Congress and Waterboarding. WSJ Editorial
Nancy Pelosi was an accomplice to 'torture.'
WSJ, May 14, 2009
Someone important appears not to be telling the truth about her knowledge of the CIA's use of enhanced interrogation techniques (EITs). That someone is Speaker of the House Nancy Pelosi. The political persecution of Bush administration officials she has been pushing may now ensnare her.
Here's what we know. On Sept. 4, 2002, less than a year after 9/11, the CIA briefed Rep. Porter Goss, then House Intelligence Committee chairman, and Mrs. Pelosi, then the committee's ranking Democrat, on EITs including waterboarding. They were the first members of Congress to be informed.
In December 2007, Mrs. Pelosi admitted that she attended the briefing, but she wouldn't comment for the record about precisely what she was told. At the time the Washington Post spoke with a "congressional source familiar with Pelosi's position on the matter" and summarized that person's comments this way: "The source said Pelosi recalls that techniques described by the CIA were still in the planning stage -- they had been designed and cleared with agency lawyers but not yet put in practice -- and acknowledged that Pelosi did not raise objections at the time."
When questions were raised last month about these statements, Mrs. Pelosi insisted at a news conference that "We were not -- I repeat -- were not told that waterboarding or any of these other enhanced interrogation methods were used." Mrs. Pelosi also claimed that the CIA "did not tell us they were using that, flat out. And any, any contention to the contrary is simply not true." She had earlier said on TV, "I can say flat-out, they never told us that these enhanced interrogations were being used."
The Obama administration's CIA director, Leon Panetta, and Mr. Goss have both disputed Mrs. Pelosi's account.
In a report to Congress on May 5, Mr. Panetta described the CIA's 2002 meeting with Mrs. Pelosi as "Briefing on EITs including use of EITs on Abu Zubaydah, background on [legal] authorities, and a description of the particular EITs that had been employed." Note the past tense -- "had been employed."
Mr. Goss says he and Mrs. Pelosi were told at the 2002 briefing about the use of the EITs and "on a bipartisan basis, we asked if the CIA needed more support from Congress to carry out its mission." He is backed by CIA sources who say Mr. Goss and Mrs. Pelosi "questioned whether we were doing enough" to extract information.
We also know that Michael Sheehy, then Mrs. Pelosi's top aide on the Intelligence Committee and later her national security adviser, not only attended the September 2002 meeting but was also briefed by the CIA on EITs on Feb. 5, 2003, and told about a videotape of Zubaydah being waterboarded. Mr. Sheehy was almost certain to have told Mrs. Pelosi. He has not commented publicly about the 2002 or the 2003 meetings.
So is the speaker of the House lying about what she knew and when? And, if so, what will Democrats do about it?
If Mrs. Pelosi considers the enhanced interrogation techniques to be torture, didn't she have a responsibility to complain at the time, introduce legislation to end the practices, or attempt to deny funding for the CIA's use of them? If she knew what was going on and did nothing, does that make her an accessory to a crime of torture, as many Democrats are calling enhanced interrogation?
Senate Judiciary Chairman Pat Leahy wants an independent investigation of Bush administration officials. House Judiciary Chairman John Conyers feels the Justice Department should investigate and prosecute anyone who violated laws against committing torture. Are these and other similarly minded Democrats willing to have Mrs. Pelosi thrown into their stew of torture conspirators as an accomplice?
It is clear that after the 9/11 attacks Mrs. Pelosi was briefed on enhanced interrogation techniques and the valuable information they produced. She not only agreed with what was being done, she apparently pressed the CIA to do more.
But when political winds shifted, Mrs. Pelosi seems to have decided to use enhanced interrogation as an issue to attack Republicans. It is disgraceful that Democrats who discovered their outrage years after the fact are now braying for disbarment of the government lawyers who justified EITs and the prosecution of Bush administration officials who authorized them. Mrs. Pelosi is hip-deep in dangerous waters, and they are rapidly rising.
Mr. Rove is the former senior adviser and deputy chief of staff to President George W. Bush.
Thursday, May 14, 2009
Target: Intel, and Competition
Target: Intel, and Competition. WSJ Editorial
Team Obama adopts the European model on antitrust.
WSJ, May 14, 2009
The world is returning to the 1970s on most economic policies, so why not antitrust too? Judging by events this week, antitrust enforcement in the U.S. and Europe is in for a major comeback, whether or not consumers benefit.
Yesterday in Brussels, the European Commission imposed a record antitrust fine of $1.45 billion on Intel for the heinous crime of discounting computer chips in its fierce and long-running competition with AMD. Meanwhile on Monday, President Obama's new antitrust chief, Christine Varney, issued a radical revision of the Department of Justice's own antitrust enforcement standards. Ms. Varney's ambition seems to be nothing less than bringing Europe's corporatist approach to competition policy to the U.S. To succeed, she will have to flout or overturn decades of Supreme Court precedent on the limits of U.S. antitrust law.
But Ms. Varney can be sure of a friendly ear in Brussels, which has never let go of the idea that competition is best when there isn't much of it. The Commission's attitude is on full display in the fining of Intel for allegedly abusing its dominant position in the market for computer processors. For years, Intel and AMD have been essentially the only game in town for computer CPUs. The Commission's complaint amounts to little more than a whinge that Intel won more of this business than the Commission would prefer.
This is couched in dark-sounding talk about Intel paying computer makers not to buy AMD chips. But remember there is only so much demand and there are only two major market players. So any order won by Intel by offering a discount or a rebate is, by definition, an order lost by AMD. And yet the Commission bizarrely claims that "millions of Europeans" have been harmed by this price war.
Intel has been able to sell enough chips cheaply enough to maintain an overall market share that has hovered between 75% and 80% for years. And those lower prices help drive down the price of a computer, which is good for consumers. A less competitive market for chips, or one in which Intel is barred from offering discounts to its biggest customers, would mean higher consumer prices. The Commission also suggests that Intel may have sold some chips below its cost, but Intel denies this and claims it can prove it if the Commission would deign to consider its evidence.
The Commission is, as ever, more focused on preserving competitor welfare above consumer welfare, and Ms. Varney at Justice seems to be promoting a similar approach. The American left likes to advertise itself as pro-consumer. But the curious reality about the left's view of antitrust in both Europe and America is that it is often used to assist big business by dampening competition. This corporatist notion seems to be that companies should compete, so long as no one really loses. Ms. Varney paid lip service to the dangers of protecting competitors when she criticized the National Industrial Recovery Act, ushered in by FDR during the Great Depression. That odious piece of industrial policy blessed price collusion between big firms in exchange for a commitment to keep people employed and share some of the collusive profits with labor.
But in her speech, Ms. Varney tries to cast this anticompetitive act as a form of deregulation. In fact, the NIRA was regulation of the worst sort, protecting competitors from competitive harm in the name of some greater good. True deregulation aims at greater competition, while European (and Rooseveltian) corporatism dampens it. This historical obfuscation allows Ms. Varney to argue that it would be good for competition to adopt something like Europe's "abuse of dominant position" standard in place of the consumer-harm test that currently prevails in the U.S.
Europe's Intel case makes the importance of these different tests very clear. By any reasonable application of a consumer-harm test, the antitrust claim that Intel is driving down prices -- and so making computers less expensive -- would be laughed out of U.S. court. The only harm here is to a competitor that can't match Intel's prices. And even at that, AMD isn't exactly going out of business. At times its market share for consumer desktop CPUs has been as high as 50%, and at its most successful the upper bound has been determined as much by AMD's own manufacturing capacity as by Intel's behavior.
When she announced the judgment against Intel Wednesday, European Competition Commissioner Neelie Kroes praised Ms. Varney's new approach to antitrust. And no wonder. Regulators love company, and European regulators in particular love it when their American counterparts help them hamstring the most efficient U.S. companies. Why President Obama should want to punish U.S. multinationals is harder to figure since his political success hangs on economic recovery and a revival in business profits and hiring. But perhaps we should conclude that this is merely one more example of the ways in which this Administration is seeking to remake American capitalism in the image of Continental Europe.
Team Obama adopts the European model on antitrust.
WSJ, May 14, 2009
The world is returning to the 1970s on most economic policies, so why not antitrust too? Judging by events this week, antitrust enforcement in the U.S. and Europe is in for a major comeback, whether or not consumers benefit.
Yesterday in Brussels, the European Commission imposed a record antitrust fine of $1.45 billion on Intel for the heinous crime of discounting computer chips in its fierce and long-running competition with AMD. Meanwhile on Monday, President Obama's new antitrust chief, Christine Varney, issued a radical revision of the Department of Justice's own antitrust enforcement standards. Ms. Varney's ambition seems to be nothing less than bringing Europe's corporatist approach to competition policy to the U.S. To succeed, she will have to flout or overturn decades of Supreme Court precedent on the limits of U.S. antitrust law.
