSJ, Mar 25, 2009
The Obama administration has finally come up with a plan to deal with the real cause of the credit crunch: the infamous "toxic assets" on bank balance sheets that have scared off investors and borrowers, clogging credit markets around the world. But if Treasury Secretary Timothy Geithner hopes to prevent a repeat of this global economic crisis, his rescue plan must recognize that the real problem is not the bad loans, but the debasement of the paper they are printed on.
Today's global crisis -- a loss on paper of more than $50 trillion in stocks, real estate, commodities and operational earnings within 15 months -- cannot be explained only by the default on a meager 7% of subprime mortgages (worth probably no more than $1 trillion) that triggered it. The real villain is the lack of trust in the paper on which they -- and all other assets -- are printed. If we don't restore trust in paper, the next default -- on credit cards or student loans -- will trigger another collapse in paper and bring the world economy to its knees.
If you think about it, everything of value we own travels on property paper. At the beginning of the decade there was about $100 trillion worth of property paper representing tangible goods such as land, buildings, and patents world-wide, and some $170 trillion representing ownership over such semiliquid assets as mortgages, stocks and bonds. Since then, however, aggressive financiers have manufactured what the Bank for International Settlements estimates to be $1 quadrillion worth of new derivatives (mortgage-backed securities, collateralized debt obligations, and credit default swaps) that have flooded the market.
These derivatives are the root of the credit crunch. Why? Unlike all other property paper, derivatives are not required by law to be recorded, continually tracked and tied to the assets they represent. Nobody knows precisely how many there are, where they are, and who is finally accountable for them. Thus, there is widespread fear that potential borrowers and recipients of capital with too many nonperforming derivatives will be unable to repay their loans. As trust in property paper breaks down it sets off a chain reaction, paralyzing credit and investment, which shrinks transactions and leads to a catastrophic drop in employment and in the value of everyone's property.
Ever since humans started trading, lending and investing beyond the confines of the family and the tribe, we have depended on legally authenticated written statements to get the facts about things of value. Over the past 200 years, that legal authority has matured into a global consensus on the procedures, standards and principles required to document facts in a way that everyone can easily understand and trust.
The result is a formidable property system with rules and recording mechanisms that fix on paper the facts that allow us to hold, transfer, transform and use everything we own, from stocks to screenplays. The only paper representing an asset that is not centrally recorded, standardized and easily tracked are derivatives.
Property is much more than a body of norms. It is also a huge information system that processes raw data until it is transformed into facts that can be tested for truth, and thereby destroys the main catalysts of recessions and panics -- ambiguity and opacity. To bring derivatives under the rule of law, governments should ensure that they conform to six longstanding procedures that guarantee the value and legitimacy of any kind of paper purporting to represent an asset:
- All documents and the assets and transactions they represent or are derived from must be recorded in publicly accessible registries. It is only by recording and continually updating such factual knowledge that we can detect the kind of overly creative financial and contractual instruments that plunged us into this recession.
- The law has to take into account the "externalities" or side effects of all financial transactions according to the legal principle of erga omnes ("toward all"), which was originally developed to protect third parties from the negative consequences of secret deals carried out by aristocracies accountable to no one but themselves.
- Every financial deal must be firmly tethered to the real performance of the asset from which it originated. By aligning debts to assets, we can create simple and understandable benchmarks for quickly detecting whether a financial transaction has been created to help production or to bet on the performance of distant "underlying assets."
- Governments should never forget that production always takes priority over finance. As Adam Smith and Karl Marx both recognized, finance supports wealth creation, but in itself creates no value.
- Governments can encourage assets to be leveraged, transformed, combined, recombined and repackaged into any number of tranches, provided the process intends to improve the value of the original asset. This has been the rule for awarding property since the beginning of time.
- Governments can no longer tolerate the use of opaque and confusing language in drafting financial instruments. Clarity and precision are indispensable for the creation of credit and capital through paper. Western politicians must not forget what their greatest thinkers have been saying for centuries: All obligations and commitments that stick are derived from words recorded on paper with great precision.
Above all, governments should stop clinging to the hope that the existing market will eventually sort things out. "Let the market do its work" has come to mean, "let the shadow economy do its work." But modern markets only work if the paper is reliable.
Government's main duty now is to bring the whole toxic environment under the rule of law where it will be subject to enforcement. No economic activity based on the public trust should be allowed to operate outside the general principles of property law.
Financial institutions will have to serve society and fully report what they own and what they owe -- just like the rest of us -- so that we get the facts necessary to find our way out of the current maze. They must begin learning to put on paper statements about facts, instead of statements about statements.
Mr. de Soto, the author of "The Mystery of Capital" (Basic Books, 2000) and "The Other Path" (Harper and Row, 1989), co-chairs the Commission on Legal Empowerment of the Poor.
We can't afford to allow shadow economies to grow this big.
WSJ, Mar 25, 2009
The Obama administration has finally come up with a plan to deal with the real cause of the credit crunch: the infamous "toxic assets" on bank balance sheets that have scared off investors and borrowers, clogging credit markets around the world. But if Treasury Secretary Timothy Geithner hopes to prevent a repeat of this global economic crisis, his rescue plan must recognize that the real problem is not the bad loans, but the debasement of the paper they are printed on.
Today's global crisis -- a loss on paper of more than $50 trillion in stocks, real estate, commodities and operational earnings within 15 months -- cannot be explained only by the default on a meager 7% of subprime mortgages (worth probably no more than $1 trillion) that triggered it. The real villain is the lack of trust in the paper on which they -- and all other assets -- are printed. If we don't restore trust in paper, the next default -- on credit cards or student loans -- will trigger another collapse in paper and bring the world economy to its knees.
If you think about it, everything of value we own travels on property paper. At the beginning of the decade there was about $100 trillion worth of property paper representing tangible goods such as land, buildings, and patents world-wide, and some $170 trillion representing ownership over such semiliquid assets as mortgages, stocks and bonds. Since then, however, aggressive financiers have manufactured what the Bank for International Settlements estimates to be $1 quadrillion worth of new derivatives (mortgage-backed securities, collateralized debt obligations, and credit default swaps) that have flooded the market.
These derivatives are the root of the credit crunch. Why? Unlike all other property paper, derivatives are not required by law to be recorded, continually tracked and tied to the assets they represent. Nobody knows precisely how many there are, where they are, and who is finally accountable for them. Thus, there is widespread fear that potential borrowers and recipients of capital with too many nonperforming derivatives will be unable to repay their loans. As trust in property paper breaks down it sets off a chain reaction, paralyzing credit and investment, which shrinks transactions and leads to a catastrophic drop in employment and in the value of everyone's property.
Ever since humans started trading, lending and investing beyond the confines of the family and the tribe, we have depended on legally authenticated written statements to get the facts about things of value. Over the past 200 years, that legal authority has matured into a global consensus on the procedures, standards and principles required to document facts in a way that everyone can easily understand and trust.
The result is a formidable property system with rules and recording mechanisms that fix on paper the facts that allow us to hold, transfer, transform and use everything we own, from stocks to screenplays. The only paper representing an asset that is not centrally recorded, standardized and easily tracked are derivatives.
Property is much more than a body of norms. It is also a huge information system that processes raw data until it is transformed into facts that can be tested for truth, and thereby destroys the main catalysts of recessions and panics -- ambiguity and opacity. To bring derivatives under the rule of law, governments should ensure that they conform to six longstanding procedures that guarantee the value and legitimacy of any kind of paper purporting to represent an asset:
- All documents and the assets and transactions they represent or are derived from must be recorded in publicly accessible registries. It is only by recording and continually updating such factual knowledge that we can detect the kind of overly creative financial and contractual instruments that plunged us into this recession.
- The law has to take into account the "externalities" or side effects of all financial transactions according to the legal principle of erga omnes ("toward all"), which was originally developed to protect third parties from the negative consequences of secret deals carried out by aristocracies accountable to no one but themselves.
- Every financial deal must be firmly tethered to the real performance of the asset from which it originated. By aligning debts to assets, we can create simple and understandable benchmarks for quickly detecting whether a financial transaction has been created to help production or to bet on the performance of distant "underlying assets."
- Governments should never forget that production always takes priority over finance. As Adam Smith and Karl Marx both recognized, finance supports wealth creation, but in itself creates no value.
- Governments can encourage assets to be leveraged, transformed, combined, recombined and repackaged into any number of tranches, provided the process intends to improve the value of the original asset. This has been the rule for awarding property since the beginning of time.
- Governments can no longer tolerate the use of opaque and confusing language in drafting financial instruments. Clarity and precision are indispensable for the creation of credit and capital through paper. Western politicians must not forget what their greatest thinkers have been saying for centuries: All obligations and commitments that stick are derived from words recorded on paper with great precision.
Above all, governments should stop clinging to the hope that the existing market will eventually sort things out. "Let the market do its work" has come to mean, "let the shadow economy do its work." But modern markets only work if the paper is reliable.
Government's main duty now is to bring the whole toxic environment under the rule of law where it will be subject to enforcement. No economic activity based on the public trust should be allowed to operate outside the general principles of property law.
Financial institutions will have to serve society and fully report what they own and what they owe -- just like the rest of us -- so that we get the facts necessary to find our way out of the current maze. They must begin learning to put on paper statements about facts, instead of statements about statements.
Mr. de Soto, the author of "The Mystery of Capital" (Basic Books, 2000) and "The Other Path" (Harper and Row, 1989), co-chairs the Commission on Legal Empowerment of the Poor.
Holman W Jenkins: The Real AIG Disgrace
The Real AIG Disgrace, by Holman W Jenkins Jr
WSJ, Mar 25, 2009
The stock market was intoxicated with the Obama administration's toxic asset plan. Whatever its contempt for the upper middle class that acquires wealth through salaried work and bonuses, Team Obama still has eyes for the hedge fund class, which will be ladled out taxpayer dollars to make one-way bets on problematic bank assets.
Yet the AIG bonus episode, the administration's one true disgrace so far, will not soon be forgotten.
Tim Geithner is rightly on the hot seat for saying he didn't know about the bonuses until just weeks ago -- because he should have quelled this furor before it ever got started. Instead he played dumb and climbed aboard the outrage bandwagon -- and let Mr. Obama do the same.
There is not a shred of justice in the hysteria that followed. As AIG chief Ed Liddy explained on the Hill last week, the people receiving retention bonuses were not the same people who launched AIG's unhedged housing bets that brought the company down. Those people were gone. Their pay is already being clawed back.
Those who remained had been asked a year ago to stay and work themselves out of a job. In accepting the terms offered to them, they committed no offense (say, failing to pay taxes). Their only crime was possessing marketable knowledge -- all the more marketable because of the opportunity for hedge funds and other counterparties to profit from AIG's distress. Had the company submitted to Chapter 11 rather than a government takeover, a bankruptcy judge might well have authorized identical incentives to minimize losses and maximize recovery for legitimate stakeholders.
The Washington Post, which has consistently distinguished itself with its reporting about the real antecedents of this "scandal," yesterday followed up by detailing "months of assurances to Financial Products employees that the insurance giant would honor those contracts, according to numerous internal AIG e-mails and memos . . . ."
Whether Mr. Geithner knew the specifics is unimportant. The retention plan was known to his staff. The details had been disclosed over and over in public filings. As far back as October, New York Attorney General Andrew Cuomo had summoned the Treasury-appointed Mr. Liddy to hammer out a deal on AIG's pay practices. Said Mr. Cuomo in a statement afterward: "These actions are not intended to jeopardize the hard-earned compensation of the vast majority of AIG's employees, including retention and severance arrangements, who are essential to rebuilding AIG and the economy of New York."
The voluble Rep. Elijah Cummings had been railing about AIG retention bonuses almost continually, on air, in the print media, and in publicly released letters to Mr. Liddy, since Dec. 1.
On March 3, Mr. Geithner himself was quizzed during a congressional hearing in detail about the AIGFP retention plan by Democratic Rep. Joe Crowley -- a week before Mr. Geithner now says he heard of the plan.
It may be that the full picture was kicked up to him only when a political decision was needed, but by then his one decent choice was to insist on the bonuses' legality. However politically inopportune the bonuses may be, the president only dirtied himself by authorizing a feel-good, bipartisan hate storm aimed at innocent AIG employees. And it's hard to believe Mr. Obama would have done so, or the subsequent spectacle would have unfolded as it did, without Mr. Geithner's seminal prevarications (and we say this fully acknowledging that he's had a rough ride in an inhumanly difficult job).
Barney Frank, who doesn't have the excuse of being stupid, was last seen bullying Mr. Liddy to do what on any other day Mr. Frank would flay Mr. Liddy for doing -- violating the privacy rights of his employees. Charles Grassley? His early bloviating about the duty of AIG executives to kill themselves almost begins to look like a grace note, since it alerted the public to the hyperbolic playacting about to come.
Paul Kanjorski, before running off to host a hearing, proclaimed on CNBC that AIG's Mr. Liddy would be responsible if Congress now failed to summon the political courage to take necessary steps to address the financial crisis.
Pause to let it sink in. Mr. Liddy, who is doing his job with grit and personal sacrifice, is blamed in advance if Congress proves too cowardly to do its own job.
But the biggest lesson here is the old one that the price of freedom is eternal vigilance -- beginning with insistence on the rule of law. Americans clearly cannot trust their elected officials to defend their rights and interests, or care whether justice is served, when the slightest political risk might attach to doing so.
Which brings us back to Mr. Cuomo, whose office has been implicitly threatening to publish names of AIG employees who don't relinquish pay they were contractually entitled to.
Mr. Cuomo is a thug, but at least he reminds us: It can happen here.
WSJ, Mar 25, 2009
The stock market was intoxicated with the Obama administration's toxic asset plan. Whatever its contempt for the upper middle class that acquires wealth through salaried work and bonuses, Team Obama still has eyes for the hedge fund class, which will be ladled out taxpayer dollars to make one-way bets on problematic bank assets.
Yet the AIG bonus episode, the administration's one true disgrace so far, will not soon be forgotten.
Tim Geithner is rightly on the hot seat for saying he didn't know about the bonuses until just weeks ago -- because he should have quelled this furor before it ever got started. Instead he played dumb and climbed aboard the outrage bandwagon -- and let Mr. Obama do the same.
There is not a shred of justice in the hysteria that followed. As AIG chief Ed Liddy explained on the Hill last week, the people receiving retention bonuses were not the same people who launched AIG's unhedged housing bets that brought the company down. Those people were gone. Their pay is already being clawed back.
Those who remained had been asked a year ago to stay and work themselves out of a job. In accepting the terms offered to them, they committed no offense (say, failing to pay taxes). Their only crime was possessing marketable knowledge -- all the more marketable because of the opportunity for hedge funds and other counterparties to profit from AIG's distress. Had the company submitted to Chapter 11 rather than a government takeover, a bankruptcy judge might well have authorized identical incentives to minimize losses and maximize recovery for legitimate stakeholders.
The Washington Post, which has consistently distinguished itself with its reporting about the real antecedents of this "scandal," yesterday followed up by detailing "months of assurances to Financial Products employees that the insurance giant would honor those contracts, according to numerous internal AIG e-mails and memos . . . ."
Whether Mr. Geithner knew the specifics is unimportant. The retention plan was known to his staff. The details had been disclosed over and over in public filings. As far back as October, New York Attorney General Andrew Cuomo had summoned the Treasury-appointed Mr. Liddy to hammer out a deal on AIG's pay practices. Said Mr. Cuomo in a statement afterward: "These actions are not intended to jeopardize the hard-earned compensation of the vast majority of AIG's employees, including retention and severance arrangements, who are essential to rebuilding AIG and the economy of New York."