But Ms. Varney can be sure of a friendly ear in Brussels, which has never let go of the idea that competition is best when there isn't much of it. The Commission's attitude is on full display in the fining of Intel for allegedly abusing its dominant position in the market for computer processors. For years, Intel and AMD have been essentially the only game in town for computer CPUs. The Commission's complaint amounts to little more than a whinge that Intel won more of this business than the Commission would prefer.
This is couched in dark-sounding talk about Intel paying computer makers not to buy AMD chips. But remember there is only so much demand and there are only two major market players. So any order won by Intel by offering a discount or a rebate is, by definition, an order lost by AMD. And yet the Commission bizarrely claims that "millions of Europeans" have been harmed by this price war.
Intel has been able to sell enough chips cheaply enough to maintain an overall market share that has hovered between 75% and 80% for years. And those lower prices help drive down the price of a computer, which is good for consumers. A less competitive market for chips, or one in which Intel is barred from offering discounts to its biggest customers, would mean higher consumer prices. The Commission also suggests that Intel may have sold some chips below its cost, but Intel denies this and claims it can prove it if the Commission would deign to consider its evidence.
The Commission is, as ever, more focused on preserving competitor welfare above consumer welfare, and Ms. Varney at Justice seems to be promoting a similar approach. The American left likes to advertise itself as pro-consumer. But the curious reality about the left's view of antitrust in both Europe and America is that it is often used to assist big business by dampening competition. This corporatist notion seems to be that companies should compete, so long as no one really loses. Ms. Varney paid lip service to the dangers of protecting competitors when she criticized the National Industrial Recovery Act, ushered in by FDR during the Great Depression. That odious piece of industrial policy blessed price collusion between big firms in exchange for a commitment to keep people employed and share some of the collusive profits with labor.
But in her speech, Ms. Varney tries to cast this anticompetitive act as a form of deregulation. In fact, the NIRA was regulation of the worst sort, protecting competitors from competitive harm in the name of some greater good. True deregulation aims at greater competition, while European (and Rooseveltian) corporatism dampens it. This historical obfuscation allows Ms. Varney to argue that it would be good for competition to adopt something like Europe's "abuse of dominant position" standard in place of the consumer-harm test that currently prevails in the U.S.
Europe's Intel case makes the importance of these different tests very clear. By any reasonable application of a consumer-harm test, the antitrust claim that Intel is driving down prices -- and so making computers less expensive -- would be laughed out of U.S. court. The only harm here is to a competitor that can't match Intel's prices. And even at that, AMD isn't exactly going out of business. At times its market share for consumer desktop CPUs has been as high as 50%, and at its most successful the upper bound has been determined as much by AMD's own manufacturing capacity as by Intel's behavior.
When she announced the judgment against Intel Wednesday, European Competition Commissioner Neelie Kroes praised Ms. Varney's new approach to antitrust. And no wonder. Regulators love company, and European regulators in particular love it when their American counterparts help them hamstring the most efficient U.S. companies. Why President Obama should want to punish U.S. multinationals is harder to figure since his political success hangs on economic recovery and a revival in business profits and hiring. But perhaps we should conclude that this is merely one more example of the ways in which this Administration is seeking to remake American capitalism in the image of Continental Europe.
Wednesday, May 13, 2009
On the Stern Review on the Economics of Climate Change and Discount Rates
Discounting the Future. By Indur M Goklany
Is it equitable to favor tomorrow’s wealthier generations over today’s poorer generations?
Cato "Regulation" - May 2009
[Full article at the link above]
One of the difficulties of analyzing climate change policies is that the costs of greenhouse gas emission reductions would be near-term while any benefits from those reductions would be delayed because of the inertia of the climate system.How should we compare costs and benefits that occur at different times? This, of course, isn.t a new problem. It is inherent to any investment that provides less than instant gratification, but it becomes a critical issue if an investment -and its associated benefits- are spread out over several years. It is precisely to deal with such problems that economists developed discounting.
Discounting recognizes that both individuals and societies prefer to get benefits sooner and to postpone any costs untillater. Discounting gives lesser weight to benefits and costs that occur in future years. Thus, for each year that eithercosts or benefits are delayed, their value is reduced by the annual discount rate.
Because this reduction is compounded, a benefit of $1 trillion obtained in the year 2100 would be valued much lower today. The higher the discount rate, the lower the present value of either costs or benefits occurring in the future. Thus a trillion-dollar benefit in the year 2100 would be valued today at only $1.2 billion if the annual discount rate is 7 percent, but at $52 billion if the discount rate is 3 percent.
Many people argue that if we value future generations. welfare, then we are ethically bound to employ a lower discount rate for future benefits that stem from global warming control policies enacted today. In contrast, use of a high discount rate for future benefits reduces the likelihood that carbon emission constraints today would pass a benefit-cost test, which, it is claimed, could put the welfare of future generations at risk. Some analysts such as Nicholas Stern, who conducted the Stern Review on the Economics of Climate Change, while emphasizing intergenerational equity, would use a near-zero discount rate (adjusted for the probability that a catastrophe might wipe out the human race and for the possibility that future generations may be wealthier than us). But the underlying premise behind using a low discount rate is that climate change, unless reduced sufficiently, could or would leave future generations worse off than current generations. This contrasts with the standard practice of using a market discount rate for both costs and benefits, so as to better consider the opportunity costs and avoid hurting both current and future generations by depriving them of the benefits flowing from current investments.
In this article, I address the threshold question of whether future generations would in fact be worse off than we are if climate change is allowed to occur and is uncontrolled. I compare current and future welfare per capita after accounting for the costs of climate change. To do this, I will reduce estimates of future welfare per capita in the absence of climate change by estimates of the welfare losses from climate change. For those downward adjustments, I use the Stern Review.s estimates of the costs of climate change from market effects, non-market (i.e., public health and environmental) effects, and the risk of catastrophe, even though several researchers have characterized the Stern Review.s estimates as excessive. I show that through 2200, at least, future generations will be much better off than present ones even after accounting for the costs of climate change.
Is it equitable to favor tomorrow’s wealthier generations over today’s poorer generations?
Cato "Regulation" - May 2009
[Full article at the link above]
One of the difficulties of analyzing climate change policies is that the costs of greenhouse gas emission reductions would be near-term while any benefits from those reductions would be delayed because of the inertia of the climate system.How should we compare costs and benefits that occur at different times? This, of course, isn.t a new problem. It is inherent to any investment that provides less than instant gratification, but it becomes a critical issue if an investment -and its associated benefits- are spread out over several years. It is precisely to deal with such problems that economists developed discounting.
Discounting recognizes that both individuals and societies prefer to get benefits sooner and to postpone any costs untillater. Discounting gives lesser weight to benefits and costs that occur in future years. Thus, for each year that eithercosts or benefits are delayed, their value is reduced by the annual discount rate.
Because this reduction is compounded, a benefit of $1 trillion obtained in the year 2100 would be valued much lower today. The higher the discount rate, the lower the present value of either costs or benefits occurring in the future. Thus a trillion-dollar benefit in the year 2100 would be valued today at only $1.2 billion if the annual discount rate is 7 percent, but at $52 billion if the discount rate is 3 percent.
Many people argue that if we value future generations. welfare, then we are ethically bound to employ a lower discount rate for future benefits that stem from global warming control policies enacted today. In contrast, use of a high discount rate for future benefits reduces the likelihood that carbon emission constraints today would pass a benefit-cost test, which, it is claimed, could put the welfare of future generations at risk. Some analysts such as Nicholas Stern, who conducted the Stern Review on the Economics of Climate Change, while emphasizing intergenerational equity, would use a near-zero discount rate (adjusted for the probability that a catastrophe might wipe out the human race and for the possibility that future generations may be wealthier than us). But the underlying premise behind using a low discount rate is that climate change, unless reduced sufficiently, could or would leave future generations worse off than current generations. This contrasts with the standard practice of using a market discount rate for both costs and benefits, so as to better consider the opportunity costs and avoid hurting both current and future generations by depriving them of the benefits flowing from current investments.
In this article, I address the threshold question of whether future generations would in fact be worse off than we are if climate change is allowed to occur and is uncontrolled. I compare current and future welfare per capita after accounting for the costs of climate change. To do this, I will reduce estimates of future welfare per capita in the absence of climate change by estimates of the welfare losses from climate change. For those downward adjustments, I use the Stern Review.s estimates of the costs of climate change from market effects, non-market (i.e., public health and environmental) effects, and the risk of catastrophe, even though several researchers have characterized the Stern Review.s estimates as excessive. I show that through 2200, at least, future generations will be much better off than present ones even after accounting for the costs of climate change.
'A Blatant Extortion': the DBPC case in Nicaragua and Dole Food
'A Blatant Extortion.' WSJ Editorial
A judge slams plaintiffs lawyers' torts-for-import game.
WSJ, May 13, 2009
Court cases get dismissed all the time, but rarely are dismissals as significant as the two lawsuits against Dole Food and other companies that were tossed recently by a California judge. Among other good things, the ruling is a setback for tort lawyers who troll abroad seeking dubious claims to bring in U.S. courts.