The voluble Rep. Elijah Cummings had been railing about AIG retention bonuses almost continually, on air, in the print media, and in publicly released letters to Mr. Liddy, since Dec. 1.
On March 3, Mr. Geithner himself was quizzed during a congressional hearing in detail about the AIGFP retention plan by Democratic Rep. Joe Crowley -- a week before Mr. Geithner now says he heard of the plan.
It may be that the full picture was kicked up to him only when a political decision was needed, but by then his one decent choice was to insist on the bonuses' legality. However politically inopportune the bonuses may be, the president only dirtied himself by authorizing a feel-good, bipartisan hate storm aimed at innocent AIG employees. And it's hard to believe Mr. Obama would have done so, or the subsequent spectacle would have unfolded as it did, without Mr. Geithner's seminal prevarications (and we say this fully acknowledging that he's had a rough ride in an inhumanly difficult job).
Barney Frank, who doesn't have the excuse of being stupid, was last seen bullying Mr. Liddy to do what on any other day Mr. Frank would flay Mr. Liddy for doing -- violating the privacy rights of his employees. Charles Grassley? His early bloviating about the duty of AIG executives to kill themselves almost begins to look like a grace note, since it alerted the public to the hyperbolic playacting about to come.
Paul Kanjorski, before running off to host a hearing, proclaimed on CNBC that AIG's Mr. Liddy would be responsible if Congress now failed to summon the political courage to take necessary steps to address the financial crisis.
Pause to let it sink in. Mr. Liddy, who is doing his job with grit and personal sacrifice, is blamed in advance if Congress proves too cowardly to do its own job.
But the biggest lesson here is the old one that the price of freedom is eternal vigilance -- beginning with insistence on the rule of law. Americans clearly cannot trust their elected officials to defend their rights and interests, or care whether justice is served, when the slightest political risk might attach to doing so.
Which brings us back to Mr. Cuomo, whose office has been implicitly threatening to publish names of AIG employees who don't relinquish pay they were contractually entitled to.
Mr. Cuomo is a thug, but at least he reminds us: It can happen here.
Transnational Progressive Nominated as Legal Advisor for State - Harold Koh
Transnational Progressive Nominated as Legal Advisor for State. By John Fonte
The Corner/NRO, Tuesday, March 24, 2009
The Transnational Progressive assault on the sovereignty of the American liberal democratic nation-state has just kicked into high gear with the nomination by the Obama administration of Yale Law School Dean Harold Koh to be the Legal Advisor to the U.S. State Department. Dean Koh wants to “trigger a transnational legal process” that will “generate legal interpretations that in turn can be internalized into domestic law.” Put simply, he favors opening a transnational legal space beyond the Constitution and the democratic decision-making process of our liberal democracy. My comments on Koh’s theories below are excerpted from my Bradley Symposium essay of June 2008, “Global Governance vs. the Liberal Democratic Nation State: What is the Best Regime?”
Harold Koh, the dean of Yale University Law School, served as assistant secretary of state for democracy, human rights, and labor during the Clinton Administration. In a detailed article in the Stanford Law Review responding to the Bush foreign policy, Koh articulates the central viewpoint of the American governing left.
Koh chastises the US for failing to “obey global norms.”America, Koh tells us, “promotes double standards” by refusing to ratify the International Criminal Court treaty; “claiming a Second Amendment exclusion from a proposed global ban on the illicit transfer of small arms and light weapons”; and “declining to implement the orders of the International Court of Justice with regard to the death penalty.”Indeed, Koh complains: “The World Court finally found that the United States had violated the Vienna Convention” (on the death penalty), but “American courts have essentially ignored” the ruling of the ICJ.
Koh’s proposed remedy to American exceptionalism is for “American lawyers, scholars and activists” to “trigger a transnational legal process,” of “transnational interactions” that will “generate legal interpretations that can in turn be internalized into the domestic law of even resistant nation-states.”For example, Koh suggests that, “human rights advocates” should litigate “not just in domestic courts, but simultaneously before foreign and international arenas.”Moreover, they should encourage foreign governments (such as Mexico) and transnational NGOs to challenge the US on the death penalty and other human rights issues.
Supporters of the International Criminal Court should, Koh recommends, “provoke interactions between the United States government and the ICC” that might lead to the US becoming enmeshed in the ICC process (by, for example, having the US provide evidence in ICC trials). These interactions with the ICC would show cooperation with the tribunal and therefore “could be used to undermine” the official US “unsigning” of the treaty because it might “constitute a de-facto repudiation” of the “act of unsignature.”
Of course, the “transnational legal process,” advocated by Koh (and others in the governing center-left) is a process outside of American constitutional democracy. The American people have a Constitution, judicial institutions, and a democratic political system. Transnational “interactions” (such as appealing to foreign courts) are not part of the institutional authority and accountability inherent in the meaning of the phrase: “We the People of the United States.” Koh’s “interactions” are something “outside” of the “People of the United States” and “beyond” the Constitution and our democratic process. Therefore, they could be characterized as extra-constitutional, post-constitutional, or post-democratic. In effect, they seek to achieve results that could not necessarily be achieved through the regular process of American democracy. This clearly raises the core “regime” questions of what constitutes legitimate political authority and who is responsible to whom in a democratic state.
— John Fonte is a senior fellow at the Hudson Institute.
The Corner/NRO, Tuesday, March 24, 2009
The Transnational Progressive assault on the sovereignty of the American liberal democratic nation-state has just kicked into high gear with the nomination by the Obama administration of Yale Law School Dean Harold Koh to be the Legal Advisor to the U.S. State Department. Dean Koh wants to “trigger a transnational legal process” that will “generate legal interpretations that in turn can be internalized into domestic law.” Put simply, he favors opening a transnational legal space beyond the Constitution and the democratic decision-making process of our liberal democracy. My comments on Koh’s theories below are excerpted from my Bradley Symposium essay of June 2008, “Global Governance vs. the Liberal Democratic Nation State: What is the Best Regime?”
Harold Koh, the dean of Yale University Law School, served as assistant secretary of state for democracy, human rights, and labor during the Clinton Administration. In a detailed article in the Stanford Law Review responding to the Bush foreign policy, Koh articulates the central viewpoint of the American governing left.
Koh chastises the US for failing to “obey global norms.”America, Koh tells us, “promotes double standards” by refusing to ratify the International Criminal Court treaty; “claiming a Second Amendment exclusion from a proposed global ban on the illicit transfer of small arms and light weapons”; and “declining to implement the orders of the International Court of Justice with regard to the death penalty.”Indeed, Koh complains: “The World Court finally found that the United States had violated the Vienna Convention” (on the death penalty), but “American courts have essentially ignored” the ruling of the ICJ.
Koh’s proposed remedy to American exceptionalism is for “American lawyers, scholars and activists” to “trigger a transnational legal process,” of “transnational interactions” that will “generate legal interpretations that can in turn be internalized into the domestic law of even resistant nation-states.”For example, Koh suggests that, “human rights advocates” should litigate “not just in domestic courts, but simultaneously before foreign and international arenas.”Moreover, they should encourage foreign governments (such as Mexico) and transnational NGOs to challenge the US on the death penalty and other human rights issues.
Supporters of the International Criminal Court should, Koh recommends, “provoke interactions between the United States government and the ICC” that might lead to the US becoming enmeshed in the ICC process (by, for example, having the US provide evidence in ICC trials). These interactions with the ICC would show cooperation with the tribunal and therefore “could be used to undermine” the official US “unsigning” of the treaty because it might “constitute a de-facto repudiation” of the “act of unsignature.”
Of course, the “transnational legal process,” advocated by Koh (and others in the governing center-left) is a process outside of American constitutional democracy. The American people have a Constitution, judicial institutions, and a democratic political system. Transnational “interactions” (such as appealing to foreign courts) are not part of the institutional authority and accountability inherent in the meaning of the phrase: “We the People of the United States.” Koh’s “interactions” are something “outside” of the “People of the United States” and “beyond” the Constitution and our democratic process. Therefore, they could be characterized as extra-constitutional, post-constitutional, or post-democratic. In effect, they seek to achieve results that could not necessarily be achieved through the regular process of American democracy. This clearly raises the core “regime” questions of what constitutes legitimate political authority and who is responsible to whom in a democratic state.
— John Fonte is a senior fellow at the Hudson Institute.
Erecting Trade Barriers: The Return of Smoot-Hawley
Erecting Trade Barriers: The Return of Smoot-Hawley
IER, March 24, 2009
Free trade is one of the greatest forces for positive change the world has ever seen. It opens new economic frontiers for American good and services, allows America access to the best the world has to offer, and promotes peace between nations. But free trade is coming under increasing assault as some in Washington, including the Obama administration, promote restricting free trade in the name of limiting carbon dioxide emissions. Secretary of Energy Steven Chu recently advocated using tariff duties as a “weapon” to restrict free trade, and some policymakers have also advocated increasing tariffs to “protect” some politically connected U.S. businesses.
These attacks are a serious threat to free trade and, if enacted, would deepen the recession. At the start of the Great Depression, Herbert Hoover made some bad economic decisions, and it appears President Obama is now considering following Hoover’s example.
In the early 1930s, in an effort to stem the economic downturn, President Hoover implemented massive deficit spending and tax hikes. This wrecked an already crippled economy. One of the worst episodes occurred when Hoover signed the infamous Smoot-Hawley tariff bill in 1930, which crippled international trade in the midst of the Depression. The Obama administration is considering a similar mistake in the form of “carbon tariffs” to prevent U.S. businesses from outsourcing to other countries after a cap-and-trade regulation makes it too economically difficult to do business in the United States. Just as in the 1930s, this Smoot-Hawley redux would punish American consumers at the worst possible time.
The Original Smoot-Hawley
Contrary to popular belief, Herbert Hoover was no fan of the free market or small government. After the stock market crashed in 1929, Hoover engaged in unprecedented peacetime deficit spending and other measures that increased the role of the federal government in the economy. Arguably, the most detrimental of his actions was the Smoot-Hawley Tariff Act of 1930, which sharply hiked taxes on thousands of imports.
Even conventional American history textbooks assign partial blame for the severity of the Depression to Hoover’s blow against international trade. In response to the legislation, European countries levied their own retaliatory tariffs and even repudiated their debts from World War I because (they claimed) the U.S. government was making it impossible for them to export goods to earn the dollars to pay back Uncle Sam’s loans.
Even without retaliation, a unilateral tariff increase makes Americans poorer. The gains to the workers in the “protected” domestic industry are more than offset by the loss to consumers who have to pay higher prices. A tariff is a tax on American consumers; the government says to its own citizens, “If you want to buy a product from a foreign producer, you have to make a side payment to the U.S. Treasury.” You don’t make a country richer by jacking up taxes on its own consumers.
International trade allows countries to specialize in their “comparative advantage,” or their areas of relative expertise. It would be catastrophic if everyone had to grow his own food, sew his own clothes, and drill his own cavities. We all benefit tremendously from the ability to specialize in occupations at which we are better than our peers, and then trade with each other.
The same principle applies to entire countries, which are simply aggregates of the individuals living in them. Because of differences in resource endowments, industrial infrastructure, weather, and the skills of the workforce, it is much more efficient for certain regions of the world to concentrate on a few key items and export them to other regions. When the government raises tax barriers, it interferes with this process and makes everyone poorer on average.
Ironically, when Herbert Hoover raised U.S. tariffs, he didn’t simply hurt American consumers, but he also crippled American exporters. Ultimately, other nations pay for their imports through their own exports. If Uncle Sam makes it more difficult for foreigners to sell their goods to Americans, then those same foreigners will not have the ability to buy goods produced by Americans. Indeed, total U.S. exports dropped from $7.2 billion in 1929 to $2.5 billion in 1932,[i] although some of this fall was no doubt due to the general price decline and the sharp drop in economic activity.
Smoot-Hawley II
True to form, the Obama administration—under the guise of fighting climate change—is testing the waters with new restrictions on imports. Specifically, lawmakers on the House Energy and Commerce Committee are considering imposing “carbon tariffs” to prevent foreign nations from gaining a competitive advantage vis-à-vis U.S. producers who are burdened with a forthcoming cap-and-trade regime. The idea is that the U.S. government would slap a huge “compensatory” tax on imports that were produced in foreign nations that do not impose carbon legislation on their manufacturers.
This is a very disturbing trend. Regardless of whether the World Trade Organization deems such “carbon tariffs” to be an acceptable infringement on trade, U.S. and European carbon tariffs will spawn another destructive trade war, just as the world suffered in the early 1930s. (If the WTO rules against the carbon tariffs, then the besieged countries will have the right to levy their own retaliatory tariffs, and if the WTO signs off on them, other countries will then find some excuse for levying tariffs to compensate themselves for the “overconsumption” of the Western nations or some such sin against the environment.)
Even if the threat from man-made climate change is as serious as some scientists claim, this fact would not overturn the centuries of work done by economic scientists. We know from both theory and history that raising trade barriers in the middle of a severe worldwide recession is a terrible policy. We also know from theory and history that government central planning does not work. When the technocrats reorder the economy, deciding which firms will survive and which prices are too high or too low, the results are disastrous. It doesn’t matter whether the justification is “fighting the Depression” (as in the 1930s) or “fighting climate change” (as in today’s discussions). Either way, central planning will wreck the economy, and it won’t even achieve its ostensible goals.
Conclusion
It is encouraging that the politicians are finally taking seriously the effects that cap-and-trade would have on U.S. manufacturers. The fact that lawmakers are finally admitting that the new burden would force many American firms to lay off domestic workers and relocate abroad is a positive development in the highly emotional debate about carbon dioxide regulations. But instead of abandoning their plans for cap-and-trade, the proposed solution of levying a fresh round of new taxes on American consumers who are merely trying to buy the best products at the lowest prices just adds insult to injury.
Notes
[i] Burton Folsom, Jr., New Deal or Raw Deal? How FDR’s Legacy Has Damaged America (New York: Threshold Editions, 2008), p. 31.
IER, March 24, 2009
Free trade is one of the greatest forces for positive change the world has ever seen. It opens new economic frontiers for American good and services, allows America access to the best the world has to offer, and promotes peace between nations. But free trade is coming under increasing assault as some in Washington, including the Obama administration, promote restricting free trade in the name of limiting carbon dioxide emissions. Secretary of Energy Steven Chu recently advocated using tariff duties as a “weapon” to restrict free trade, and some policymakers have also advocated increasing tariffs to “protect” some politically connected U.S. businesses.
These attacks are a serious threat to free trade and, if enacted, would deepen the recession. At the start of the Great Depression, Herbert Hoover made some bad economic decisions, and it appears President Obama is now considering following Hoover’s example.
In the early 1930s, in an effort to stem the economic downturn, President Hoover implemented massive deficit spending and tax hikes. This wrecked an already crippled economy. One of the worst episodes occurred when Hoover signed the infamous Smoot-Hawley tariff bill in 1930, which crippled international trade in the midst of the Depression. The Obama administration is considering a similar mistake in the form of “carbon tariffs” to prevent U.S. businesses from outsourcing to other countries after a cap-and-trade regulation makes it too economically difficult to do business in the United States. Just as in the 1930s, this Smoot-Hawley redux would punish American consumers at the worst possible time.
The Original Smoot-Hawley
Contrary to popular belief, Herbert Hoover was no fan of the free market or small government. After the stock market crashed in 1929, Hoover engaged in unprecedented peacetime deficit spending and other measures that increased the role of the federal government in the economy. Arguably, the most detrimental of his actions was the Smoot-Hawley Tariff Act of 1930, which sharply hiked taxes on thousands of imports.
Even conventional American history textbooks assign partial blame for the severity of the Depression to Hoover’s blow against international trade. In response to the legislation, European countries levied their own retaliatory tariffs and even repudiated their debts from World War I because (they claimed) the U.S. government was making it impossible for them to export goods to earn the dollars to pay back Uncle Sam’s loans.
Even without retaliation, a unilateral tariff increase makes Americans poorer. The gains to the workers in the “protected” domestic industry are more than offset by the loss to consumers who have to pay higher prices. A tariff is a tax on American consumers; the government says to its own citizens, “If you want to buy a product from a foreign producer, you have to make a side payment to the U.S. Treasury.” You don’t make a country richer by jacking up taxes on its own consumers.
International trade allows countries to specialize in their “comparative advantage,” or their areas of relative expertise. It would be catastrophic if everyone had to grow his own food, sew his own clothes, and drill his own cavities. We all benefit tremendously from the ability to specialize in occupations at which we are better than our peers, and then trade with each other.
The same principle applies to entire countries, which are simply aggregates of the individuals living in them. Because of differences in resource endowments, industrial infrastructure, weather, and the skills of the workforce, it is much more efficient for certain regions of the world to concentrate on a few key items and export them to other regions. When the government raises tax barriers, it interferes with this process and makes everyone poorer on average.
Ironically, when Herbert Hoover raised U.S. tariffs, he didn’t simply hurt American consumers, but he also crippled American exporters. Ultimately, other nations pay for their imports through their own exports. If Uncle Sam makes it more difficult for foreigners to sell their goods to Americans, then those same foreigners will not have the ability to buy goods produced by Americans. Indeed, total U.S. exports dropped from $7.2 billion in 1929 to $2.5 billion in 1932,[i] although some of this fall was no doubt due to the general price decline and the sharp drop in economic activity.
Smoot-Hawley II
True to form, the Obama administration—under the guise of fighting climate change—is testing the waters with new restrictions on imports. Specifically, lawmakers on the House Energy and Commerce Committee are considering imposing “carbon tariffs” to prevent foreign nations from gaining a competitive advantage vis-à-vis U.S. producers who are burdened with a forthcoming cap-and-trade regime. The idea is that the U.S. government would slap a huge “compensatory” tax on imports that were produced in foreign nations that do not impose carbon legislation on their manufacturers.
This is a very disturbing trend. Regardless of whether the World Trade Organization deems such “carbon tariffs” to be an acceptable infringement on trade, U.S. and European carbon tariffs will spawn another destructive trade war, just as the world suffered in the early 1930s. (If the WTO rules against the carbon tariffs, then the besieged countries will have the right to levy their own retaliatory tariffs, and if the WTO signs off on them, other countries will then find some excuse for levying tariffs to compensate themselves for the “overconsumption” of the Western nations or some such sin against the environment.)
Even if the threat from man-made climate change is as serious as some scientists claim, this fact would not overturn the centuries of work done by economic scientists. We know from both theory and history that raising trade barriers in the middle of a severe worldwide recession is a terrible policy. We also know from theory and history that government central planning does not work. When the technocrats reorder the economy, deciding which firms will survive and which prices are too high or too low, the results are disastrous. It doesn’t matter whether the justification is “fighting the Depression” (as in the 1930s) or “fighting climate change” (as in today’s discussions). Either way, central planning will wreck the economy, and it won’t even achieve its ostensible goals.
Conclusion
It is encouraging that the politicians are finally taking seriously the effects that cap-and-trade would have on U.S. manufacturers. The fact that lawmakers are finally admitting that the new burden would force many American firms to lay off domestic workers and relocate abroad is a positive development in the highly emotional debate about carbon dioxide regulations. But instead of abandoning their plans for cap-and-trade, the proposed solution of levying a fresh round of new taxes on American consumers who are merely trying to buy the best products at the lowest prices just adds insult to injury.
Notes
[i] Burton Folsom, Jr., New Deal or Raw Deal? How FDR’s Legacy Has Damaged America (New York: Threshold Editions, 2008), p. 31.
State Sec Clinton on US programs against tuberculosis
World Tuberculosis Day 2009, by Hillary Rodham Clinton, Secretary of State
Washington, DC, March 24, 2009
Today marks World Tuberculosis Day, and I join others around the world in saying “I am stopping TB.”
Tuberculosis (TB) kills almost 5000 people each day, and is the leading cause of death for people living with HIV/AIDS. According to the World Health Organization, almost 40% of TB cases are not properly detected and treated. While treatment for TB exists, more and more individuals are being diagnosed with multidrug-resistant (MDR) TB or extensively drug-resistant (XDR) TB, which are difficult and expensive to treat.
Our government is taking steps to address the global burden of TB. The U.S. Government is the largest contributor to the Global Fund to Fight AIDS, Tuberculosis, and Malaria, which has detected and treated over 4 million cases of TB. The President's Emergency Plan for AIDS Relief (PEPFAR) is working to improve the diagnosis and treatment of TB for co-infected persons, and is engaged in infection control efforts to prevent new cases of TB. In addition, the United States Agency for International Development (USAID) has tuberculosis programs in more than 35 countries and is working to strengthen the capacity of health systems to identify, detect and control TB, particularly MDR and XDR TB.
While much has been accomplished in the fight against this disease, there is still much more to be done if we are to meet the Millennium Development Goal of halting and reversing the spread of TB by 2015. I strongly believe the State Department should continue and expand its commitment to reducing the global burden of TB, and I look forward to working to improve the global response to this and other leading causes of death for the world's poorest communities.
PRN: 2009/252
Washington, DC, March 24, 2009
Today marks World Tuberculosis Day, and I join others around the world in saying “I am stopping TB.”
Tuberculosis (TB) kills almost 5000 people each day, and is the leading cause of death for people living with HIV/AIDS. According to the World Health Organization, almost 40% of TB cases are not properly detected and treated. While treatment for TB exists, more and more individuals are being diagnosed with multidrug-resistant (MDR) TB or extensively drug-resistant (XDR) TB, which are difficult and expensive to treat.
Our government is taking steps to address the global burden of TB. The U.S. Government is the largest contributor to the Global Fund to Fight AIDS, Tuberculosis, and Malaria, which has detected and treated over 4 million cases of TB. The President's Emergency Plan for AIDS Relief (PEPFAR) is working to improve the diagnosis and treatment of TB for co-infected persons, and is engaged in infection control efforts to prevent new cases of TB. In addition, the United States Agency for International Development (USAID) has tuberculosis programs in more than 35 countries and is working to strengthen the capacity of health systems to identify, detect and control TB, particularly MDR and XDR TB.
While much has been accomplished in the fight against this disease, there is still much more to be done if we are to meet the Millennium Development Goal of halting and reversing the spread of TB by 2015. I strongly believe the State Department should continue and expand its commitment to reducing the global burden of TB, and I look forward to working to improve the global response to this and other leading causes of death for the world's poorest communities.
PRN: 2009/252
US State Dept Calls for Release of Political Prisoners in Burma
UN Working Group on Arbitrary Detention Calls for Release of Political Prisoners in Burma. By Robert Wood, Acting Department Spokesman, Office of the Spokesman
US State Dept, Washington, DC, March 24, 2009
The United Nations Working Group on Arbitrary Detention issued opinions today affirming that the continued detentions of Aung San Suu Kyi, Aung Myin, Ko Jimmy, Paw Oo Tun, and Mtay Win Aung are arbitrary and unjustified and that the detention of Aung San Suu Kyi is in contravention of Burma’s own law. The U.N. working group urged the Burmese government to release these individuals immediately.
We are disappointed that the regime continues to ignore the calls of the international community, including the UN Security Council, to release the more than 2,100 political prisoners immediately and unconditionally. We once again urge the Burmese authorities to release all political prisoners and initiate a genuine dialogue that can help move the country forward.
# # #
PRN: 2009/254
US State Dept, Washington, DC, March 24, 2009
The United Nations Working Group on Arbitrary Detention issued opinions today affirming that the continued detentions of Aung San Suu Kyi, Aung Myin, Ko Jimmy, Paw Oo Tun, and Mtay Win Aung are arbitrary and unjustified and that the detention of Aung San Suu Kyi is in contravention of Burma’s own law. The U.N. working group urged the Burmese government to release these individuals immediately.
We are disappointed that the regime continues to ignore the calls of the international community, including the UN Security Council, to release the more than 2,100 political prisoners immediately and unconditionally. We once again urge the Burmese authorities to release all political prisoners and initiate a genuine dialogue that can help move the country forward.
# # #
PRN: 2009/254
USAID Collaborates with Iraqis to Reopen Vocational Training School
USAID Collaborates with Iraqis to Reopen Vocational Training School
USAID, March 24, 2009
BAGHDAD, IRAQ-The U.S. Agency for International Development (USAID), in collaboration with the Mada'in District Council, reopened Salman Pak Industrial School today. The school's mission is to improve Iraqis' skills that will enable them to find a better life through further employment and improved businesses in their communities.
The Iraqi Ministry of Education (MoE) offers technical and vocational training in the last three years of secondary education. There are about 154 industrial vocational education schools in Iraq, according to the ministry. The renovated Salman Pak school has the capacity to train up to 700 students in eight courses: sewing, generator maintenance; welding; automotive repair; plumbing; electrical installation; masonry; and carpentry.
In his remarks at the opening, USAID's country director Christopher D. Crowley said, "The reopening of the school will provide Iraqis with useful skills in a competitive job market and local employers with a qualified labor force that increases their productivity." He also said that he hoped the Iraqis who receive training at the school will contribute to an expanding and diversified private sector and help the Iraqi government in its reconstruction efforts.
Local Iraqi officials identified the renovation of Salman Pak Industrial School as an important community priority, after insurgent-led attacks had destroyed much of the building. The MoE and the Mada'in District Council worked in partnership with the embedded Provincial Reconstruction Team, the U.S. military, and the local security officials to complete the project, which created short-term jobs for unemployed laborers and long-term jobs for the staff.
USAID invested $600,000 in the project, as a part of its country-wide efforts to help create an environment for stability and establish the conditions for long-term development to take hold in violence-affected areas. The Government of Iraq contributed approximately $58,000 in labor to remove and dispose of trash and debris from the grounds, and drain the standing water that had accumulated in the garden. Moving forward, the MoE will maintain the building grounds, provide a full-time guard and hire and retain qualified teachers for the school.
Since 2003, USAID has partnered with Iraq in more than $6 billion of programs; all designed to stabilize communities; foster economic and agricultural growth; and build the capacity of the national, local, and provincial governments to respond to the needs of the Iraqi people.
USAID, March 24, 2009
BAGHDAD, IRAQ-The U.S. Agency for International Development (USAID), in collaboration with the Mada'in District Council, reopened Salman Pak Industrial School today. The school's mission is to improve Iraqis' skills that will enable them to find a better life through further employment and improved businesses in their communities.
The Iraqi Ministry of Education (MoE) offers technical and vocational training in the last three years of secondary education. There are about 154 industrial vocational education schools in Iraq, according to the ministry. The renovated Salman Pak school has the capacity to train up to 700 students in eight courses: sewing, generator maintenance; welding; automotive repair; plumbing; electrical installation; masonry; and carpentry.
In his remarks at the opening, USAID's country director Christopher D. Crowley said, "The reopening of the school will provide Iraqis with useful skills in a competitive job market and local employers with a qualified labor force that increases their productivity." He also said that he hoped the Iraqis who receive training at the school will contribute to an expanding and diversified private sector and help the Iraqi government in its reconstruction efforts.
Local Iraqi officials identified the renovation of Salman Pak Industrial School as an important community priority, after insurgent-led attacks had destroyed much of the building. The MoE and the Mada'in District Council worked in partnership with the embedded Provincial Reconstruction Team, the U.S. military, and the local security officials to complete the project, which created short-term jobs for unemployed laborers and long-term jobs for the staff.
USAID invested $600,000 in the project, as a part of its country-wide efforts to help create an environment for stability and establish the conditions for long-term development to take hold in violence-affected areas. The Government of Iraq contributed approximately $58,000 in labor to remove and dispose of trash and debris from the grounds, and drain the standing water that had accumulated in the garden. Moving forward, the MoE will maintain the building grounds, provide a full-time guard and hire and retain qualified teachers for the school.
Since 2003, USAID has partnered with Iraq in more than $6 billion of programs; all designed to stabilize communities; foster economic and agricultural growth; and build the capacity of the national, local, and provincial governments to respond to the needs of the Iraqi people.
USAID Announces Newly Approved FC2 Female Condom® to Protect Sexual Health of Women in Developing Countries
USAID Announces Newly Approved FC2 Female Condom® to Protect Sexual Health of Women in Developing Countries
US State Dept, March 24, 2009
WASHINGTON, D.C. - MARCH 24, 2009 - The U.S. Agency for International Development (USAID) has announced that the U.S. Food and Drug Administration (FDA) has approved use of the FC2 Female Condom® (FC2) made by the Female Health Company (FHC). FC2 is a woman-initiated barrier method that helps protect against sexually transmitted infections, HIV/AIDS, and unintended pregnancy. Its design and method of use is similar to its predecessor - FC1 - and studies have shown that FC2 performs in a comparable manner to FC1 in terms of safety, failure rates and acceptability.
The second generation female condom FC2 is made of a synthetic latex. It consists of a soft, loose fitting sheath, a rolled outer ring made of nitrile polymer and one flexible inner ring made of polyurethane and other materials. The nitrile polymer allows FC2 to be produced more economically than FC1. FC2 will also cost distributors about 33 percent less than FC1, depending on the volume of purchases. Like the FC1, the approved label for the FC2 is not reusable.
The FDA approval of FC2 will allow USAID to procure the second-generation female condom at a lower unit cost for U.S.-supported HIV/AIDS prevention and family planning programs around the world.
FC2 is currently available in 77 countries, and is produced at FHC's facilities in Malaysia and India.
The USAID DELIVER PROJECT is preparing a new contract to purchase this product on behalf of USAID. All pending orders in the system for FC1 will be filled until the new FC2 contract is in place. All new orders will be filled with FC2 once the contract is awarded with FHC and registration/importation requirements in the countries where USAID works have been secured.
USAID has long recognized the importance of the female condom and the role it plays in sexual and reproductive health programs worldwide. The Agency has been a committed purchaser of the female condom, and its missions have worked to introduce and integrate the female condom at the country level.
US State Dept, March 24, 2009
WASHINGTON, D.C. - MARCH 24, 2009 - The U.S. Agency for International Development (USAID) has announced that the U.S. Food and Drug Administration (FDA) has approved use of the FC2 Female Condom® (FC2) made by the Female Health Company (FHC). FC2 is a woman-initiated barrier method that helps protect against sexually transmitted infections, HIV/AIDS, and unintended pregnancy. Its design and method of use is similar to its predecessor - FC1 - and studies have shown that FC2 performs in a comparable manner to FC1 in terms of safety, failure rates and acceptability.
The second generation female condom FC2 is made of a synthetic latex. It consists of a soft, loose fitting sheath, a rolled outer ring made of nitrile polymer and one flexible inner ring made of polyurethane and other materials. The nitrile polymer allows FC2 to be produced more economically than FC1. FC2 will also cost distributors about 33 percent less than FC1, depending on the volume of purchases. Like the FC1, the approved label for the FC2 is not reusable.
The FDA approval of FC2 will allow USAID to procure the second-generation female condom at a lower unit cost for U.S.-supported HIV/AIDS prevention and family planning programs around the world.
FC2 is currently available in 77 countries, and is produced at FHC's facilities in Malaysia and India.
The USAID DELIVER PROJECT is preparing a new contract to purchase this product on behalf of USAID. All pending orders in the system for FC1 will be filled until the new FC2 contract is in place. All new orders will be filled with FC2 once the contract is awarded with FHC and registration/importation requirements in the countries where USAID works have been secured.