The allegations against Dole, the world's largest fruit and vegetable producer, involved banana plantation workers in Nicaragua who alleged that exposure to the pesticide DBPC in the 1970s left them sterile. The only problem is that most of the plaintiffs had not worked at plantations and weren't sterile. In fact, there's no evidence that farm workers at Dole facilities were exposed to harmful levels of the chemical -- which was legal and widely used at the time -- or that the level of exposure they did experience even causes sterility.
"What has occurred here is not just a fraud on the court, but it is a blatant extortion of the defendants," said Los Angeles Superior Court Judge Victoria Chaney in her oral ruling. More than 40 related cases involving thousands of plaintiffs from Honduras, Costa Rica, Guatemala, Panama and the Ivory Coast are pending in her court. And the ruling puts in doubt some $2 billion in judgments that plaintiffs lawyers have already obtained in Nicaragua.
Judge Chaney dismissed the cases "with prejudice" to prevent the plaintiffs from filing again on the same claims, and she denounced the lawyers who hatched the scheme. "This is a very sad day for me to be presiding over such a horrific situation," said the judge, who described a "pervasive conspiracy" involving U.S. plaintiffs lawyers and corrupt Nicaraguan judges.
Judge Chaney said she heard evidence of U.S. attorneys colluding with judges, lab technicians and local officials in Nicaragua to suborn perjury and doctor medical reports. Ten thousand men were rounded up and coached to make false claims of sterility in hope of reaping billions of dollars from companies like Dole, Dow Chemical and Amvac. Anyone who revealed the ruse was threatened with violence, as were the U.S. investigators hired by the defendants.
"There have been groups of medical personnel providing sham laboratory reports indicating sterility where none really exists; groups of fathers denying paternity of their own children, posing as lonely men coming into the court, saying that they had no solace in their old age because they have no children," said the judge.
Plaintiffs attorney Juan Dominguez of Los Angeles was singled out for alleged behavior that Judge Chaney said has "criminal overtones." At a hearing last week, she announced that she was referring Mr. Dominguez to federal prosecutors for investigation of perjury, obstruction of justice, defrauding the court and conspiring to defraud a U.S. company. Mr. Dominguez didn't show at Judge Chaney's hearing and is thought to be somewhere in Nicaragua.
The plaintiffs were also represented by the Sacramento firm of Miller, Axline & Sawyer. The judge said she didn't believe the Miller Axline lawyers were in on the conspiracy but added that they should have been suspicious. "I would have thought that a bit of vigilance would have suggested to plaintiff's counsel that something was awry," she said.
The ruling is especially useful as a rebuke to the torts-for-import business, whereby U.S. tort lawyers travel abroad, join with local lawyers to manufacture claims, and then engage in client recruitment practices that are blatantly illegal in the U.S. In essence, the tort bar's goal is to import lawsuits from foreign countries where it's nearly impossible to challenge claims on factual grounds because evidence is hard to come by. In a related case involving Dole, the Texas plaintiffs firm Provost Umphrey is asking a federal judge in Miami to enforce a $98.5 million judgment obtained by banana farm workers in Nicaragua. Never mind that the Nicaraguan judge who made the initial ruling is the same one cited by Judge Chaney for allegedly taking bribes and fixing cases against U.S. firms.
Judge Chaney's actions are a welcome act of legal hygiene and an example for other judges of how to police false legal claims.
A judge slams plaintiffs lawyers' torts-for-import game.
WSJ, May 13, 2009
Court cases get dismissed all the time, but rarely are dismissals as significant as the two lawsuits against Dole Food and other companies that were tossed recently by a California judge. Among other good things, the ruling is a setback for tort lawyers who troll abroad seeking dubious claims to bring in U.S. courts.
The allegations against Dole, the world's largest fruit and vegetable producer, involved banana plantation workers in Nicaragua who alleged that exposure to the pesticide DBPC in the 1970s left them sterile. The only problem is that most of the plaintiffs had not worked at plantations and weren't sterile. In fact, there's no evidence that farm workers at Dole facilities were exposed to harmful levels of the chemical -- which was legal and widely used at the time -- or that the level of exposure they did experience even causes sterility.
"What has occurred here is not just a fraud on the court, but it is a blatant extortion of the defendants," said Los Angeles Superior Court Judge Victoria Chaney in her oral ruling. More than 40 related cases involving thousands of plaintiffs from Honduras, Costa Rica, Guatemala, Panama and the Ivory Coast are pending in her court. And the ruling puts in doubt some $2 billion in judgments that plaintiffs lawyers have already obtained in Nicaragua.
Judge Chaney dismissed the cases "with prejudice" to prevent the plaintiffs from filing again on the same claims, and she denounced the lawyers who hatched the scheme. "This is a very sad day for me to be presiding over such a horrific situation," said the judge, who described a "pervasive conspiracy" involving U.S. plaintiffs lawyers and corrupt Nicaraguan judges.
Judge Chaney said she heard evidence of U.S. attorneys colluding with judges, lab technicians and local officials in Nicaragua to suborn perjury and doctor medical reports. Ten thousand men were rounded up and coached to make false claims of sterility in hope of reaping billions of dollars from companies like Dole, Dow Chemical and Amvac. Anyone who revealed the ruse was threatened with violence, as were the U.S. investigators hired by the defendants.
"There have been groups of medical personnel providing sham laboratory reports indicating sterility where none really exists; groups of fathers denying paternity of their own children, posing as lonely men coming into the court, saying that they had no solace in their old age because they have no children," said the judge.
Plaintiffs attorney Juan Dominguez of Los Angeles was singled out for alleged behavior that Judge Chaney said has "criminal overtones." At a hearing last week, she announced that she was referring Mr. Dominguez to federal prosecutors for investigation of perjury, obstruction of justice, defrauding the court and conspiring to defraud a U.S. company. Mr. Dominguez didn't show at Judge Chaney's hearing and is thought to be somewhere in Nicaragua.
The plaintiffs were also represented by the Sacramento firm of Miller, Axline & Sawyer. The judge said she didn't believe the Miller Axline lawyers were in on the conspiracy but added that they should have been suspicious. "I would have thought that a bit of vigilance would have suggested to plaintiff's counsel that something was awry," she said.
The ruling is especially useful as a rebuke to the torts-for-import business, whereby U.S. tort lawyers travel abroad, join with local lawyers to manufacture claims, and then engage in client recruitment practices that are blatantly illegal in the U.S. In essence, the tort bar's goal is to import lawsuits from foreign countries where it's nearly impossible to challenge claims on factual grounds because evidence is hard to come by. In a related case involving Dole, the Texas plaintiffs firm Provost Umphrey is asking a federal judge in Miami to enforce a $98.5 million judgment obtained by banana farm workers in Nicaragua. Never mind that the Nicaraguan judge who made the initial ruling is the same one cited by Judge Chaney for allegedly taking bribes and fixing cases against U.S. firms.
Judge Chaney's actions are a welcome act of legal hygiene and an example for other judges of how to police false legal claims.
A bipartisan commission says we still need a strong deterrent
The Nuclear Realists. WSJ Editorial
A bipartisan commission says we still need a strong deterrent.
ArticleWSJ, May 13, 2009
A bipartisan Congressional commission on U.S. nuclear strategy released its report last week, and it deserved more attention than it got. It delivered a candid message that not many want to hear: We're a long way from a nuclear-free world.
Led by former Defense Secretaries William Perry and James Schlesinger, the commission is blunt on this point: "The conditions that might make possible the global elimination of nuclear weapons are not present today and their creation would require a fundamental transformation of the world political order." Until then, the report says, the U.S. must have a strong and credible nuclear deterrent.
To do so, the U.S. must maintain its triad of nuclear-delivery systems -- bombers, missiles and submarines -- a course of action that will require some "difficult investment choices." It also calls for modernization of the U.S. nuclear stockpile and the "transformation" of the aging physical and intellectual capital of the national nuclear laboratories.
The commission doesn't directly endorse the now-canceled Reliable Replacement Warhead program -- a political hot potato that President Obama rejects and Defense Secretary Robert Gates supports. But it does so indirectly by countering two of the arguments against it -- that it might lead to the need for nuclear testing and that it might undermine U.S. credibility on nonproliferation. The commission finds both risks to be minimal.
The commission warns that "we may be close to a tipping point" as more countries seek to go nuclear, in part because they may not have confidence in the reliability of U.S. nuclear weapons or that the U.S. would be willing to use them. It supports a "strengthening" of the international treaty system, including the Nuclear Nonproliferation Treaty, as well as nontreaty efforts such as the Proliferation Security Initiative. It also endorses a strong missile defense -- including against more "complex" threats, such as technologies that help incoming missiles penetrate U.S. defenses. It couldn't reach a consensus on the Comprehensive Test Ban Treaty, which Mr. Obama wants the Senate to ratify.
The commission's recommendations provide a welcome dose of nuclear realism. The Administration and Congress ignore them at the nation's peril.
A bipartisan commission says we still need a strong deterrent.
ArticleWSJ, May 13, 2009
A bipartisan Congressional commission on U.S. nuclear strategy released its report last week, and it deserved more attention than it got. It delivered a candid message that not many want to hear: We're a long way from a nuclear-free world.
Led by former Defense Secretaries William Perry and James Schlesinger, the commission is blunt on this point: "The conditions that might make possible the global elimination of nuclear weapons are not present today and their creation would require a fundamental transformation of the world political order." Until then, the report says, the U.S. must have a strong and credible nuclear deterrent.
To do so, the U.S. must maintain its triad of nuclear-delivery systems -- bombers, missiles and submarines -- a course of action that will require some "difficult investment choices." It also calls for modernization of the U.S. nuclear stockpile and the "transformation" of the aging physical and intellectual capital of the national nuclear laboratories.
The commission doesn't directly endorse the now-canceled Reliable Replacement Warhead program -- a political hot potato that President Obama rejects and Defense Secretary Robert Gates supports. But it does so indirectly by countering two of the arguments against it -- that it might lead to the need for nuclear testing and that it might undermine U.S. credibility on nonproliferation. The commission finds both risks to be minimal.
The commission warns that "we may be close to a tipping point" as more countries seek to go nuclear, in part because they may not have confidence in the reliability of U.S. nuclear weapons or that the U.S. would be willing to use them. It supports a "strengthening" of the international treaty system, including the Nuclear Nonproliferation Treaty, as well as nontreaty efforts such as the Proliferation Security Initiative. It also endorses a strong missile defense -- including against more "complex" threats, such as technologies that help incoming missiles penetrate U.S. defenses. It couldn't reach a consensus on the Comprehensive Test Ban Treaty, which Mr. Obama wants the Senate to ratify.
The commission's recommendations provide a welcome dose of nuclear realism. The Administration and Congress ignore them at the nation's peril.
Tuesday, May 12, 2009
NATO Intelligence: A Contradiction in Terms - Report dated in 1985
NATO Intelligence: A Contradiction in Terms. By Edward B. Atkeson
CIA, Center for the Study of Intelligence > Studies in Intelligence > Vol 53 No 1 > From the Archives-1984: Design for Dysfunction
CIA, Center for the Study of Intelligence > Studies in Intelligence > Vol 53 No 1 > From the Archives-1984: Design for Dysfunction
US Derivatives Sector Riled By Treasury Tax Plan
US Derivatives Sector Riled By Treasury Tax Plan. By Jacob Bunge
Dow Jones Newswires, May 12, 2009 14:41
CHICAGO -(Dow Jones)- A U.S. Treasury plan to end a preferential tax treatment for the derivatives industry could drive away market liquidity, according to opponents of the move.
The Treasury's 2010 revenue proposal release Monday would see banks, hedge funds, proprietary trading firms and other market makers would lose their so- called 60/40 tax treatment.
The move is the latest in long-running efforts to boost taxes on the derivatives sector, and would raise an estimated $2.5 billion over the next 10 years.
The futures and options industry, fresh from a scare that the administration would revive plans for a trading tax, immediately moved on the offensive.
Susan Milligan, senior vice president of government relations for the Options Clearing Corp., said the move would hit individuals and partnerships involved in market-making, who benefit from the blended capital gains and ordinary income tax rate.
Market makers are key to the efficiency of the markets by standing ready to buy or sell contracts.
"If individuals leave the market making profession because of [the tax increase], that has an impact on market quality," Milligan said.
The 60/40 tax treatment dates from 1981 when then-Rep. Dan Rostenkowski, (D- Ill.), pushed through a provision allowing derivatives market makers to pay 60% of their income tax at the capital-gains rate and the remaining 40% at the ordinary tax rate.
The treatment provides a blended tax rate of around 23%, according to industry estimates.
The 2010 budget proposal would tax 100% of these entities' income from futures and options trade at the ordinary tax rate, which currently tops out at 35%, but could rise to 39.6% in 2011.
"There is no reason to treat dealers in commodities, commodities derivatives dealers, dealers in securities and dealers in equity options differently than dealers in other types of property," Treasury officials wrote in a document explaining tax proposals for 2010, released Monday.
"Increasing taxes on players in the financial services industry is in vogue right now," said Scott Talbott, senior vice president of government affairs for the Financial Services Roundtable, which represents the banking sector and plans to argue against the budget proposal.
Officials at Chicago-based CME Group Inc. (CME) were reviewing the proposal Tuesday, and the Chicago Board Options Exchange was preparing its own response, according to officials.
The International Securities Exchange, an electronic U.S. options platform owned by Deutsche Boerse (DB1.XE), said in a statement that events of the past year have highlighted the role of transparent, regulated markets.
"This is not the time to alter the tax treatment - and ultimately the health of - the very markets that our nation's regulators are attempting to drive business towards." Treasury representatives did not respond to requests for comment.
The financial services industry has successfully defeated challenges to the 60/40 rule in the past.
In 2003, the Senate was on the verge of repealing the provision before a lobbying campaign by exchanges and derivatives industry groups won a reprieve, arguing that elimination of the 60/40 tax treatment would hurt U.S. markets and investors.
-By Jacob Bunge, Dow Jones Newswires (Sarah N. Lynch contributed to this report.)
05-12-09 1441ET
Dow Jones Newswires, May 12, 2009 14:41
CHICAGO -(Dow Jones)- A U.S. Treasury plan to end a preferential tax treatment for the derivatives industry could drive away market liquidity, according to opponents of the move.
The Treasury's 2010 revenue proposal release Monday would see banks, hedge funds, proprietary trading firms and other market makers would lose their so- called 60/40 tax treatment.
The move is the latest in long-running efforts to boost taxes on the derivatives sector, and would raise an estimated $2.5 billion over the next 10 years.
The futures and options industry, fresh from a scare that the administration would revive plans for a trading tax, immediately moved on the offensive.
Susan Milligan, senior vice president of government relations for the Options Clearing Corp., said the move would hit individuals and partnerships involved in market-making, who benefit from the blended capital gains and ordinary income tax rate.
Market makers are key to the efficiency of the markets by standing ready to buy or sell contracts.
"If individuals leave the market making profession because of [the tax increase], that has an impact on market quality," Milligan said.
The 60/40 tax treatment dates from 1981 when then-Rep. Dan Rostenkowski, (D- Ill.), pushed through a provision allowing derivatives market makers to pay 60% of their income tax at the capital-gains rate and the remaining 40% at the ordinary tax rate.
The treatment provides a blended tax rate of around 23%, according to industry estimates.
The 2010 budget proposal would tax 100% of these entities' income from futures and options trade at the ordinary tax rate, which currently tops out at 35%, but could rise to 39.6% in 2011.
"There is no reason to treat dealers in commodities, commodities derivatives dealers, dealers in securities and dealers in equity options differently than dealers in other types of property," Treasury officials wrote in a document explaining tax proposals for 2010, released Monday.
"Increasing taxes on players in the financial services industry is in vogue right now," said Scott Talbott, senior vice president of government affairs for the Financial Services Roundtable, which represents the banking sector and plans to argue against the budget proposal.
Officials at Chicago-based CME Group Inc. (CME) were reviewing the proposal Tuesday, and the Chicago Board Options Exchange was preparing its own response, according to officials.
The International Securities Exchange, an electronic U.S. options platform owned by Deutsche Boerse (DB1.XE), said in a statement that events of the past year have highlighted the role of transparent, regulated markets.
"This is not the time to alter the tax treatment - and ultimately the health of - the very markets that our nation's regulators are attempting to drive business towards." Treasury representatives did not respond to requests for comment.
The financial services industry has successfully defeated challenges to the 60/40 rule in the past.
In 2003, the Senate was on the verge of repealing the provision before a lobbying campaign by exchanges and derivatives industry groups won a reprieve, arguing that elimination of the 60/40 tax treatment would hurt U.S. markets and investors.
-By Jacob Bunge, Dow Jones Newswires (Sarah N. Lynch contributed to this report.)
05-12-09 1441ET
'Thought Crimes' Bill Advances
'Thought Crimes' Bill Advances. By Nat Hentoff
This article appeared in the Metro West Daily News on May 11, 2009.
Cato
Why is the press remaining mostly silent about the so-called "hate crimes law" that passed in the House on April 29? The Local Law Enforcement Hate Crimes Prevention Act passed in a 249-175 vote (17 Republicans joined with 231 Democrats). These Democrats should have been tested on their knowledge of the First Amendment, equal protection of the laws (14th Amendment), and the prohibition of double jeopardy (no American can be prosecuted twice for the same crime or offense). If they had been, they would have known that this proposal, now headed for a Senate vote, violates all these constitutional provisions.
This bill would make it a federal crime to willfully cause bodily injury (or try to) because of the victim's actual or perceived "race, color, religion, national origin, gender, sexual orientation, gender identity or disability" - as explained on the White House Web site, signaling the president's approval. A defendant convicted on these grounds would be charged with a "hate crime" in addition to the original crime, and would get extra prison time.