USAID has long recognized the importance of the female condom and the role it plays in sexual and reproductive health programs worldwide. The Agency has been a committed purchaser of the female condom, and its missions have worked to introduce and integrate the female condom at the country level.
Does Red Meat Increase Risk of Early Death?
Does Red Meat Increase Risk of Early Death? By Ruth Kava, Ph.D., R.D.
American Council on Science and Health, March 24, 2009
Should we be wary of eating red meat? Taken at face value, a new study suggests that might be a good idea -- but a more careful consideration does not.
A report in the March 23 issue of the Archives of Internal Medicine describes a very large study -- over half a million people initially aged fifty-one to seventy-one years -- who reported their diets at the study's outset and were then followed for ten years. Over 300,000 men and over 200,000 women participated in the study. During the follow-up period approximately 48,000 men and 23,000 women died.
The researchers tabulated the numbers who died from cancer, cardiovascular disease, injuries and sudden deaths, and from all other causes. When they divided the subjects according to how much red, processed, and white meat they reported eating at baseline, the researchers found some increases in the risk of death in those reporting the highest intake of red and processed meats compared to those reporting the lowest intake. Conversely, the highest intake of white meat -- chicken, turkey, and fish in various forms -- was associated with a reduced risk of dying of cancer and other causes of death.While the sheer size of the study means it should not be taken lightly, there are reasons to look askance at some of the scary stories now making the rounds that are not really supported by the science.
•First, participants in the study didn't actually measure the amount of foods they ate. While this may not be very important for foods and beverages that are purchased in discrete quantities (e.g., a fast food hamburger or a bottle of soft drink), meat can be purchased and consumed in a wide variety of forms and sizes. Thus, the accuracy of the data depends on how well participants can estimate the quantities of the various foods they consumed, as well as how accurate they are when they recall how often they ate or drank particular items. Neither of these estimates is the most reliable indicator of actual consumption.
•Second, intake of various food items was ascertained only once -- at the start of the study. There is no information about whether or not people changed their diets over the course of the follow-up period -- this may well have had an impact on any disease-diet relationships.
•Third, the increases in risk did not reach the levels that would make most epidemiologists sit up and take notice -- a relative risk of 2 (a 100% increase) or greater. In fact, the increased risk of all deaths in the men in the highest group of red meat intake was 31% and for cancer was 22%. For women, the corresponding increases were 36 and 20%.As the authors concluded, the highest intakes of red and processed meats were associated with "a modest increase in risk of total mortality, cancer, and CVD mortality in both men and women."
At best, this study supports the oft-repeated advice that a healthful diet should be based on moderation, variety, and balance. What's so new about that?
Ruth Kava, Ph.D., R.D., is Director of Nutrition at the American Council on Science and Health (ACSH.org, HealthFactsAndFears.com).
American Council on Science and Health, March 24, 2009
Should we be wary of eating red meat? Taken at face value, a new study suggests that might be a good idea -- but a more careful consideration does not.
A report in the March 23 issue of the Archives of Internal Medicine describes a very large study -- over half a million people initially aged fifty-one to seventy-one years -- who reported their diets at the study's outset and were then followed for ten years. Over 300,000 men and over 200,000 women participated in the study. During the follow-up period approximately 48,000 men and 23,000 women died.
The researchers tabulated the numbers who died from cancer, cardiovascular disease, injuries and sudden deaths, and from all other causes. When they divided the subjects according to how much red, processed, and white meat they reported eating at baseline, the researchers found some increases in the risk of death in those reporting the highest intake of red and processed meats compared to those reporting the lowest intake. Conversely, the highest intake of white meat -- chicken, turkey, and fish in various forms -- was associated with a reduced risk of dying of cancer and other causes of death.While the sheer size of the study means it should not be taken lightly, there are reasons to look askance at some of the scary stories now making the rounds that are not really supported by the science.
•First, participants in the study didn't actually measure the amount of foods they ate. While this may not be very important for foods and beverages that are purchased in discrete quantities (e.g., a fast food hamburger or a bottle of soft drink), meat can be purchased and consumed in a wide variety of forms and sizes. Thus, the accuracy of the data depends on how well participants can estimate the quantities of the various foods they consumed, as well as how accurate they are when they recall how often they ate or drank particular items. Neither of these estimates is the most reliable indicator of actual consumption.
•Second, intake of various food items was ascertained only once -- at the start of the study. There is no information about whether or not people changed their diets over the course of the follow-up period -- this may well have had an impact on any disease-diet relationships.
•Third, the increases in risk did not reach the levels that would make most epidemiologists sit up and take notice -- a relative risk of 2 (a 100% increase) or greater. In fact, the increased risk of all deaths in the men in the highest group of red meat intake was 31% and for cancer was 22%. For women, the corresponding increases were 36 and 20%.As the authors concluded, the highest intakes of red and processed meats were associated with "a modest increase in risk of total mortality, cancer, and CVD mortality in both men and women."
At best, this study supports the oft-repeated advice that a healthful diet should be based on moderation, variety, and balance. What's so new about that?
Ruth Kava, Ph.D., R.D., is Director of Nutrition at the American Council on Science and Health (ACSH.org, HealthFactsAndFears.com).
Tuesday, March 24, 2009
Having nightmares about broadening prosperity
What Gives the Alarmists Nightmares? By Greg Pollowitz
Planet Gore/NRO, Mar 23, 2009
Would you believe it's the Nano, a $2000 car produced in India? From the Green, Inc. blog at the NYTimes.com:
People across India have been saving money for months with the goal of purchasing the car, made by Tata Motors, a branch of the Indian conglomerate Tata Group, and which will be priced at about $2,000. For many, it would represent a leap, overnight, from the indignity of two-wheeled motor scooters to the relative luxury of four wheels and a roof.
For millions the car has become emblematic of their aspirations, as Vishal Bhatia, a Green Inc. reader in Mumbai, suggested in his comment the last time I posted about the Nano:
“I’m buying it because it gives a sense of freedom,” Mr. Bhatia wrote, “freedom to go to someplace in uncrumpled clothes, with my deodorant still being able to mask my body odor. But above all to see the look in my family’s eyes when they see it in person.”
Environmentalists, however, have decried the Nano and its low-cost imitators as an impending disaster. Certainly, the seemingly guaranteed success of the Nano may create more traffic and strain on India’s already rickety urban infrastructure.
And although the car may emit fewer greenhouse gases than some two-wheelers, its launch still has troubled officials leading efforts on global climate protection. Last year, the Nobel Prize winner Rajendra Pachauri, who is head of the Intergovernmental Panel on Climate Change, was quoted as saying he was “having nightmares” about the car.
Unbelievable. These guys actually have nightmares about broadening prosperity — and the economic freedom that brings it about.
Planet Gore/NRO, Mar 23, 2009
Would you believe it's the Nano, a $2000 car produced in India? From the Green, Inc. blog at the NYTimes.com:
People across India have been saving money for months with the goal of purchasing the car, made by Tata Motors, a branch of the Indian conglomerate Tata Group, and which will be priced at about $2,000. For many, it would represent a leap, overnight, from the indignity of two-wheeled motor scooters to the relative luxury of four wheels and a roof.
For millions the car has become emblematic of their aspirations, as Vishal Bhatia, a Green Inc. reader in Mumbai, suggested in his comment the last time I posted about the Nano:
“I’m buying it because it gives a sense of freedom,” Mr. Bhatia wrote, “freedom to go to someplace in uncrumpled clothes, with my deodorant still being able to mask my body odor. But above all to see the look in my family’s eyes when they see it in person.”
Environmentalists, however, have decried the Nano and its low-cost imitators as an impending disaster. Certainly, the seemingly guaranteed success of the Nano may create more traffic and strain on India’s already rickety urban infrastructure.
And although the car may emit fewer greenhouse gases than some two-wheelers, its launch still has troubled officials leading efforts on global climate protection. Last year, the Nobel Prize winner Rajendra Pachauri, who is head of the Intergovernmental Panel on Climate Change, was quoted as saying he was “having nightmares” about the car.
Unbelievable. These guys actually have nightmares about broadening prosperity — and the economic freedom that brings it about.
Monday, March 23, 2009
Iran Has Started an Arms Race in the Mideast and Beyond
Iran Has Started a Mideast Arms Race. By Amir Taheri
States throughout the region are looking to establish nuclear programs.
WSJ, Mar 23, 2009
In the capitals of Western nations, Abdul Qadeer Khan, the man regarded as the father of the Pakistani atom bomb, is regarded as a maverick with a criminal past. In addition to his well-documented role in developing a nuclear device for Pakistan, he helped Iran and North Korea with their nuclear programs.
But since his release from house arrest a month ago, Mr. Khan has entertained a string of official visitors from across the Middle East. All come with messages of sympathy; and some governments in that region are looking to him for the knowledge and advice they need to fast track their own illicit nuclear projects.
Make no mistake: The Middle East may be on the verge of a nuclear arms race triggered by the inability of the West to stop Iran's quest for a bomb. Since Tehran's nuclear ambitions hit the headlines five years ago, 25 countries -- 10 of them in the greater Middle East -- have announced plans to build nuclear power plants for the first time.
The six-nation Gulf Cooperation Council (Saudi Arabia, Kuwait, Bahrain, Qatar, the United Arab Emirates [UAE] and Oman) set up a nuclear exploratory commission in 2007 to prepare a "strategic report" for submission to the alliance's summit later this year. But Saudi Arabia is not waiting for the report. It opened negotiations with the U.S. in 2008 to obtain "a nuclear capacity," ostensibly for "peaceful purposes."
Egypt also signed a nuclear cooperation agreement, with France, last year. Egyptian leaders make no secret of the fact that the decision to invest in a costly nuclear industry was prompted by fears of Iran. "A nuclear armed Iran with hegemonic ambitions is the greatest threat to Arab nations today," President Hosni Mubarak told the Arab summit in Riyadh, Saudi Arabia two weeks ago.
Last November, France concluded a similar nuclear cooperation accord with the UAE, promising to offer these oil-rich lands "a complete nuclear industry." According to the foreign ministry in Paris, the French are building a military base close to Abu Dhabi ostensibly to protect the nuclear installations against "hostile action," including the possibility of "sensitive material" being stolen by terrorist groups or smuggled to Iran.
The UAE, to be sure, has signed a cooperation agreement with the U.S. forswearing the right to enrich uranium or produce plutonium in exchange for American nuclear technology and fuel. The problem is that the UAE's commercial hub, the sheikhdom of Dubai, has been the nerve center of illicit trade with Iran for decades, according to Western and Arab intelligence. Through Dubai, stolen U.S. technology and spent fuel needed for producing raw material for nuclear weapons could be smuggled to Iran.
Qatar, the smallest GCC member by population, is also toying with the idea of creating a nuclear capability. According to the Qatari media, it is shopping around in the U.S., France, Germany and China.
Newly liberated Iraq has not been spared by the new nuclear fever. Recall the history. With help from France, Iraq developed a nuclear capacity in the late 1970s to counterbalance its demographic inferiority vis-à-vis Iran. In 1980, Israel destroyed Osirak, the French-built nuclear center close to Baghdad, but Saddam Hussein restored part of that capacity between 1988 and 1991. What he rebuilt was dismantled by the United Nations' inspectors between 1992 and 2003. But with Saddam dead and buried, some Iraqis are calling for a revival of the nation's nuclear program as a means of deterring "bullying and blackmail from the mullahs in Tehran," as parliamentarian Saleh al-Mutlaq has put it.
"A single tactical nuclear attack on Basra and Baghdad could wipe out a third of our population," a senior Iraqi official told me, on condition of anonymity. Since almost 90% of Iraqis live within 90 miles of the Iranian border, the "fear is felt in every town and village," he says.
Tehran, meanwhile, is playing an active part in proliferation. So far, Syria and Sudan have shown interest in its nuclear technology, setting up joint scientific committees with Iran, according to the official Islamic Republic News Agency. Iranian media reports say Tehran is also setting up joint programs with a number of anti-U.S. regimes in Latin America, notably Venezuela, Bolivia, Nicaragua and Ecuador, bringing proliferation to America's backyard.
According to official reports in Tehran, in 2006 and 2007 the Islamic Republic also initialed agreements with China to build 20 nuclear-power stations in Iran. The first of these stations is already under construction at Dar-Khuwayn, in the oil-rich province of Khuzestan close to the Iraqi border.
There is no doubt that the current nuclear race in the Middle East is largely prompted by the fear of a revolutionary Iran using an arsenal as a means of establishing hegemony in the region. Iran's rivals for regional leadership, especially Turkey, Egypt and Saudi Arabia, are aware of the propaganda appeal of the Islamic Republic's claim of being " the first Muslim superpower" capable of defying the West and rivaling it in scientific and technological fields. In that context, Tehran's development of long-range missiles and the Muslim world's first space satellite are considered political coups.
Mohamed al Quwaihis, a member of Saudi Arabia's appointed parliament, the Shura Council, warns of Iran's growing influence. Addressing the Shura Council earlier this month, he described Iranian interferences in Arab affairs as "overt," and claimed that Iran is "endeavoring to seduce the Gulf States, and recruit some of the citizens of these countries to work for its interests."
The Shura devoted a recent session to "the Iranian threat," insisting that unless Tehran abandoned its nuclear program, Saudi Arabia should lead the Arabs in developing their own "nuclear response." The debate came just days after the foreign ministry in Riyadh issued a report identifying the Islamic Republic's nuclear program as the "principal security threat to Arab nations."
A four-nation Arab summit held in the Saudi capital on March 11 endorsed that analysis, giving the green light for a pan-Arab quest for "a complete nuclear industry." Such a project would draw support from Pakistan, whose nuclear industry was built with Arab money. Mr. Khan and his colleagues have an opportunity to repay that debt by helping Arabs step on a ladder that could lead them to the coveted "threshold" to becoming nuclear powers in a few years' time.
Earlier this month, Mohamed ElBaradei, the retiring head of the International Atomic Energy Agency, warned that the Nuclear Nonproliferation Treaty has become a blunt instrument in preventing a nuclear arms race. Meanwhile, the U.S., France, Russia and China are competing for nuclear contracts without developing safeguards to ensure that projects which start as peaceful undertakings are not used as cover for clandestine military activities.
The Obama administration should take the growing threat of nuclear proliferation seriously. It should try to provide leadership in forging a united response by the major powers to what could become the world's No. 1 security concern within the next few years.
Mr. Taheri's new book, "The Persian Night: Iran Under The Khomeinist Revolution," is published by Encounter Books.
States throughout the region are looking to establish nuclear programs.
WSJ, Mar 23, 2009
In the capitals of Western nations, Abdul Qadeer Khan, the man regarded as the father of the Pakistani atom bomb, is regarded as a maverick with a criminal past. In addition to his well-documented role in developing a nuclear device for Pakistan, he helped Iran and North Korea with their nuclear programs.
But since his release from house arrest a month ago, Mr. Khan has entertained a string of official visitors from across the Middle East. All come with messages of sympathy; and some governments in that region are looking to him for the knowledge and advice they need to fast track their own illicit nuclear projects.
Make no mistake: The Middle East may be on the verge of a nuclear arms race triggered by the inability of the West to stop Iran's quest for a bomb. Since Tehran's nuclear ambitions hit the headlines five years ago, 25 countries -- 10 of them in the greater Middle East -- have announced plans to build nuclear power plants for the first time.
The six-nation Gulf Cooperation Council (Saudi Arabia, Kuwait, Bahrain, Qatar, the United Arab Emirates [UAE] and Oman) set up a nuclear exploratory commission in 2007 to prepare a "strategic report" for submission to the alliance's summit later this year. But Saudi Arabia is not waiting for the report. It opened negotiations with the U.S. in 2008 to obtain "a nuclear capacity," ostensibly for "peaceful purposes."