The extra punishment applies only to these "protected classes." As Denver criminal defense lawyer Robert J Corry Jr. asked (Denver Post April 28): "Isn't every criminal act that harms another person a 'hate crime'?" Then, regarding a Colorado "hate crime" law, one of 45 such state laws, Corry wrote: "When a Colorado gang engaged in an initiation ritual of specifically seeking out a "white woman" to rape, the Boulder prosecutor declined to pursue 'hate crime' charges." She was not enough of one of its protected classes.
Corey adds that the state "hate crime" law - like the newly expanded House of Representatives federal bill - "does not apply equally" (as the 14th Amendment requires), essentially instead "criminalizing only politically incorrect thoughts directed against politically incorrect victim categories."
Whether you're a Republican or Democrat, think hard about what Corry adds: "A government powerful enough to pick and choose which thoughts to prosecute is a government too powerful."
But James Madison, who initially introduced the First Amendment to the Constitution, had previously written to Thomas Jefferson on the passage of the Virginia Statute on Religious Freedom: "We have in this country extinguished forever ... making laws for the human mind." No American, he emphasized later, would be punished for his "thoughts."
However, doesn't the House "Hate Crimes Bill" state that nothing in the legislation shall "prohibit any expressive conduct protected from legal prohibition" - or speech "protected by the free speech or free exercise clauses in the First Amendment"?
Remember, however, as Kathleen Gilbert notes (LifeSiteNews.com) that "free speech advocates have pointed out that under current U.S. law, any action that 'abets, counsels, commands (or) induces a perceived 'hate crime' shares in the guilt of that crime and is therefore punishable."
But doesn't this new bill slip in an insistence that "evidence or expression or association of the defendant may not be introduced as evidence at trail unless the evidence specifically relates to that offense"?
In the definitive constitutional analysis of James B. Jacobs and researcher Kimberly Potter (Oxford University Press 1998, still in print), it is documented in "Hate Crimes: Criminal Law and Identity Politics" that "In Grimm v. Churchill the arresting officer was permitted to testify that the defendant had a history of making racial remarks. Similarly, in People v. Lampkin, the prosecution presented as evidence racist statements the defendant had uttered six years before the crime for which he was on trial," as specifically relating to the offense.
As for the 14th Amendment's essential requirement that no person be denied "the equal protection of the laws," there is carved above the entrance to the Supreme Court: "Equal Justice Under Law."
This legislation, certain to be passed by the Senate, will come to the Supreme Court. I hope the Justices will look up at the carving as they go into the building.
They should also remember that the Fifth Amendment makes clear: "nor shall any person be subject for the same offence to be twice put in jeopardy." But the House "hate crime" bill allows defendants found innocent of that offense in a state court to be tried again in federal court because of insufficiently diligent prosecutors; or, as Attorney General Eric Holder says, when state prosecutors claim lack of evidence. It must be tried again in federal court!
Imagine Holder as the state prosecutor in the long early stages of the Duke University Lacrosse rape case!
What also appalls me, as the new federal bill races toward a presidential signature, is that for years, and now, the American Civil Liberties Union approves "hate crimes" prosecutions!
I have long depended on the ACLU's staff of constitutional warriors to act persistently against government abuses of our founding documents. And these attorneys and analysts have been especially valuable in exposing the results of executive-branch lunges against the separation of powers in the Bush-Cheney years, and still under Obama.
Is there no non-politically correct ACLU lawyer or other staff worker or anyone in the ACLU affiliates around the country or any dues-paying member outraged enough to demand of the ACLU's ruling circle to at last disavow this corruption of the Constitution?
And the president, former senior lecturer in that document at the University of Chicago, should at least take it with him on Air Force One, where there are fewer necessary distractions, and familiarize himself with what the Constitution actually says.
This article appeared in the Metro West Daily News on May 11, 2009.
Cato
Why is the press remaining mostly silent about the so-called "hate crimes law" that passed in the House on April 29? The Local Law Enforcement Hate Crimes Prevention Act passed in a 249-175 vote (17 Republicans joined with 231 Democrats). These Democrats should have been tested on their knowledge of the First Amendment, equal protection of the laws (14th Amendment), and the prohibition of double jeopardy (no American can be prosecuted twice for the same crime or offense). If they had been, they would have known that this proposal, now headed for a Senate vote, violates all these constitutional provisions.
This bill would make it a federal crime to willfully cause bodily injury (or try to) because of the victim's actual or perceived "race, color, religion, national origin, gender, sexual orientation, gender identity or disability" - as explained on the White House Web site, signaling the president's approval. A defendant convicted on these grounds would be charged with a "hate crime" in addition to the original crime, and would get extra prison time.
The extra punishment applies only to these "protected classes." As Denver criminal defense lawyer Robert J Corry Jr. asked (Denver Post April 28): "Isn't every criminal act that harms another person a 'hate crime'?" Then, regarding a Colorado "hate crime" law, one of 45 such state laws, Corry wrote: "When a Colorado gang engaged in an initiation ritual of specifically seeking out a "white woman" to rape, the Boulder prosecutor declined to pursue 'hate crime' charges." She was not enough of one of its protected classes.
Corey adds that the state "hate crime" law - like the newly expanded House of Representatives federal bill - "does not apply equally" (as the 14th Amendment requires), essentially instead "criminalizing only politically incorrect thoughts directed against politically incorrect victim categories."
Whether you're a Republican or Democrat, think hard about what Corry adds: "A government powerful enough to pick and choose which thoughts to prosecute is a government too powerful."
But James Madison, who initially introduced the First Amendment to the Constitution, had previously written to Thomas Jefferson on the passage of the Virginia Statute on Religious Freedom: "We have in this country extinguished forever ... making laws for the human mind." No American, he emphasized later, would be punished for his "thoughts."
However, doesn't the House "Hate Crimes Bill" state that nothing in the legislation shall "prohibit any expressive conduct protected from legal prohibition" - or speech "protected by the free speech or free exercise clauses in the First Amendment"?
Remember, however, as Kathleen Gilbert notes (LifeSiteNews.com) that "free speech advocates have pointed out that under current U.S. law, any action that 'abets, counsels, commands (or) induces a perceived 'hate crime' shares in the guilt of that crime and is therefore punishable."
But doesn't this new bill slip in an insistence that "evidence or expression or association of the defendant may not be introduced as evidence at trail unless the evidence specifically relates to that offense"?
In the definitive constitutional analysis of James B. Jacobs and researcher Kimberly Potter (Oxford University Press 1998, still in print), it is documented in "Hate Crimes: Criminal Law and Identity Politics" that "In Grimm v. Churchill the arresting officer was permitted to testify that the defendant had a history of making racial remarks. Similarly, in People v. Lampkin, the prosecution presented as evidence racist statements the defendant had uttered six years before the crime for which he was on trial," as specifically relating to the offense.
As for the 14th Amendment's essential requirement that no person be denied "the equal protection of the laws," there is carved above the entrance to the Supreme Court: "Equal Justice Under Law."
This legislation, certain to be passed by the Senate, will come to the Supreme Court. I hope the Justices will look up at the carving as they go into the building.
They should also remember that the Fifth Amendment makes clear: "nor shall any person be subject for the same offence to be twice put in jeopardy." But the House "hate crime" bill allows defendants found innocent of that offense in a state court to be tried again in federal court because of insufficiently diligent prosecutors; or, as Attorney General Eric Holder says, when state prosecutors claim lack of evidence. It must be tried again in federal court!
Imagine Holder as the state prosecutor in the long early stages of the Duke University Lacrosse rape case!
What also appalls me, as the new federal bill races toward a presidential signature, is that for years, and now, the American Civil Liberties Union approves "hate crimes" prosecutions!
I have long depended on the ACLU's staff of constitutional warriors to act persistently against government abuses of our founding documents. And these attorneys and analysts have been especially valuable in exposing the results of executive-branch lunges against the separation of powers in the Bush-Cheney years, and still under Obama.
Is there no non-politically correct ACLU lawyer or other staff worker or anyone in the ACLU affiliates around the country or any dues-paying member outraged enough to demand of the ACLU's ruling circle to at last disavow this corruption of the Constitution?
And the president, former senior lecturer in that document at the University of Chicago, should at least take it with him on Air Force One, where there are fewer necessary distractions, and familiarize himself with what the Constitution actually says.
AEI fellow on how federal president's care proposals will affect physicians
How ObamaCare Will Affect Your Doctor. By Scott Gottlieb
Expect longer waits for appointments as physicians get pinched on reimbursements.
WSJ, May 12, 2009
At the heart of President Barack Obama's health-care plan is an insurance program funded by taxpayers, administered by Washington, and open to everyone. Modeled on Medicare, this "public option" will soon become the single dominant health plan, which is its political purpose. It will restructure the practice of medicine in the process.
Republicans and Democrats agree that the government's Medicare scheme for compensating doctors is deeply flawed. Yet Mr. Obama's plan for a centrally managed government insurance program exacerbates Medicare's problems by redistributing even more income away from lower-paid primary care providers and misaligning doctors' financial incentives.
Like Medicare, the "public option" will control spending by using its purchasing clout and political leverage to dictate low prices to doctors. (Medicare pays doctors 20% to 30% less than private plans, on average.) While the public option is meant for the uninsured, employers will realize it's easier -- and cheaper -- to move employees into the government plan than continue workplace coverage.
The Lewin Group, a health-care policy research and consulting firm, estimates that enrollment in the public option will reach 131 million people if it's open to everyone and pays Medicare rates, as many expect. Fully two-thirds of the privately insured will move out of or lose coverage. As patients shift to a lower-paying government plan, doctors' incomes will decline by as much as 15% to 20% depending on their specialty.
Physician income declines will be accompanied by regulations that will make practicing medicine more costly, creating a double whammy of lower revenue and higher practice costs, especially for primary-care doctors who generally operate busy practices and work on thinner margins. For example, doctors will face expenses to deploy pricey electronic prescribing tools and computerized health records that are mandated under the Obama plan. For most doctors these capital costs won't be fully covered by the subsidies provided by the plan.
Government insurance programs also shift compliance costs directly onto doctors by encumbering them with rules requiring expensive staffing and documentation. It's a way for government health programs like Medicare to control charges. The rules are backed up with threats of arbitrary probes targeting documentation infractions. There will also be disproportionate fines, giving doctors and hospitals reason to overspend on their back offices to avoid reprisals.
The 60% of doctors who are self-employed will be hardest hit. That includes specialists, such as dermatologists and surgeons, who see a lot of private patients. But it also includes tens of thousands of primary-care doctors, the very physicians the Obama administration says need the most help.
Doctors will consolidate into larger practices to spread overhead costs, and they'll cram more patients into tight schedules to make up in volume what's lost in margin. Visits will be shortened and new appointments harder to secure. It already takes on average 18 days to get an initial appointment with an internist, according to the American Medical Association, and as many as 30 days for specialists like obstetricians and neurologists.
Right or wrong, more doctors will close their practices to new patients, especially patients carrying lower paying insurance such as Medicaid. Some doctors will opt out of the system entirely, going "cash only." If too many doctors take this route the government could step in -- as in Canada, for example -- to effectively outlaw private-only medical practice.
These changes are superimposed on a payment system where compensation often bears no connection to clinical outcomes. Medicare provides all the wrong incentives. Its charge-based system pays doctors more for delivering more care, meaning incomes rise as medical problems persist and decline when illness resolves.
So how should we reform our broken health-care system? Rather than redistribute physician income as a way to subsidize an expansion of government control, Mr. Obama should fix the payment system to align incentives with improved care. After years of working on this problem, Medicare has only a few token demonstration programs to show for its efforts. Medicare's failure underscores why an inherently local undertaking like a medical practice is badly managed by a remote and political bureaucracy.
But while Medicare has stumbled with these efforts, private health plans have made notable progress on similar payment reforms. Private plans are more likely to lead payment reform efforts because they have more motivation than Medicare to use pay as a way to achieve better outcomes.
Private plans already pay doctors more than Medicare because they compete to attract higher quality providers into their networks. This gives them every incentive, as well as added leverage, to reward good clinicians while penalizing or excluding bad ones. A recent report by PriceWaterhouse Coopers that examined 10 of the nation's largest commercial health plans found that eight had implemented performance-based pay measures for doctors. All 10 plans are expanding efforts to monitor quality improvement at the provider level.
Among the promising examples of private innovation in health-care delivery: In Pennsylvania, the Geisinger Clinic's "warranty" program, where providers take financial responsibility for the entire episode of care; or the experience of the Blue Cross Blue Shield plans in Pennsylvania, Michigan and Virginia, where doctors are paid more for delivering better outcomes.
There are plenty of alternatives to Mr. Obama's plan that expand coverage to the uninsured, give them the chance to buy private coverage like Congress enjoys, and limit government management over what are inherently personal transactions between doctors and patients.
Rep. Nydia Velazquez (D., N.Y.) has introduced a bipartisan measure, the Small Business Cooperative for Healthcare Options to Improve Coverage for Employees (Choice) Act of 2009, that would make it cheaper and easier for small employers to offer health insurance. Mr. Obama would also get bipartisan compromise on premium support for people priced out of insurance to give them a wider range of choices. This could be modeled after the Medicare drug benefit, which relies on competition between private plans to increase choices and hold down costs. It could be funded, in part, through tax credits targeted to lower-income Americans.
There are also measures available that could fix structural flaws in our delivery system and make coverage more affordable without top-down controls set in Washington. The surest way to intensify flaws in the delivery of health care is to extend a Medicare-like "public option" into more corners of the private market. More government control of doctors and their reimbursement schemes will only create more problems.
Dr. Gottlieb, a former official at the Centers for Medicare and Medicaid Services, is a fellow at the American Enterprise Institute and a practicing internist. He's partner to a firm that invests in health-care companies.
Expect longer waits for appointments as physicians get pinched on reimbursements.
WSJ, May 12, 2009
At the heart of President Barack Obama's health-care plan is an insurance program funded by taxpayers, administered by Washington, and open to everyone. Modeled on Medicare, this "public option" will soon become the single dominant health plan, which is its political purpose. It will restructure the practice of medicine in the process.
Republicans and Democrats agree that the government's Medicare scheme for compensating doctors is deeply flawed. Yet Mr. Obama's plan for a centrally managed government insurance program exacerbates Medicare's problems by redistributing even more income away from lower-paid primary care providers and misaligning doctors' financial incentives.
Like Medicare, the "public option" will control spending by using its purchasing clout and political leverage to dictate low prices to doctors. (Medicare pays doctors 20% to 30% less than private plans, on average.) While the public option is meant for the uninsured, employers will realize it's easier -- and cheaper -- to move employees into the government plan than continue workplace coverage.
The Lewin Group, a health-care policy research and consulting firm, estimates that enrollment in the public option will reach 131 million people if it's open to everyone and pays Medicare rates, as many expect. Fully two-thirds of the privately insured will move out of or lose coverage. As patients shift to a lower-paying government plan, doctors' incomes will decline by as much as 15% to 20% depending on their specialty.
Physician income declines will be accompanied by regulations that will make practicing medicine more costly, creating a double whammy of lower revenue and higher practice costs, especially for primary-care doctors who generally operate busy practices and work on thinner margins. For example, doctors will face expenses to deploy pricey electronic prescribing tools and computerized health records that are mandated under the Obama plan. For most doctors these capital costs won't be fully covered by the subsidies provided by the plan.
Government insurance programs also shift compliance costs directly onto doctors by encumbering them with rules requiring expensive staffing and documentation. It's a way for government health programs like Medicare to control charges. The rules are backed up with threats of arbitrary probes targeting documentation infractions. There will also be disproportionate fines, giving doctors and hospitals reason to overspend on their back offices to avoid reprisals.
The 60% of doctors who are self-employed will be hardest hit. That includes specialists, such as dermatologists and surgeons, who see a lot of private patients. But it also includes tens of thousands of primary-care doctors, the very physicians the Obama administration says need the most help.
Doctors will consolidate into larger practices to spread overhead costs, and they'll cram more patients into tight schedules to make up in volume what's lost in margin. Visits will be shortened and new appointments harder to secure. It already takes on average 18 days to get an initial appointment with an internist, according to the American Medical Association, and as many as 30 days for specialists like obstetricians and neurologists.
Right or wrong, more doctors will close their practices to new patients, especially patients carrying lower paying insurance such as Medicaid. Some doctors will opt out of the system entirely, going "cash only." If too many doctors take this route the government could step in -- as in Canada, for example -- to effectively outlaw private-only medical practice.
These changes are superimposed on a payment system where compensation often bears no connection to clinical outcomes. Medicare provides all the wrong incentives. Its charge-based system pays doctors more for delivering more care, meaning incomes rise as medical problems persist and decline when illness resolves.
So how should we reform our broken health-care system? Rather than redistribute physician income as a way to subsidize an expansion of government control, Mr. Obama should fix the payment system to align incentives with improved care. After years of working on this problem, Medicare has only a few token demonstration programs to show for its efforts. Medicare's failure underscores why an inherently local undertaking like a medical practice is badly managed by a remote and political bureaucracy.
But while Medicare has stumbled with these efforts, private health plans have made notable progress on similar payment reforms. Private plans are more likely to lead payment reform efforts because they have more motivation than Medicare to use pay as a way to achieve better outcomes.
Private plans already pay doctors more than Medicare because they compete to attract higher quality providers into their networks. This gives them every incentive, as well as added leverage, to reward good clinicians while penalizing or excluding bad ones. A recent report by PriceWaterhouse Coopers that examined 10 of the nation's largest commercial health plans found that eight had implemented performance-based pay measures for doctors. All 10 plans are expanding efforts to monitor quality improvement at the provider level.
Among the promising examples of private innovation in health-care delivery: In Pennsylvania, the Geisinger Clinic's "warranty" program, where providers take financial responsibility for the entire episode of care; or the experience of the Blue Cross Blue Shield plans in Pennsylvania, Michigan and Virginia, where doctors are paid more for delivering better outcomes.