Egypt also signed a nuclear cooperation agreement, with France, last year. Egyptian leaders make no secret of the fact that the decision to invest in a costly nuclear industry was prompted by fears of Iran. "A nuclear armed Iran with hegemonic ambitions is the greatest threat to Arab nations today," President Hosni Mubarak told the Arab summit in Riyadh, Saudi Arabia two weeks ago.
Last November, France concluded a similar nuclear cooperation accord with the UAE, promising to offer these oil-rich lands "a complete nuclear industry." According to the foreign ministry in Paris, the French are building a military base close to Abu Dhabi ostensibly to protect the nuclear installations against "hostile action," including the possibility of "sensitive material" being stolen by terrorist groups or smuggled to Iran.
The UAE, to be sure, has signed a cooperation agreement with the U.S. forswearing the right to enrich uranium or produce plutonium in exchange for American nuclear technology and fuel. The problem is that the UAE's commercial hub, the sheikhdom of Dubai, has been the nerve center of illicit trade with Iran for decades, according to Western and Arab intelligence. Through Dubai, stolen U.S. technology and spent fuel needed for producing raw material for nuclear weapons could be smuggled to Iran.
Qatar, the smallest GCC member by population, is also toying with the idea of creating a nuclear capability. According to the Qatari media, it is shopping around in the U.S., France, Germany and China.
Newly liberated Iraq has not been spared by the new nuclear fever. Recall the history. With help from France, Iraq developed a nuclear capacity in the late 1970s to counterbalance its demographic inferiority vis-à-vis Iran. In 1980, Israel destroyed Osirak, the French-built nuclear center close to Baghdad, but Saddam Hussein restored part of that capacity between 1988 and 1991. What he rebuilt was dismantled by the United Nations' inspectors between 1992 and 2003. But with Saddam dead and buried, some Iraqis are calling for a revival of the nation's nuclear program as a means of deterring "bullying and blackmail from the mullahs in Tehran," as parliamentarian Saleh al-Mutlaq has put it.
"A single tactical nuclear attack on Basra and Baghdad could wipe out a third of our population," a senior Iraqi official told me, on condition of anonymity. Since almost 90% of Iraqis live within 90 miles of the Iranian border, the "fear is felt in every town and village," he says.
Tehran, meanwhile, is playing an active part in proliferation. So far, Syria and Sudan have shown interest in its nuclear technology, setting up joint scientific committees with Iran, according to the official Islamic Republic News Agency. Iranian media reports say Tehran is also setting up joint programs with a number of anti-U.S. regimes in Latin America, notably Venezuela, Bolivia, Nicaragua and Ecuador, bringing proliferation to America's backyard.
According to official reports in Tehran, in 2006 and 2007 the Islamic Republic also initialed agreements with China to build 20 nuclear-power stations in Iran. The first of these stations is already under construction at Dar-Khuwayn, in the oil-rich province of Khuzestan close to the Iraqi border.
There is no doubt that the current nuclear race in the Middle East is largely prompted by the fear of a revolutionary Iran using an arsenal as a means of establishing hegemony in the region. Iran's rivals for regional leadership, especially Turkey, Egypt and Saudi Arabia, are aware of the propaganda appeal of the Islamic Republic's claim of being " the first Muslim superpower" capable of defying the West and rivaling it in scientific and technological fields. In that context, Tehran's development of long-range missiles and the Muslim world's first space satellite are considered political coups.
Mohamed al Quwaihis, a member of Saudi Arabia's appointed parliament, the Shura Council, warns of Iran's growing influence. Addressing the Shura Council earlier this month, he described Iranian interferences in Arab affairs as "overt," and claimed that Iran is "endeavoring to seduce the Gulf States, and recruit some of the citizens of these countries to work for its interests."
The Shura devoted a recent session to "the Iranian threat," insisting that unless Tehran abandoned its nuclear program, Saudi Arabia should lead the Arabs in developing their own "nuclear response." The debate came just days after the foreign ministry in Riyadh issued a report identifying the Islamic Republic's nuclear program as the "principal security threat to Arab nations."
A four-nation Arab summit held in the Saudi capital on March 11 endorsed that analysis, giving the green light for a pan-Arab quest for "a complete nuclear industry." Such a project would draw support from Pakistan, whose nuclear industry was built with Arab money. Mr. Khan and his colleagues have an opportunity to repay that debt by helping Arabs step on a ladder that could lead them to the coveted "threshold" to becoming nuclear powers in a few years' time.
Earlier this month, Mohamed ElBaradei, the retiring head of the International Atomic Energy Agency, warned that the Nuclear Nonproliferation Treaty has become a blunt instrument in preventing a nuclear arms race. Meanwhile, the U.S., France, Russia and China are competing for nuclear contracts without developing safeguards to ensure that projects which start as peaceful undertakings are not used as cover for clandestine military activities.
The Obama administration should take the growing threat of nuclear proliferation seriously. It should try to provide leadership in forging a united response by the major powers to what could become the world's No. 1 security concern within the next few years.
Mr. Taheri's new book, "The Persian Night: Iran Under The Khomeinist Revolution," is published by Encounter Books.
Federal President's Latest Appointments with the FDA - Joshua Sharfstein
Obama's Latest Troubling Appointments with the FDA. By Jeff Stier, Esq.
American Council on Science and Health, Wednesday, March 18, 2009
The president tapped into broadly held public sentiment in his radio address on Saturday, calling for reform at the Food and Drug Administration. But understanding why his assertion that the government can ensure "the medicines we take...don't cause harm" is simplistic can also help us understand why his choice for the person who will have that impossible responsibility is folly.
In naming Dr. Joshua Sharfstein as deputy commissioner, the president decided that absolute drug safety should come first--even at the cost of the drugs' availability to sick patients. That doesn't bode well for our chances of getting the new medications needed to keep pace with our enviable improvements in quality of life and life expectancy.
Let's be clear: There is no such thing as a "safe" medication. All medications come with benefits and risks. It is the role of a physician to work with the patient to evaluate each person's unique circumstances to decide whether the benefits of a drug outweigh the risks. That calculation is different for everyone and, whenever possible, should be made in the doctor's office rather than a federal agency. I doubt whether the president or his new appointment agree.
An evaluation of his work makes it clear where Dr. Sharfstein falls on the spectrum between those who see the companies he is about to regulate as part of the problem or part of the solution. Dr. Sharfstein's relatively brief career is rich with examples of criticism of pharmaceutical companies--including his stint working for anti-pharmaceutical crusader Sidney Wolfe--plus support for safe-seeming but failed policies and initiatives that grab adoring headlines but do little to fix serious problems.
His shortsighted, partisan and perversely populist "attack big pharma" approach won't work at this critical time when major reform is in order. Change of this type calls for the ability to bring various and sometimes opposing stakeholders together.
Sharfstein, only 39, has a long history of antagonizing the pharmaceutical industry. Consider the example recently reported online by Scientific American, based on an October 1992 report in the Harvard Crimson, written when Sharfstein was a first-year medical student. He led a student campaign urging classmates to return textbooks donated by a pharmaceutical company.
Sharfstein and his group wrote that the texts "are paid for by consumers in the form of higher drug prices. Accepting gifts from companies violates an ethical obligation to our future patients." They set up a drop-box where, like a gun amnesty program, students were guilted to return the books. Fortunately, at the time of the Crimson report, only eight books had been returned. (Sharfstein told the Crimson that more had been returned, but some had been stolen from the box.) Even back then, it seems, Dr. Sharfstein was way to the left of his colleagues.
It is not fair to predict an official's approach to issues based only on his activism in school. But young Dr. Sharfstein's "us vs. them" view toward the pharmaceutical industry was not an outlier--it was a template for his future career. He went on to work for Rep. Henry Waxman, D-Calif., who personifies the divisive approach, which seeks to persecute innovative pharmaceutical companies.
I talked with Dr. Sharfstein while he was working on Rep. Waxman's legislation that would give the FDA authority to regulate tobacco. I tried to encourage him to be open to the concept of harm reduction for smokers. The approach would allow makers of smokeless tobacco to explain that their product was less harmful than cigarettes. Dr. Sharfstein impressed me with his familiarity of the evidence from Sweden supporting this way to help smokers reduce their risk from tobacco.
What startled me was that despite his knowledge of the facts, he was still ardently against it. Rather than acknowledge the complexity of the issues and the need to weigh the pros and cons, he dismissed the approach out of hand, choosing instead the "quit or die" approach that has been failing smokers for years. I believe his rigid ideology overshadowed his willingness to support a different, but scientifically valid, way of thinking about the country's leading public health problem.
During his tenure as commissioner of health in Baltimore, he continued to grab headlines with initiatives that drew him praise but failed to solve serious problems. Take for instance his approach to a real but diminishing public health problem: childhood lead poisoning.
Dr. Sharfstein campaigned for the notion that there is "no safe level" of exposure to lead. Yet there is little scientific support for this view. Citizens would have been better served had the commissioner placed his emphasis on the scientifically sound goal of eliminating chipping and peeling lead paint in Baltimore's inner city.
Twenty years ago, nearly a quarter of the children tested in Baltimore had elevated blood lead levels (a much lower level than that considered "lead poisoned"). Today, only 3.5% of the children tested have that level. Similar improvements across the country can be traced to the removal of lead from gasoline and interior paint over a generation ago. There is no evidence that extremely low levels of lead contribute to lead poisoning.
Dr. Sharfstein's misguided approach is the type of distorted policymaking that brought us the hugely unpopular Consumer Produce Safety Improvement Act (CPSIA), championed by his former boss, Rep. Waxman, which today is putting thousands of people out of work, causing stores to throw away safe merchandise and not making anyone any safer. This history sheds a troubling light on how Dr. Sharfstein would deal with today's most pressing and controversial issues relating to the complex and sensitive task of regulating pharmaceuticals.
The job, especially now, takes nuance and the ability to weigh benefits and risks. And it requires a willingness to put partisan approaches aside so the agency can endorse the best available science. Certainly Dr. Sharfstein has tipped his hand to how he would deal with calls by activists to forbid free drug samples to consumers. Would he allow FDA panels to benefit from top experts? Or would he consider them bias if they ever worked for industry. Would he hold anti-industry scientists to the same tough standards?
His record indicates he would blacklist scientists who were capable enough to be hired by companies and leave panels skewed with scientists who were either not competent enough to get jobs--or so anti-industry that they refused to work for them in the first place. This would hamper the agency's ability to evaluate complex science above the fray of politics. A deputy commissioner so invested against the success of the pharmaceutical industry is poised to fail consumers.
Perhaps Dr. Sharfstein's reputation for stridency explains the reported move to split the agency--one part headed by Dr. Margaret Hamburg, who will serve as commissioner for food and tobacco (if the agency gets control of it) and one part with Dr. Sharfstein as deputy commissioner fully responsible for pharmaceutical issues. This allows Dr. Sharfstein to act as FDA commissioner with regard to medicine, while circumventing a Senate confirmation, where senators who don't share his vitriol for drugmakers were prepared to ask him tough questions about his views. So much for a new, transparent way of doing the people's business in Washington.
In his Inaugural address, the president promised to "restore science to its rightful place." With this appointment, he has taken a step in the wrong direction.
Jeff Stier is an associate director of the American Council on Science and Health.
American Council on Science and Health, Wednesday, March 18, 2009
The president tapped into broadly held public sentiment in his radio address on Saturday, calling for reform at the Food and Drug Administration. But understanding why his assertion that the government can ensure "the medicines we take...don't cause harm" is simplistic can also help us understand why his choice for the person who will have that impossible responsibility is folly.
In naming Dr. Joshua Sharfstein as deputy commissioner, the president decided that absolute drug safety should come first--even at the cost of the drugs' availability to sick patients. That doesn't bode well for our chances of getting the new medications needed to keep pace with our enviable improvements in quality of life and life expectancy.
Let's be clear: There is no such thing as a "safe" medication. All medications come with benefits and risks. It is the role of a physician to work with the patient to evaluate each person's unique circumstances to decide whether the benefits of a drug outweigh the risks. That calculation is different for everyone and, whenever possible, should be made in the doctor's office rather than a federal agency. I doubt whether the president or his new appointment agree.
An evaluation of his work makes it clear where Dr. Sharfstein falls on the spectrum between those who see the companies he is about to regulate as part of the problem or part of the solution. Dr. Sharfstein's relatively brief career is rich with examples of criticism of pharmaceutical companies--including his stint working for anti-pharmaceutical crusader Sidney Wolfe--plus support for safe-seeming but failed policies and initiatives that grab adoring headlines but do little to fix serious problems.
His shortsighted, partisan and perversely populist "attack big pharma" approach won't work at this critical time when major reform is in order. Change of this type calls for the ability to bring various and sometimes opposing stakeholders together.
Sharfstein, only 39, has a long history of antagonizing the pharmaceutical industry. Consider the example recently reported online by Scientific American, based on an October 1992 report in the Harvard Crimson, written when Sharfstein was a first-year medical student. He led a student campaign urging classmates to return textbooks donated by a pharmaceutical company.
Sharfstein and his group wrote that the texts "are paid for by consumers in the form of higher drug prices. Accepting gifts from companies violates an ethical obligation to our future patients." They set up a drop-box where, like a gun amnesty program, students were guilted to return the books. Fortunately, at the time of the Crimson report, only eight books had been returned. (Sharfstein told the Crimson that more had been returned, but some had been stolen from the box.) Even back then, it seems, Dr. Sharfstein was way to the left of his colleagues.
It is not fair to predict an official's approach to issues based only on his activism in school. But young Dr. Sharfstein's "us vs. them" view toward the pharmaceutical industry was not an outlier--it was a template for his future career. He went on to work for Rep. Henry Waxman, D-Calif., who personifies the divisive approach, which seeks to persecute innovative pharmaceutical companies.
I talked with Dr. Sharfstein while he was working on Rep. Waxman's legislation that would give the FDA authority to regulate tobacco. I tried to encourage him to be open to the concept of harm reduction for smokers. The approach would allow makers of smokeless tobacco to explain that their product was less harmful than cigarettes. Dr. Sharfstein impressed me with his familiarity of the evidence from Sweden supporting this way to help smokers reduce their risk from tobacco.
What startled me was that despite his knowledge of the facts, he was still ardently against it. Rather than acknowledge the complexity of the issues and the need to weigh the pros and cons, he dismissed the approach out of hand, choosing instead the "quit or die" approach that has been failing smokers for years. I believe his rigid ideology overshadowed his willingness to support a different, but scientifically valid, way of thinking about the country's leading public health problem.
During his tenure as commissioner of health in Baltimore, he continued to grab headlines with initiatives that drew him praise but failed to solve serious problems. Take for instance his approach to a real but diminishing public health problem: childhood lead poisoning.
Dr. Sharfstein campaigned for the notion that there is "no safe level" of exposure to lead. Yet there is little scientific support for this view. Citizens would have been better served had the commissioner placed his emphasis on the scientifically sound goal of eliminating chipping and peeling lead paint in Baltimore's inner city.
Twenty years ago, nearly a quarter of the children tested in Baltimore had elevated blood lead levels (a much lower level than that considered "lead poisoned"). Today, only 3.5% of the children tested have that level. Similar improvements across the country can be traced to the removal of lead from gasoline and interior paint over a generation ago. There is no evidence that extremely low levels of lead contribute to lead poisoning.