There are plenty of alternatives to Mr. Obama's plan that expand coverage to the uninsured, give them the chance to buy private coverage like Congress enjoys, and limit government management over what are inherently personal transactions between doctors and patients.
Rep. Nydia Velazquez (D., N.Y.) has introduced a bipartisan measure, the Small Business Cooperative for Healthcare Options to Improve Coverage for Employees (Choice) Act of 2009, that would make it cheaper and easier for small employers to offer health insurance. Mr. Obama would also get bipartisan compromise on premium support for people priced out of insurance to give them a wider range of choices. This could be modeled after the Medicare drug benefit, which relies on competition between private plans to increase choices and hold down costs. It could be funded, in part, through tax credits targeted to lower-income Americans.
There are also measures available that could fix structural flaws in our delivery system and make coverage more affordable without top-down controls set in Washington. The surest way to intensify flaws in the delivery of health care is to extend a Medicare-like "public option" into more corners of the private market. More government control of doctors and their reimbursement schemes will only create more problems.
Dr. Gottlieb, a former official at the Centers for Medicare and Medicaid Services, is a fellow at the American Enterprise Institute and a practicing internist. He's partner to a firm that invests in health-care companies.
Schumer's Shareholder Bill Misses the Mark
Schumer's Shareholder Bill Misses the Mark. By Martin Lipton, Jay W Lorsch and Theodore N Mirvis
Corporate managers need to be able to take the long view.
WSJ, May 12, 2009
This week New York Sen. Chuck Schumer is expected to introduce the Shareholder Bill of Rights Act of 2009. The stated goal of the legislation -- "to prioritize the long-term health of firms and their shareholders" -- is commendable.
The trouble is that its provisions actually encourage the opposite. In its current form, the bill would require annual votes by stockholders on executive compensation. It would grant stockholders a new right to include their own director nominees in the corporation's proxy statement. The bill would put an end to staggered boards at all companies (the traditional option of electing one-third of the board each year). And it would require that all directors receive a majority of votes cast to be elected. Public companies would be forced to split the CEO and board chair positions.
Excessive stockholder power is precisely what caused the short-term fixation that led to the current financial crisis. As stockholder power increased over the last 20 years, our stock markets also became increasingly institutionalized. The real investors are mostly professional money managers who are focused on the short term.
It is these shareholders who pushed companies to generate returns at levels that were not sustainable. They also made sure high returns were tied to management compensation. The pressure to produce unrealistic profit fueled increased risk-taking. And as the government relaxed checks on excessive risk-taking (or, at a minimum, didn't respond with increased prudential regulation), stockholder demands for ever higher returns grew still further. It was a vicious cycle.
Thoughtful observers of corporate governance have recognized the direct causal relationship between the financial meltdown and the short-term focus that drove reckless risk-taking.
One key observer, the International Corporate Governance Network, issued a statement about the global financial crisis on Nov. 10, 2008. It spelled out the problem of shareholder power: "[i]t is true that shareholders sometimes encouraged companies, including investment banks, to ramp up short-term returns through leverage." It further declared that "[i]nstitutional shareholders must recognize their responsibility to generate long term value on behalf of their beneficiaries, the savers and pensioners for whom they are ultimately working." It recommended that pension funds and others seeking to hire fund managers "should insist that fund managers put sufficient resources into governance that delivers long term value."
If government really wants to encourage stability and profitability, the Schumer bill must call for measures that would promote the long-term value perspective. Providing long-term shareholders a greater number of votes per share should become a permissible option. Quinquennial rather than annual or triennial elections of corporate board members should be considered. Institutions should discontinue the practice of compensating fund managers based on quarterly performance. And corporations should follow the lead of General Electric by discontinuing the practice of issuing quarterly earnings.
The stockholder-centric view of the current Schumer bill simply cannot be the cure for the disease it spawned. Though the short-term focus benefited shareholders for a time, when the meltdown happened shareholders weren't the only people hit. Employees who devoted their lives to building stockholder value felt the pain acutely. Communities, suppliers and creditors -- indeed, the whole range of constituencies who support the creation and maintenance of stock value -- were impacted. They have a legitimate stake in this debate.
Let's use the opportunity for fresh thinking that this crisis presents and restore the ability of boards and managers to run America's companies for our long-term best interest. Hopefully, the astounding losses we have witnessed over the past months will steer us back to responsibility.
Messrs. Lipton and Mirvis are partners of the New York law firm Wachtell, Lipton, Rosen and Katz. Mr. Lorsch is a professor at Harvard Business School.
Corporate managers need to be able to take the long view.
WSJ, May 12, 2009
This week New York Sen. Chuck Schumer is expected to introduce the Shareholder Bill of Rights Act of 2009. The stated goal of the legislation -- "to prioritize the long-term health of firms and their shareholders" -- is commendable.
The trouble is that its provisions actually encourage the opposite. In its current form, the bill would require annual votes by stockholders on executive compensation. It would grant stockholders a new right to include their own director nominees in the corporation's proxy statement. The bill would put an end to staggered boards at all companies (the traditional option of electing one-third of the board each year). And it would require that all directors receive a majority of votes cast to be elected. Public companies would be forced to split the CEO and board chair positions.
Excessive stockholder power is precisely what caused the short-term fixation that led to the current financial crisis. As stockholder power increased over the last 20 years, our stock markets also became increasingly institutionalized. The real investors are mostly professional money managers who are focused on the short term.
It is these shareholders who pushed companies to generate returns at levels that were not sustainable. They also made sure high returns were tied to management compensation. The pressure to produce unrealistic profit fueled increased risk-taking. And as the government relaxed checks on excessive risk-taking (or, at a minimum, didn't respond with increased prudential regulation), stockholder demands for ever higher returns grew still further. It was a vicious cycle.
Thoughtful observers of corporate governance have recognized the direct causal relationship between the financial meltdown and the short-term focus that drove reckless risk-taking.
One key observer, the International Corporate Governance Network, issued a statement about the global financial crisis on Nov. 10, 2008. It spelled out the problem of shareholder power: "[i]t is true that shareholders sometimes encouraged companies, including investment banks, to ramp up short-term returns through leverage." It further declared that "[i]nstitutional shareholders must recognize their responsibility to generate long term value on behalf of their beneficiaries, the savers and pensioners for whom they are ultimately working." It recommended that pension funds and others seeking to hire fund managers "should insist that fund managers put sufficient resources into governance that delivers long term value."
If government really wants to encourage stability and profitability, the Schumer bill must call for measures that would promote the long-term value perspective. Providing long-term shareholders a greater number of votes per share should become a permissible option. Quinquennial rather than annual or triennial elections of corporate board members should be considered. Institutions should discontinue the practice of compensating fund managers based on quarterly performance. And corporations should follow the lead of General Electric by discontinuing the practice of issuing quarterly earnings.
The stockholder-centric view of the current Schumer bill simply cannot be the cure for the disease it spawned. Though the short-term focus benefited shareholders for a time, when the meltdown happened shareholders weren't the only people hit. Employees who devoted their lives to building stockholder value felt the pain acutely. Communities, suppliers and creditors -- indeed, the whole range of constituencies who support the creation and maintenance of stock value -- were impacted. They have a legitimate stake in this debate.
Let's use the opportunity for fresh thinking that this crisis presents and restore the ability of boards and managers to run America's companies for our long-term best interest. Hopefully, the astounding losses we have witnessed over the past months will steer us back to responsibility.
Messrs. Lipton and Mirvis are partners of the New York law firm Wachtell, Lipton, Rosen and Katz. Mr. Lorsch is a professor at Harvard Business School.
WSJ Editorial Page on Geithner: He concedes that monetary policy was 'too loose too long'
Geithner's Revelation. WSJ Editorial
He concedes that monetary policy was 'too loose too long.'
WSJ, May 12, 2009
He concedes that monetary policy was 'too loose too long.'
WSJ, May 12, 2009
Iraq: Hold And Build, Or Lose
Iraq: Hold And Build, Or Lose. By Anthony H. Cordesman
WaPo, Tuesday, May 12, 2009
Despite the violence of the past few weeks, it is Iraq that now risks becoming the "forgotten war." Iraq has become both a perceived "victory" and a war that many Americans and members of Congress would like to forget. As a result, we may rush toward the "exit" without a strategy -- and lose both the ongoing war and the peace that could follow.
It is all too easy to forget that we "won" in Vietnam. We left having defeated the Viet Cong, having forced North Vietnam to halt its offensives -- and having gotten a Nobel Prize for the settlement. We created something approaching a functioning democracy, a reasonable level of development, and Vietnamese forces that seemed able to defend both without our support. It only took a few years, however, to show how costly an exit without a strategy can be.
There are limits to what we can do in Iraq. We cannot force Iraqis into political accommodation. We cannot develop their economy for them. And we cannot act as a lasting substitute for effective Iraqi forces or the creation of local security and a rule of law. But there are steps we can and should take to complete the "clear, hold and build" strategy that has changed the war so dramatically since 2007.