Dr. Sharfstein's misguided approach is the type of distorted policymaking that brought us the hugely unpopular Consumer Produce Safety Improvement Act (CPSIA), championed by his former boss, Rep. Waxman, which today is putting thousands of people out of work, causing stores to throw away safe merchandise and not making anyone any safer. This history sheds a troubling light on how Dr. Sharfstein would deal with today's most pressing and controversial issues relating to the complex and sensitive task of regulating pharmaceuticals.
The job, especially now, takes nuance and the ability to weigh benefits and risks. And it requires a willingness to put partisan approaches aside so the agency can endorse the best available science. Certainly Dr. Sharfstein has tipped his hand to how he would deal with calls by activists to forbid free drug samples to consumers. Would he allow FDA panels to benefit from top experts? Or would he consider them bias if they ever worked for industry. Would he hold anti-industry scientists to the same tough standards?
His record indicates he would blacklist scientists who were capable enough to be hired by companies and leave panels skewed with scientists who were either not competent enough to get jobs--or so anti-industry that they refused to work for them in the first place. This would hamper the agency's ability to evaluate complex science above the fray of politics. A deputy commissioner so invested against the success of the pharmaceutical industry is poised to fail consumers.
Perhaps Dr. Sharfstein's reputation for stridency explains the reported move to split the agency--one part headed by Dr. Margaret Hamburg, who will serve as commissioner for food and tobacco (if the agency gets control of it) and one part with Dr. Sharfstein as deputy commissioner fully responsible for pharmaceutical issues. This allows Dr. Sharfstein to act as FDA commissioner with regard to medicine, while circumventing a Senate confirmation, where senators who don't share his vitriol for drugmakers were prepared to ask him tough questions about his views. So much for a new, transparent way of doing the people's business in Washington.
In his Inaugural address, the president promised to "restore science to its rightful place." With this appointment, he has taken a step in the wrong direction.
Jeff Stier is an associate director of the American Council on Science and Health.
Populist Anger Is Hard to Contain - The president could have spoken more responsibly about AIG
Populist Anger Is Hard to Contain. By SUZANNE GARMENT
The president could have spoken more responsibly about AIG.
WSJ, Mar 23, 2009
Last week's collective screech about the AIG bonuses should leave the participants shaken, the way you feel when you've done something really stupid in traffic and realize you could have killed yourself. Populism is dangerous. The AIG death threats gave us an inkling of just how dangerous. A political leader can't simply stir up a little bit of populism, then turn it off when it gets inconvenient -- not even a leader as eloquent as President Barack Obama.
When Edward Liddy, AIG's government-appointed CEO, made Treasury Secretary Tim Geithner aware that bonuses would be paid to employees of AIG's Financial Products unit -- which had virtually destroyed AIG, prompting a $173 billion bailout -- the administration didn't want to be the chief target of the criticism that would follow. It decided to get out in front, as chief criticizer. First, White House economist Larry Summers said that AIG's behavior was "outrageous" but that the bonus contracts could not be abrogated. "We are a nation of laws," he said, and an administration "can't govern out of anger."
Some presidential advisers thought the "outrageous" part wasn't plain enough. So the next day Mr. Obama angrily denounced AIG's "recklessness and greed" and said he would "pursue every single legal avenue" to block the bonuses.
Mayhem followed. The calls and emails poured in. Virtually every member of Congress assured the public of his or her personal anger and disgust. Last Wednesday, Mr. Liddy appeared before a House subcommittee as a prop for a Congressional Day of Rage. At the end of the week the House passed its 90% surtax on the bonuses. By then, there were protesters in the streets, threats of bodily harm to AIG employees, and beefed-up security at their homes. A legislative clawback of the bonuses may now be unnecessary. The employees have been asked to give them back, which suddenly seems like the best of a set of bad options, law or no law.
Within hours after Mr. Obama's initial anger announcement, the White House started trying to turn down the temperature -- without giving up its position at the head of the outrage parade. "I don't want to quell anger," Mr. Obama said. "I think people are right to be angry. I'm angry. What I want us to do, though, is channel our anger in a constructive way." At week's end, with the Senate working on its own clawback bill, White House Press Secretary Robert Gibbs said the president would judge any such bill according to whether it adequately reflected "taxpayer anger and frustration" and whether it maintained "our ability to stabilize the financial system and ensure that credit flows."
These statements are clever and ridiculous. You can't "channel" this kind of anger, let alone constructively. Populist anger is often illiberal and indiscriminate. The post-Civil War populist movement brought needed changes but also disenfranchised African-Americans in the South through Jim Crow laws and physical terror. As historian Richard Hofstadter noted in his famous book "The Age of Reform" (1955), the connection was not accidental. Further, Hofstadter cautioned, it is hard for political leaders to see the moment at which a populist outburst "has passed beyond the demand for necessary reforms" to "the expression of a resentment so inclusive" that it attacks the capacity of society to sustain values such as the rule of law.
It is one of the miracles of American politics that this type of misjudgment hasn't occurred more often and that populist excess has not done more damage. We should not take the miracle for granted.
Presidential adviser David Axelrod, explaining why Mr. Obama supplanted Mr. Summers's early statement about the bonuses with an angrier one, said that while Mr. Summers had to weigh the effect of the government's actions on its ability to manage the financial system, "the president's job is to speak for the country."
That is deeply wrong. Precisely because the president speaks for the country, it is his job, and not just Mr. Summers's job, to weigh the economic consequences of his words. The president's job is not to express populist anger but to address the anger and talk sense to it.
Ms. Garment, a tax attorney, is the author of "Scandal: The Culture of Mistrust in American Politics" (Random House, 1991).
The president could have spoken more responsibly about AIG.
WSJ, Mar 23, 2009
Last week's collective screech about the AIG bonuses should leave the participants shaken, the way you feel when you've done something really stupid in traffic and realize you could have killed yourself. Populism is dangerous. The AIG death threats gave us an inkling of just how dangerous. A political leader can't simply stir up a little bit of populism, then turn it off when it gets inconvenient -- not even a leader as eloquent as President Barack Obama.
When Edward Liddy, AIG's government-appointed CEO, made Treasury Secretary Tim Geithner aware that bonuses would be paid to employees of AIG's Financial Products unit -- which had virtually destroyed AIG, prompting a $173 billion bailout -- the administration didn't want to be the chief target of the criticism that would follow. It decided to get out in front, as chief criticizer. First, White House economist Larry Summers said that AIG's behavior was "outrageous" but that the bonus contracts could not be abrogated. "We are a nation of laws," he said, and an administration "can't govern out of anger."
Some presidential advisers thought the "outrageous" part wasn't plain enough. So the next day Mr. Obama angrily denounced AIG's "recklessness and greed" and said he would "pursue every single legal avenue" to block the bonuses.
Mayhem followed. The calls and emails poured in. Virtually every member of Congress assured the public of his or her personal anger and disgust. Last Wednesday, Mr. Liddy appeared before a House subcommittee as a prop for a Congressional Day of Rage. At the end of the week the House passed its 90% surtax on the bonuses. By then, there were protesters in the streets, threats of bodily harm to AIG employees, and beefed-up security at their homes. A legislative clawback of the bonuses may now be unnecessary. The employees have been asked to give them back, which suddenly seems like the best of a set of bad options, law or no law.
Within hours after Mr. Obama's initial anger announcement, the White House started trying to turn down the temperature -- without giving up its position at the head of the outrage parade. "I don't want to quell anger," Mr. Obama said. "I think people are right to be angry. I'm angry. What I want us to do, though, is channel our anger in a constructive way." At week's end, with the Senate working on its own clawback bill, White House Press Secretary Robert Gibbs said the president would judge any such bill according to whether it adequately reflected "taxpayer anger and frustration" and whether it maintained "our ability to stabilize the financial system and ensure that credit flows."
These statements are clever and ridiculous. You can't "channel" this kind of anger, let alone constructively. Populist anger is often illiberal and indiscriminate. The post-Civil War populist movement brought needed changes but also disenfranchised African-Americans in the South through Jim Crow laws and physical terror. As historian Richard Hofstadter noted in his famous book "The Age of Reform" (1955), the connection was not accidental. Further, Hofstadter cautioned, it is hard for political leaders to see the moment at which a populist outburst "has passed beyond the demand for necessary reforms" to "the expression of a resentment so inclusive" that it attacks the capacity of society to sustain values such as the rule of law.
It is one of the miracles of American politics that this type of misjudgment hasn't occurred more often and that populist excess has not done more damage. We should not take the miracle for granted.
Presidential adviser David Axelrod, explaining why Mr. Obama supplanted Mr. Summers's early statement about the bonuses with an angrier one, said that while Mr. Summers had to weigh the effect of the government's actions on its ability to manage the financial system, "the president's job is to speak for the country."
That is deeply wrong. Precisely because the president speaks for the country, it is his job, and not just Mr. Summers's job, to weigh the economic consequences of his words. The president's job is not to express populist anger but to address the anger and talk sense to it.
Ms. Garment, a tax attorney, is the author of "Scandal: The Culture of Mistrust in American Politics" (Random House, 1991).
Treasury Sec Tim Geithner: My Plan for Bad Bank Assets
My Plan for Bad Bank Assets. Treasury Sec Tim Geithner
The private sector will set prices. Taxpayers will share in any upside.
WSJ, Mar 23, 2009
The American economy and much of the world now face extraordinary challenges, and confronting these challenges will continue to require extraordinary actions.
No crisis like this has a simple or single cause, but as a nation we borrowed too much and let our financial system take on irresponsible levels of risk. Those decisions have caused enormous suffering, and much of the damage has fallen on ordinary Americans and small-business owners who were careful and responsible. This is fundamentally unfair, and Americans are justifiably angry and frustrated.
The depth of public anger and the gravity of this crisis require that every policy we take be held to the most serious test: whether it gets our financial system back to the business of providing credit to working families and viable businesses, and helps prevent future crises.
Over the past six weeks we have put in place a series of financial initiatives, alongside the Recovery and Reinvestment Program, to help lay the financial foundation for economic recovery. We launched a broad program to stabilize the housing market by encouraging lower mortgage rates and making it easier for millions to refinance and avoid foreclosure. We established a new capital program to provide banks with a safeguard against a deeper recession. By providing confidence that banks will have a sufficient level of capital even if the outlook is worse than expected, more credit will be available to the economy at lower interest rates today -- making it less likely that the more negative economy they fear will take place.
We started a major new lending program with the Federal Reserve targeted at the securitization markets critical for consumer and small business lending. Last week, we announced additional actions to support lending to small businesses by directly purchasing securities backed by Small Business Administration loans.
Together, actions over the last several months by the Federal Reserve and these initiatives by this administration are already starting to make a difference. They have helped to bring mortgage interest rates near historic lows. Just this month, we saw a 30% increase in refinancing of mortgages, which means millions of Americans are taking advantage of the lower rates. This is good for homeowners, and it's good for the economy. The new joint lending program with the Federal Reserve led to almost $9 billion of new securitizations last week, more than in the last four months combined.
However, the financial system as a whole is still working against recovery. Many banks, still burdened by bad lending decisions, are holding back on providing credit. Market prices for many assets held by financial institutions -- so-called legacy assets -- are either uncertain or depressed. With these pressures at work on bank balance sheets, credit remains a scarce commodity, and credit that is available carries a high cost for borrowers.
Today, we are announcing another critical piece of our plan to increase the flow of credit and expand liquidity. Our new Public-Private Investment Program will set up funds to provide a market for the legacy loans and securities that currently burden the financial system.
The Public-Private Investment Program will purchase real-estate related loans from banks and securities from the broader markets. Banks will have the ability to sell pools of loans to dedicated funds, and investors will compete to have the ability to participate in those funds and take advantage of the financing provided by the government.
The funds established under this program will have three essential design features. First, they will use government resources in the form of capital from the Treasury, and financing from the FDIC and Federal Reserve, to mobilize capital from private investors. Second, the Public-Private Investment Program will ensure that private-sector participants share the risks alongside the taxpayer, and that the taxpayer shares in the profits from these investments. These funds will be open to investors of all types, such as pension funds, so that a broad range of Americans can participate.
Third, private-sector purchasers will establish the value of the loans and securities purchased under the program, which will protect the government from overpaying for these assets.
The new Public-Private Investment Program will initially provide financing for $500 billion with the potential to expand up to $1 trillion over time, which is a substantial share of real-estate related assets originated before the recession that are now clogging our financial system. Over time, by providing a market for these assets that does not now exist, this program will help improve asset values, increase lending capacity by banks, and reduce uncertainty about the scale of losses on bank balance sheets. The ability to sell assets to this fund will make it easier for banks to raise private capital, which will accelerate their ability to replace the capital investments provided by the Treasury.
This program to address legacy loans and securities is part of an overall strategy to resolve the crisis as quickly and effectively as possible at least cost to the taxpayer. The Public-Private Investment Program is better for the taxpayer than having the government alone directly purchase the assets from banks that are still operating and assume a larger share of the losses. Our approach shares risk with the private sector, efficiently leverages taxpayer dollars, and deploys private-sector competition to determine market prices for currently illiquid assets. Simply hoping for banks to work these assets off over time risks prolonging the crisis in a repeat of the Japanese experience.
Moving forward, we as a nation must work together to strike the right balance between our need to promote the public trust and using taxpayer money prudently to strengthen the financial system, while also ensuring the trust of those market participants who we need to do their part to get credit flowing to working families and businesses -- large and small -- across this nation.
This requires those in the private sector to remember that government assistance is a privilege, not a right. When financial institutions come to us for direct financial assistance, our government has a responsibility to ensure these funds are deployed to expand the flow of credit to the economy, not to enrich executives or shareholders. These provisions need to be designed and applied in a way that does not deter the participation by the private sector in generally available programs to stabilize the housing markets, jump-start the credit markets, and rid banks of legacy assets.
We cannot solve this crisis without making it possible for investors to take risks. While this crisis was caused by banks taking too much risk, the danger now is that they will take too little. In working with Congress to put in place strong conditions to prevent misuse of taxpayer assistance, we need to be very careful not to discourage those investments the economy needs to recover from recession. The rule of law gives responsible entrepreneurs and investors the confidence to invest and create jobs in our nation. Our nation's commitment to pursue economic policies that promote confidence and stability dates back to the very first secretary of the Treasury, Alexander Hamilton, who first made it clear that when our government gives its word we mean it.
For all the challenges we face, we still have a diverse and resilient financial system. The process of repair will take time, and progress will be uneven, with periods of stress and fragility. But these policies will work. We have already seen that where our government has provided support and financing, credit is more available at lower costs.
But as we fight the current crisis, we must also start the process of ensuring a crisis like this never happens again. As President Obama has said, we can no longer sustain 21st century markets with 20th century regulations. Our nation deserves better choices than, on one hand, accepting the catastrophic damage caused by a failure like Lehman Brothers, or on the other hand being forced to pour billions of taxpayer dollars into an institution like AIG to protect the economy against that scale of damage. The lack of an appropriate and modern regulatory regime and resolution authority helped cause this crisis, and it will continue to constrain our capacity to address future crises until we put in place fundamental reforms.
Our goal must be a stronger system that can provide the credit necessary for recovery, and that also ensures that we never find ourselves in this type of financial crisis again. We are moving quickly to achieve those goals, and we will keep at it until we have done so.
Mr. Geithner is the U.S. Treasury secretary.
The private sector will set prices. Taxpayers will share in any upside.
WSJ, Mar 23, 2009
The American economy and much of the world now face extraordinary challenges, and confronting these challenges will continue to require extraordinary actions.
No crisis like this has a simple or single cause, but as a nation we borrowed too much and let our financial system take on irresponsible levels of risk. Those decisions have caused enormous suffering, and much of the damage has fallen on ordinary Americans and small-business owners who were careful and responsible. This is fundamentally unfair, and Americans are justifiably angry and frustrated.
The depth of public anger and the gravity of this crisis require that every policy we take be held to the most serious test: whether it gets our financial system back to the business of providing credit to working families and viable businesses, and helps prevent future crises.
Over the past six weeks we have put in place a series of financial initiatives, alongside the Recovery and Reinvestment Program, to help lay the financial foundation for economic recovery. We launched a broad program to stabilize the housing market by encouraging lower mortgage rates and making it easier for millions to refinance and avoid foreclosure. We established a new capital program to provide banks with a safeguard against a deeper recession. By providing confidence that banks will have a sufficient level of capital even if the outlook is worse than expected, more credit will be available to the economy at lower interest rates today -- making it less likely that the more negative economy they fear will take place.
We started a major new lending program with the Federal Reserve targeted at the securitization markets critical for consumer and small business lending. Last week, we announced additional actions to support lending to small businesses by directly purchasing securities backed by Small Business Administration loans.
Together, actions over the last several months by the Federal Reserve and these initiatives by this administration are already starting to make a difference. They have helped to bring mortgage interest rates near historic lows. Just this month, we saw a 30% increase in refinancing of mortgages, which means millions of Americans are taking advantage of the lower rates. This is good for homeowners, and it's good for the economy. The new joint lending program with the Federal Reserve led to almost $9 billion of new securitizations last week, more than in the last four months combined.
However, the financial system as a whole is still working against recovery. Many banks, still burdened by bad lending decisions, are holding back on providing credit. Market prices for many assets held by financial institutions -- so-called legacy assets -- are either uncertain or depressed. With these pressures at work on bank balance sheets, credit remains a scarce commodity, and credit that is available carries a high cost for borrowers.
Today, we are announcing another critical piece of our plan to increase the flow of credit and expand liquidity. Our new Public-Private Investment Program will set up funds to provide a market for the legacy loans and securities that currently burden the financial system.
The Public-Private Investment Program will purchase real-estate related loans from banks and securities from the broader markets. Banks will have the ability to sell pools of loans to dedicated funds, and investors will compete to have the ability to participate in those funds and take advantage of the financing provided by the government.
The funds established under this program will have three essential design features. First, they will use government resources in the form of capital from the Treasury, and financing from the FDIC and Federal Reserve, to mobilize capital from private investors. Second, the Public-Private Investment Program will ensure that private-sector participants share the risks alongside the taxpayer, and that the taxpayer shares in the profits from these investments. These funds will be open to investors of all types, such as pension funds, so that a broad range of Americans can participate.
Third, private-sector purchasers will establish the value of the loans and securities purchased under the program, which will protect the government from overpaying for these assets.
The new Public-Private Investment Program will initially provide financing for $500 billion with the potential to expand up to $1 trillion over time, which is a substantial share of real-estate related assets originated before the recession that are now clogging our financial system. Over time, by providing a market for these assets that does not now exist, this program will help improve asset values, increase lending capacity by banks, and reduce uncertainty about the scale of losses on bank balance sheets. The ability to sell assets to this fund will make it easier for banks to raise private capital, which will accelerate their ability to replace the capital investments provided by the Treasury.
This program to address legacy loans and securities is part of an overall strategy to resolve the crisis as quickly and effectively as possible at least cost to the taxpayer. The Public-Private Investment Program is better for the taxpayer than having the government alone directly purchase the assets from banks that are still operating and assume a larger share of the losses. Our approach shares risk with the private sector, efficiently leverages taxpayer dollars, and deploys private-sector competition to determine market prices for currently illiquid assets. Simply hoping for banks to work these assets off over time risks prolonging the crisis in a repeat of the Japanese experience.
Moving forward, we as a nation must work together to strike the right balance between our need to promote the public trust and using taxpayer money prudently to strengthen the financial system, while also ensuring the trust of those market participants who we need to do their part to get credit flowing to working families and businesses -- large and small -- across this nation.
This requires those in the private sector to remember that government assistance is a privilege, not a right. When financial institutions come to us for direct financial assistance, our government has a responsibility to ensure these funds are deployed to expand the flow of credit to the economy, not to enrich executives or shareholders. These provisions need to be designed and applied in a way that does not deter the participation by the private sector in generally available programs to stabilize the housing markets, jump-start the credit markets, and rid banks of legacy assets.
We cannot solve this crisis without making it possible for investors to take risks. While this crisis was caused by banks taking too much risk, the danger now is that they will take too little. In working with Congress to put in place strong conditions to prevent misuse of taxpayer assistance, we need to be very careful not to discourage those investments the economy needs to recover from recession. The rule of law gives responsible entrepreneurs and investors the confidence to invest and create jobs in our nation. Our nation's commitment to pursue economic policies that promote confidence and stability dates back to the very first secretary of the Treasury, Alexander Hamilton, who first made it clear that when our government gives its word we mean it.
For all the challenges we face, we still have a diverse and resilient financial system. The process of repair will take time, and progress will be uneven, with periods of stress and fragility. But these policies will work. We have already seen that where our government has provided support and financing, credit is more available at lower costs.
But as we fight the current crisis, we must also start the process of ensuring a crisis like this never happens again. As President Obama has said, we can no longer sustain 21st century markets with 20th century regulations. Our nation deserves better choices than, on one hand, accepting the catastrophic damage caused by a failure like Lehman Brothers, or on the other hand being forced to pour billions of taxpayer dollars into an institution like AIG to protect the economy against that scale of damage. The lack of an appropriate and modern regulatory regime and resolution authority helped cause this crisis, and it will continue to constrain our capacity to address future crises until we put in place fundamental reforms.
Our goal must be a stronger system that can provide the credit necessary for recovery, and that also ensures that we never find ourselves in this type of financial crisis again. We are moving quickly to achieve those goals, and we will keep at it until we have done so.
Mr. Geithner is the U.S. Treasury secretary.
Sunday, March 22, 2009
Red Ink Red Alert
Red Ink Red Alert. WaPo Editorial
A congressional report should give the president pause.
WaPo, Sunday, March 22, 2009; A18
THE NEW estimates by the Congressional Budget Office showing a federal deficit of 13.1 percent of gross domestic product for the current budget year, which began Oct. 1, are neither surprising nor particularly alarming, though it's larger than the 12.3 percent foreseen by the White House. Both are stunning numbers -- far and away the largest deficit ratio since World War II. But spending rises in recessions and tax revenue falls, and we're in a big recession. It would be counterproductive to balance the budget in this historic downturn. The huge deficit includes $700 billion for a necessary rescue of the financial sector. Nor is it shocking that the CBO forecasts a deficit of 9.6 percent of GDP in fiscal 2010 if Congress enacts President Obama's $3.6 trillion budget plan -- a deficit also much larger than what the president predicted. The difference largely reflects the CBO's economic forecast, which is more up-to-date and, hence, gloomier than the one Mr. Obama relied on.
What is scary, though, is the CBO's depiction of the remaining years of the president's term, and the half-decade after that -- if his budget is enacted. In none of those years would the federal deficit fall below 4.1 percent of GDP -- and it would be stuck at 5.7 percent of GDP in 2019. This is in stark contrast to the president's projection: that his plan would get the deficit down to about 3 percent or so of GDP by that time. It's true, as Peter R. Orszag, director of the Office of Management and Budget, told us, that the CBO's forecasts are subject to large margins of error, especially in the out years. And Mr. Orszag is correct to point out that, even under the CBO's scenario, the deficit as a share of GDP would decline by half under Mr. Obama.
Still, it's less significant to meet that target than to keep the deficits within sustainable bounds, and few experts believe that years of deficits above 4 percent of GDP are consistent with long-term economic vitality. If the CBO's numbers are subject to revision on account of changing circumstances, then so are the administration's; and those were based on very rosy economic assumptions to begin with. Very little of the claimed deficit reduction in the Obama plan comes from policy changes; it results more or less automatically from the assumed end of the recession, as well as by claiming savings in reducing operations in Iraq and Afghanistan from unrealistically high forecasts. Yet both the White House and House Speaker Nancy Pelosi said that the CBO report is no reason to revise the president's ambitious tax and spending blueprint.
Mr. Obama should treat the CBO report as an incentive to fulfill his repeated promises, during and after the campaign, to make hard choices on the budget. Until now he has offered a host of new spending -- on health care, middle-class tax cuts, education and alternative energy -- without calling for much sacrifice from anyone except the top 5 percent of the income scale. Though his emphasis on controlling health-care costs is welcome, it's not a substitute for reforming the entitlement programs that are the drivers of long-term fiscal crisis, Medicare and Social Security. Yet the president has offered no plan for either and no road map even for achieving a plan. Several members of his own party in the Senate have been expressing doubts about his strategy, and the CBO report will lend credibility to their concerns. He should heed them.
A congressional report should give the president pause.
WaPo, Sunday, March 22, 2009; A18
THE NEW estimates by the Congressional Budget Office showing a federal deficit of 13.1 percent of gross domestic product for the current budget year, which began Oct. 1, are neither surprising nor particularly alarming, though it's larger than the 12.3 percent foreseen by the White House. Both are stunning numbers -- far and away the largest deficit ratio since World War II. But spending rises in recessions and tax revenue falls, and we're in a big recession. It would be counterproductive to balance the budget in this historic downturn. The huge deficit includes $700 billion for a necessary rescue of the financial sector. Nor is it shocking that the CBO forecasts a deficit of 9.6 percent of GDP in fiscal 2010 if Congress enacts President Obama's $3.6 trillion budget plan -- a deficit also much larger than what the president predicted. The difference largely reflects the CBO's economic forecast, which is more up-to-date and, hence, gloomier than the one Mr. Obama relied on.
What is scary, though, is the CBO's depiction of the remaining years of the president's term, and the half-decade after that -- if his budget is enacted. In none of those years would the federal deficit fall below 4.1 percent of GDP -- and it would be stuck at 5.7 percent of GDP in 2019. This is in stark contrast to the president's projection: that his plan would get the deficit down to about 3 percent or so of GDP by that time. It's true, as Peter R. Orszag, director of the Office of Management and Budget, told us, that the CBO's forecasts are subject to large margins of error, especially in the out years. And Mr. Orszag is correct to point out that, even under the CBO's scenario, the deficit as a share of GDP would decline by half under Mr. Obama.
Still, it's less significant to meet that target than to keep the deficits within sustainable bounds, and few experts believe that years of deficits above 4 percent of GDP are consistent with long-term economic vitality. If the CBO's numbers are subject to revision on account of changing circumstances, then so are the administration's; and those were based on very rosy economic assumptions to begin with. Very little of the claimed deficit reduction in the Obama plan comes from policy changes; it results more or less automatically from the assumed end of the recession, as well as by claiming savings in reducing operations in Iraq and Afghanistan from unrealistically high forecasts. Yet both the White House and House Speaker Nancy Pelosi said that the CBO report is no reason to revise the president's ambitious tax and spending blueprint.
Mr. Obama should treat the CBO report as an incentive to fulfill his repeated promises, during and after the campaign, to make hard choices on the budget. Until now he has offered a host of new spending -- on health care, middle-class tax cuts, education and alternative energy -- without calling for much sacrifice from anyone except the top 5 percent of the income scale. Though his emphasis on controlling health-care costs is welcome, it's not a substitute for reforming the entitlement programs that are the drivers of long-term fiscal crisis, Medicare and Social Security. Yet the president has offered no plan for either and no road map even for achieving a plan. Several members of his own party in the Senate have been expressing doubts about his strategy, and the CBO report will lend credibility to their concerns. He should heed them.
How the U.S. can help revitalize economies in Pakistan and Afghanistan
Plowshares for Peace. WaPo Editorial
How the U.S. can help revitalize economies in Pakistan and Afghanistan
WaPo, Sunday, March 22, 2009; page A18
AS THE Obama administration formulates its strategy for Pakistan and Afghanistan, pretty much everyone agrees that spurring the economy in both countries -- creating jobs -- is key to defusing militancy. The usual prescription is more foreign aid, which is sure to figure in any new plan. But what doesn't always get acknowledged in these discussions is that such aid often doesn't do much good. The United States wasted billions of dollars in Iraqi reconstruction aid, and given the dangerous environment -- which discourages inspection and monitoring -- you can expect a rerun in Afghanistan and Pakistan. A more effective way to boost both economies would be to allow them to export their products tariff-free into the United States. But that idea arouses the enmity of U.S. labor unions, which means that it's not going to get far in a Democratic Congress.
Enter Rep. Chris Van Hollen, Montgomery County Democrat and member of the House leadership, with a practical alternative. Mr. Van Hollen, with co-sponsors, has introduced legislation to create "reconstruction opportunity zones" within both countries. Certain products, including some (not all) textiles, produced within the zones would enjoy duty-free access to the U.S. market for 15 years. This would encourage investment by local businessmen, who best know the terrain, and create jobs. There's no better formula for discouraging Taliban recruitment.
It's not a magic formula, of course. The investment areas have to be drawn widely enough to make the prospect of investment realistic; if you limit them to the most intense battle zones, you're not going to see many jobs created. The bigger they are, though, the likelier the bill will arouse union opposition, so the politics are tricky. Mr. Van Hollen and his co-sponsors -- including Reps. Sander M. Levin (D-Mich), Peter Hoekstra (R-Mich.) and Mark Steven Kirk (R-Ill.) -- have tried to find the sweet spot, and their bill also insists that any factories in the zones meet core international standards in their treatment of workers.
Maybe the strongest argument for the opportunity zones is that there is no down side; the worst that could possibly happen is they don't trigger much investment. But they would immediately provide a signal of U.S. commitment -- the governments of both countries strongly support the idea -- and they could have a substantial positive effect reasonably quickly, at almost no cost to the U.S. Treasury. Congress and the administration should get behind this idea.
How the U.S. can help revitalize economies in Pakistan and Afghanistan
WaPo, Sunday, March 22, 2009; page A18
AS THE Obama administration formulates its strategy for Pakistan and Afghanistan, pretty much everyone agrees that spurring the economy in both countries -- creating jobs -- is key to defusing militancy. The usual prescription is more foreign aid, which is sure to figure in any new plan. But what doesn't always get acknowledged in these discussions is that such aid often doesn't do much good. The United States wasted billions of dollars in Iraqi reconstruction aid, and given the dangerous environment -- which discourages inspection and monitoring -- you can expect a rerun in Afghanistan and Pakistan. A more effective way to boost both economies would be to allow them to export their products tariff-free into the United States. But that idea arouses the enmity of U.S. labor unions, which means that it's not going to get far in a Democratic Congress.
Enter Rep. Chris Van Hollen, Montgomery County Democrat and member of the House leadership, with a practical alternative. Mr. Van Hollen, with co-sponsors, has introduced legislation to create "reconstruction opportunity zones" within both countries. Certain products, including some (not all) textiles, produced within the zones would enjoy duty-free access to the U.S. market for 15 years. This would encourage investment by local businessmen, who best know the terrain, and create jobs. There's no better formula for discouraging Taliban recruitment.
It's not a magic formula, of course. The investment areas have to be drawn widely enough to make the prospect of investment realistic; if you limit them to the most intense battle zones, you're not going to see many jobs created. The bigger they are, though, the likelier the bill will arouse union opposition, so the politics are tricky. Mr. Van Hollen and his co-sponsors -- including Reps. Sander M. Levin (D-Mich), Peter Hoekstra (R-Mich.) and Mark Steven Kirk (R-Ill.) -- have tried to find the sweet spot, and their bill also insists that any factories in the zones meet core international standards in their treatment of workers.
Maybe the strongest argument for the opportunity zones is that there is no down side; the worst that could possibly happen is they don't trigger much investment. But they would immediately provide a signal of U.S. commitment -- the governments of both countries strongly support the idea -- and they could have a substantial positive effect reasonably quickly, at almost no cost to the U.S. Treasury. Congress and the administration should get behind this idea.
Executives Detail Card Check Legislation Compromise
Executives Detail Labor Bill Compromise. By Alec MacGillis
Washington Post, Sunday, March 22, 2009; A02
As business and labor gird for battle over legislation that would make it easier for workers to organize, the debate could be transformed by a "third way" proposed by three companies that like to project a progressive image: Costco, Starbucks and Whole Foods.
Like other businesses, the three companies are opposed to two of the Employee Free Choice Act's components -- a provision that would allow workers to form a union if a majority sign pro-union cards, without having to hold a secret-ballot election, and one that would impose binding arbitration when employers and unions fail to reach a contract after 120 days.
But the companies' chief executive officers say they also recognize that just opposing the legislation, commonly called "card check," is not enough because of the widespread perception in Democrat-dominated Washington that there is not a level playing field between labor and business. So the CEOs have come up with ideas they hope will form the basis of new legislation.
Their proposal would maintain management's right to demand a secret-ballot election and would leave out binding arbitration. The proposal would keep the third main element of card check -- toughening the penalties for companies that retaliate against workers before union elections or refuse to engage in collective bargaining. But it would also toughen penalties for union violations, and it would make it easier for businesses to call elections to try to decertify a union.
To address labor's concern that businesses intimidate workers before elections, it would set a fixed period in which an election must be held, limiting the delays that give employers time to exert pressure. The proposal does not specify what the time period should be.
The proposal would also provide unions equal access to workers before elections -- for instance, by allowing organizers to address workers on a lunch break in the company cafeteria just as management can.
"We wanted to see what we can do to come up with a compromise position that is going to address the concerns of labor and also protect the sanctity of the collective bargaining process and secret ballot," said Costco Wholesale chief executive James D. Sinegal.
Starbucks chief executive Howard Schultz cast the proposal in more defensive terms. "The way the wind is blowing, we're heading toward a bill that is not the right approach," he said. "My responsibility is to not be a bystander but to offer a voice of reason, offer a more positive alternative that levels the playing field."
The effort is being led in Washington by Lanny Davis, a former special counsel to President Bill Clinton. Davis said he had approached about 20 Senate offices and gotten an overwhelmingly encouraging response. The Employee Free Choice Act has majority support in both chambers, but there are signs it may have trouble getting a filibuster-proof 60 votes in the Senate, where several centrist Democrats who previously supported it are expressing reservations.
Sen. Mark Pryor (D-Ark.), a centrist who is ambivalent about card check, praised the companies' proposal. "I appreciate a good-faith effort that could result in a reasonable compromise on what has become a highly polarizing matter," he said.
Davis said he thought that the proposal would intrigue President Obama, who as a senator was a co-sponsor of the card-check bill in 2007 but signaled in an interview before his inauguration that he was also open to other proposals to help organized labor. "This is consistent with President Obama's overall approach of avoiding polarized positions and looking for third-way ideas," Davis said.
The business lobby has been warning against any moves to tweak card check just enough to give centrists cover to support it. And word that a compromise is circulating from three "progressive" companies prompted business groups to warn yesterday against premature compromise.
But it is possible that the proposal will generate even greater opposition among unions and their supporters in Congress. Some business groups say they are open to limited changes in organizing rules, separate from card check -- a position not so far from what the three companies propose.
Labor unions, though, are adamant that workers be able to choose to organize via card check so they can avoid employer intimidation before elections. They say binding arbitration is needed because so many companies refuse to bargain -- nearly half of new unions never even get a contract.
The three CEOs are at odds with those planks. Whole Foods Market chief executive John Mackey said that binding arbitration is "not the way we normally do things in the United States" and that allowing workers to organize without a secret ballot "violates a bedrock principle of American democracy."
And the CEOs also do not share the labor movement's underlying belief that the decline of organized labor has contributed to income inequality and the economy's current imbalance. "That so few companies are unionized is not for a lack of trying but because [unions] are losing elections -- workers aren't choosing to have labor representation," Mackey said. "I don't feel things are worse off for labor today."
Of the three companies, only Costco has a substantial minority of employees that are unionized -- about a fifth of its hourly employees belong to the Teamsters, with whom it has good relations. Starbucks and Whole Foods have resisted most unionizing efforts.
Giving organizers the ability to use card check, Schultz said, would lead to a slew of separate bargaining units at a company like his, leading to "havoc and significant cost and disruption." Mackey had an even grimmer view. "Armed with those weapons, you will see unionization sweep across the United States and set workplaces at war with each other," he said. "I do not think it would be a good thing."
Washington Post, Sunday, March 22, 2009; A02
As business and labor gird for battle over legislation that would make it easier for workers to organize, the debate could be transformed by a "third way" proposed by three companies that like to project a progressive image: Costco, Starbucks and Whole Foods.
Like other businesses, the three companies are opposed to two of the Employee Free Choice Act's components -- a provision that would allow workers to form a union if a majority sign pro-union cards, without having to hold a secret-ballot election, and one that would impose binding arbitration when employers and unions fail to reach a contract after 120 days.
But the companies' chief executive officers say they also recognize that just opposing the legislation, commonly called "card check," is not enough because of the widespread perception in Democrat-dominated Washington that there is not a level playing field between labor and business. So the CEOs have come up with ideas they hope will form the basis of new legislation.
Their proposal would maintain management's right to demand a secret-ballot election and would leave out binding arbitration. The proposal would keep the third main element of card check -- toughening the penalties for companies that retaliate against workers before union elections or refuse to engage in collective bargaining. But it would also toughen penalties for union violations, and it would make it easier for businesses to call elections to try to decertify a union.
To address labor's concern that businesses intimidate workers before elections, it would set a fixed period in which an election must be held, limiting the delays that give employers time to exert pressure. The proposal does not specify what the time period should be.
The proposal would also provide unions equal access to workers before elections -- for instance, by allowing organizers to address workers on a lunch break in the company cafeteria just as management can.
"We wanted to see what we can do to come up with a compromise position that is going to address the concerns of labor and also protect the sanctity of the collective bargaining process and secret ballot," said Costco Wholesale chief executive James D. Sinegal.
Starbucks chief executive Howard Schultz cast the proposal in more defensive terms. "The way the wind is blowing, we're heading toward a bill that is not the right approach," he said. "My responsibility is to not be a bystander but to offer a voice of reason, offer a more positive alternative that levels the playing field."
The effort is being led in Washington by Lanny Davis, a former special counsel to President Bill Clinton. Davis said he had approached about 20 Senate offices and gotten an overwhelmingly encouraging response. The Employee Free Choice Act has majority support in both chambers, but there are signs it may have trouble getting a filibuster-proof 60 votes in the Senate, where several centrist Democrats who previously supported it are expressing reservations.
Sen. Mark Pryor (D-Ark.), a centrist who is ambivalent about card check, praised the companies' proposal. "I appreciate a good-faith effort that could result in a reasonable compromise on what has become a highly polarizing matter," he said.
Davis said he thought that the proposal would intrigue President Obama, who as a senator was a co-sponsor of the card-check bill in 2007 but signaled in an interview before his inauguration that he was also open to other proposals to help organized labor. "This is consistent with President Obama's overall approach of avoiding polarized positions and looking for third-way ideas," Davis said.
The business lobby has been warning against any moves to tweak card check just enough to give centrists cover to support it. And word that a compromise is circulating from three "progressive" companies prompted business groups to warn yesterday against premature compromise.
But it is possible that the proposal will generate even greater opposition among unions and their supporters in Congress. Some business groups say they are open to limited changes in organizing rules, separate from card check -- a position not so far from what the three companies propose.
Labor unions, though, are adamant that workers be able to choose to organize via card check so they can avoid employer intimidation before elections. They say binding arbitration is needed because so many companies refuse to bargain -- nearly half of new unions never even get a contract.
The three CEOs are at odds with those planks. Whole Foods Market chief executive John Mackey said that binding arbitration is "not the way we normally do things in the United States" and that allowing workers to organize without a secret ballot "violates a bedrock principle of American democracy."
And the CEOs also do not share the labor movement's underlying belief that the decline of organized labor has contributed to income inequality and the economy's current imbalance. "That so few companies are unionized is not for a lack of trying but because [unions] are losing elections -- workers aren't choosing to have labor representation," Mackey said. "I don't feel things are worse off for labor today."
Of the three companies, only Costco has a substantial minority of employees that are unionized -- about a fifth of its hourly employees belong to the Teamsters, with whom it has good relations. Starbucks and Whole Foods have resisted most unionizing efforts.
Giving organizers the ability to use card check, Schultz said, would lead to a slew of separate bargaining units at a company like his, leading to "havoc and significant cost and disruption." Mackey had an even grimmer view. "Armed with those weapons, you will see unionization sweep across the United States and set workplaces at war with each other," he said. "I do not think it would be a good thing."
Saturday, March 21, 2009
President Obama's health benefits tax plans
Vindicating McCain. WSJ Editorial
WSJ, Mar 21, 2009
The worst-kept secret on Capitol Hill is that Democrats have always planned to tax health benefits to pay for their "universal" health-care plans. Now White House aides are whispering that they're also open to the idea. Maybe they will all now apologize to John McCain for trashing his proposal to do the same thing in the Presidential campaign.
Democrats are desperately searching for the $1.2 trillion and more they'll need to subsidize middle-class health coverage. With deficits already at epic levels, more spending is politically a harder sell. So they're now circling the tax deduction that employers receive to offer insurance to their workers for the same reason that Willie Sutton robbed banks, because that's where the money is.
Most likely, Democrats will cap the exclusion by income or cost of the health plan, so that those with the most gold-plated benefits pay more for the privilege. The Congressional Budget Office estimates that a ceiling at the 75th percentile of current levels would generate $452 billion over 10 years.
But hold on. John McCain also wanted to reform this tax break, which goes only to business. Individuals don't get the same tax break if they buy insurance themselves. Mr. McCain proposed to gradually replace the workplace deduction with a refundable tax credit available to all Americans, regardless of where they acquired their coverage. Mr. Obama attacked him ruthlessly for it.
"And this is your plan, John," he said at one debate. "For the first time in history, you will be taxing people's health-care benefits." Mr. Obama added that the McCain proposal was "radical," "the biggest middle-class tax increase in history," "out of line with our basic values" and that "the choice you'll have is having your employer no longer provide you health care." Combined with heavy advertising and Mr. McCain's inability to defend his own ideas, these distortions were highly effective.
In a deeply cynical turnabout, the White House now says a tax on employer benefits is acceptable as long as someone else proposes it. We suppose anyone would be embarrassed to endorse a fundamental insight that he once claimed was vile and destructive.
The reality is that the employer-based tax deduction is the original sin of our health-care system. Particularly indefensible is the coverage gap it creates between those who receive it from their employers and those who pay (or can't afford to pay) for their own policies with after-tax dollars. A universal deduction or credit would restore tax parity -- and gradually stimulate the demand for new, less expensive insurance where consumers, not their bosses, are in charge.
This relic of the World War II era has also left us with a health-care financing "system" that only a central planner could love, with neither a functional price mechanism nor the capacity to recognize value. The employer-exclusive deduction has created what is essentially a giant money laundering operation, an endless cycle of third parties lacking any direct stake in controlling costs elsewhere -- when they're not profiting from the waste.
Capping the open-ended tax exclusion is a perfectly sensible idea, which would discipline the excess health insurance that contributes to rising health spending. The problem is that reducing the exclusion means withdrawing a benefit, which is easy to demagogue, as Mr. Obama showed in 2008. It is also unpopular among unions, which have often secured Cadillac health plans in labor contracts. But we suspect the unions will come around if they get the taxpayers to pay for health care instead.
The deeper problem is that Democrats don't want to create a new private market for individual health insurance. Their goal in reducing the employer tax deduction is to apply the revenue to finance a new "public option," a subsidized program modeled after Medicare and open to the middle class that would crowd out private insurers. Another idea is to provide the tax subsidy only to businesses that comply with a new federally mandated benefits package.
The almost certain long-run outcome of these efforts is the total nationalization of health care. Anyone who believed Mr. Obama when he said that under his plan "you can keep your health insurance, keep your choice of doctor, keep your plan" should think twice. Everything else he said during his campaign is obviously subject to change, as John McCain can attest.
WSJ, Mar 21, 2009
The worst-kept secret on Capitol Hill is that Democrats have always planned to tax health benefits to pay for their "universal" health-care plans. Now White House aides are whispering that they're also open to the idea. Maybe they will all now apologize to John McCain for trashing his proposal to do the same thing in the Presidential campaign.
Democrats are desperately searching for the $1.2 trillion and more they'll need to subsidize middle-class health coverage. With deficits already at epic levels, more spending is politically a harder sell. So they're now circling the tax deduction that employers receive to offer insurance to their workers for the same reason that Willie Sutton robbed banks, because that's where the money is.
Most likely, Democrats will cap the exclusion by income or cost of the health plan, so that those with the most gold-plated benefits pay more for the privilege. The Congressional Budget Office estimates that a ceiling at the 75th percentile of current levels would generate $452 billion over 10 years.
But hold on. John McCain also wanted to reform this tax break, which goes only to business. Individuals don't get the same tax break if they buy insurance themselves. Mr. McCain proposed to gradually replace the workplace deduction with a refundable tax credit available to all Americans, regardless of where they acquired their coverage. Mr. Obama attacked him ruthlessly for it.
"And this is your plan, John," he said at one debate. "For the first time in history, you will be taxing people's health-care benefits." Mr. Obama added that the McCain proposal was "radical," "the biggest middle-class tax increase in history," "out of line with our basic values" and that "the choice you'll have is having your employer no longer provide you health care." Combined with heavy advertising and Mr. McCain's inability to defend his own ideas, these distortions were highly effective.
In a deeply cynical turnabout, the White House now says a tax on employer benefits is acceptable as long as someone else proposes it. We suppose anyone would be embarrassed to endorse a fundamental insight that he once claimed was vile and destructive.
The reality is that the employer-based tax deduction is the original sin of our health-care system. Particularly indefensible is the coverage gap it creates between those who receive it from their employers and those who pay (or can't afford to pay) for their own policies with after-tax dollars. A universal deduction or credit would restore tax parity -- and gradually stimulate the demand for new, less expensive insurance where consumers, not their bosses, are in charge.
This relic of the World War II era has also left us with a health-care financing "system" that only a central planner could love, with neither a functional price mechanism nor the capacity to recognize value. The employer-exclusive deduction has created what is essentially a giant money laundering operation, an endless cycle of third parties lacking any direct stake in controlling costs elsewhere -- when they're not profiting from the waste.
Capping the open-ended tax exclusion is a perfectly sensible idea, which would discipline the excess health insurance that contributes to rising health spending. The problem is that reducing the exclusion means withdrawing a benefit, which is easy to demagogue, as Mr. Obama showed in 2008. It is also unpopular among unions, which have often secured Cadillac health plans in labor contracts. But we suspect the unions will come around if they get the taxpayers to pay for health care instead.
The deeper problem is that Democrats don't want to create a new private market for individual health insurance. Their goal in reducing the employer tax deduction is to apply the revenue to finance a new "public option," a subsidized program modeled after Medicare and open to the middle class that would crowd out private insurers. Another idea is to provide the tax subsidy only to businesses that comply with a new federally mandated benefits package.
The almost certain long-run outcome of these efforts is the total nationalization of health care. Anyone who believed Mr. Obama when he said that under his plan "you can keep your health insurance, keep your choice of doctor, keep your plan" should think twice. Everything else he said during his campaign is obviously subject to change, as John McCain can attest.
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