First, we need to ensure that Iraq can finish "winning" and continue to "hold." We should make clear that we will be flexible about the speed and level of our withdrawal of U.S. forces if an elected Iraqi government needs a limited amount of added help to defeat al-Qaeda and establish national security. We should also make clear that U.S. military advisory teams, including the embedded advisers necessary to make Iraqi combat forces fully independent and effective, will stay as long as Iraq wants them. We should be prepared to maintain and strengthen our advisory teams to help Iraq develop effective police and a criminal justice system.
If necessary, we should provide military assistance and equipment until Iraq can emerge from the budget crisis triggered by the collapse of world oil prices -- a crisis that has sharply cut its planned budget to $58.6 billion from an anticipated $78 billion. The revenue shortfall has also forced a freeze on the expansion of Iraqi forces when the country needs some 60,000 recruits in the coming year and has delayed most major equipment purchases.
Second, we must help Iraq "build." U.S. help will steadily grow more important as the necessary transition from armed nation-building to post-conflict reconstruction occurs over the next three to four years. This means keeping our economic and governance advisers in place as long as Iraq wants them. It means keeping our Provincial Reconstruction Teams (PRTs) in the field and replacing their military members with civilians. It means a major U.S. effort to support Iraq in dealing with both the International Monetary Fund and its debt and reparations problems. It might require carefully targeted economic aid in select areas. Iraq's budgetary and governance problems are solvable, but they will require years of additional aid and support.
Active U.S. diplomacy will be equally important in helping Iraq move toward political accommodation and minimizing the risk of new conflicts between Arabs and Kurds, Sunnis and Shiites, or local violence. It will be critical to working with a strong U.N. team, and it should involve doing everything possible to seek support from other Arab states, Turkey, and even (possibly) Iran.
The final dimension of the "hold" effort requires giving the highest possible priority to helping Iraq develop its oil fields and renovate and increase its export capabilities. This does not mean financial aid. It means recognizing that some 95 percent of the Iraqi government's revenue will come from oil exports over the next five years and that fixing the petroleum sector as quickly as possible is the only way for Iraq to obtain the money and government revenue that can hold the country together and fund security and stability.
Iraq can maintain and expand its petroleum exports only through major investment and the technology transfers that come from foreign oil companies. Progress cannot wait until Baghdad can pass perfect petroleum laws. Helping Iraq does not mean pushing it into contracts with American firms or those that are not to Iraq's clear advantage. It does mean giving U.S. firms and teamed U.S. and foreign oil company efforts proper support, and prioritizing open, competitive bidding managed by the Iraqi government. Without this, Iraq cannot find the money to help bridge its ethnic and sectarian divisions, unemployment will get even worse, and young men will turn back toward violence. Iraq will not be able to make use of its past aid, pay for key services such as education and medical care, improve its infrastructure, or attract other forms of investment. In the short term, Iraq has no other options.
Yes, some of these actions will cost U.S. lives and dollars. Such costs, though, will be far lower than the mid- to long-term cost of throwing away a high probability of leaving Iraq with lasting security and stability. The United States must find a way to leave Iraq that ensures the stability of the Persian Gulf -- a region with close to half of the world's known oil and gas reserves and where America's future credibility will be as critical to dealing with jihadist terrorism as is the war in Afghanistan and Pakistan. In strategic terms, Vietnam was always expendable. Iraq and the Gulf are not.
The writer holds the Arleigh A. Burke Chair in Strategy at the Center for Strategic and International Studies.
WaPo, Tuesday, May 12, 2009
Despite the violence of the past few weeks, it is Iraq that now risks becoming the "forgotten war." Iraq has become both a perceived "victory" and a war that many Americans and members of Congress would like to forget. As a result, we may rush toward the "exit" without a strategy -- and lose both the ongoing war and the peace that could follow.
It is all too easy to forget that we "won" in Vietnam. We left having defeated the Viet Cong, having forced North Vietnam to halt its offensives -- and having gotten a Nobel Prize for the settlement. We created something approaching a functioning democracy, a reasonable level of development, and Vietnamese forces that seemed able to defend both without our support. It only took a few years, however, to show how costly an exit without a strategy can be.
There are limits to what we can do in Iraq. We cannot force Iraqis into political accommodation. We cannot develop their economy for them. And we cannot act as a lasting substitute for effective Iraqi forces or the creation of local security and a rule of law. But there are steps we can and should take to complete the "clear, hold and build" strategy that has changed the war so dramatically since 2007.
First, we need to ensure that Iraq can finish "winning" and continue to "hold." We should make clear that we will be flexible about the speed and level of our withdrawal of U.S. forces if an elected Iraqi government needs a limited amount of added help to defeat al-Qaeda and establish national security. We should also make clear that U.S. military advisory teams, including the embedded advisers necessary to make Iraqi combat forces fully independent and effective, will stay as long as Iraq wants them. We should be prepared to maintain and strengthen our advisory teams to help Iraq develop effective police and a criminal justice system.
If necessary, we should provide military assistance and equipment until Iraq can emerge from the budget crisis triggered by the collapse of world oil prices -- a crisis that has sharply cut its planned budget to $58.6 billion from an anticipated $78 billion. The revenue shortfall has also forced a freeze on the expansion of Iraqi forces when the country needs some 60,000 recruits in the coming year and has delayed most major equipment purchases.
Second, we must help Iraq "build." U.S. help will steadily grow more important as the necessary transition from armed nation-building to post-conflict reconstruction occurs over the next three to four years. This means keeping our economic and governance advisers in place as long as Iraq wants them. It means keeping our Provincial Reconstruction Teams (PRTs) in the field and replacing their military members with civilians. It means a major U.S. effort to support Iraq in dealing with both the International Monetary Fund and its debt and reparations problems. It might require carefully targeted economic aid in select areas. Iraq's budgetary and governance problems are solvable, but they will require years of additional aid and support.
Active U.S. diplomacy will be equally important in helping Iraq move toward political accommodation and minimizing the risk of new conflicts between Arabs and Kurds, Sunnis and Shiites, or local violence. It will be critical to working with a strong U.N. team, and it should involve doing everything possible to seek support from other Arab states, Turkey, and even (possibly) Iran.
The final dimension of the "hold" effort requires giving the highest possible priority to helping Iraq develop its oil fields and renovate and increase its export capabilities. This does not mean financial aid. It means recognizing that some 95 percent of the Iraqi government's revenue will come from oil exports over the next five years and that fixing the petroleum sector as quickly as possible is the only way for Iraq to obtain the money and government revenue that can hold the country together and fund security and stability.
Iraq can maintain and expand its petroleum exports only through major investment and the technology transfers that come from foreign oil companies. Progress cannot wait until Baghdad can pass perfect petroleum laws. Helping Iraq does not mean pushing it into contracts with American firms or those that are not to Iraq's clear advantage. It does mean giving U.S. firms and teamed U.S. and foreign oil company efforts proper support, and prioritizing open, competitive bidding managed by the Iraqi government. Without this, Iraq cannot find the money to help bridge its ethnic and sectarian divisions, unemployment will get even worse, and young men will turn back toward violence. Iraq will not be able to make use of its past aid, pay for key services such as education and medical care, improve its infrastructure, or attract other forms of investment. In the short term, Iraq has no other options.
Yes, some of these actions will cost U.S. lives and dollars. Such costs, though, will be far lower than the mid- to long-term cost of throwing away a high probability of leaving Iraq with lasting security and stability. The United States must find a way to leave Iraq that ensures the stability of the Persian Gulf -- a region with close to half of the world's known oil and gas reserves and where America's future credibility will be as critical to dealing with jihadist terrorism as is the war in Afghanistan and Pakistan. In strategic terms, Vietnam was always expendable. Iraq and the Gulf are not.
The writer holds the Arleigh A. Burke Chair in Strategy at the Center for Strategic and International Studies.
Monday, May 11, 2009
Aung San Suu Kyi's Health
Aung San Suu Kyi's Health. By Ian Kelly
Department Spokesman, Office of the Spokesman
Bureau of Public Affairs, Washington, DC, May 11, 2009
The United States Government is concerned about reports that Aung San Suu Kyi needs medical care and that Burmese authorities have detained her primary personal physician, Dr. Tin Myo Win. We urge the Burmese regime to allow Aung San Suu Kyi to receive immediate medical care from Dr. Tin Myo Win. We further call on the regime to permit Aung San Suu Kyi to meet with her personal attorney immediately.
As the anniversary of her detention approaches, we are reminded that the house arrest of Aung San Suu Kyi is unjust. We join with the calls of the international community and urge her immediate release, along with the release of all the more than 2100 political prisoners the Burmese regime currently holds.
PRN: 2009/442
Department Spokesman, Office of the Spokesman
Bureau of Public Affairs, Washington, DC, May 11, 2009
The United States Government is concerned about reports that Aung San Suu Kyi needs medical care and that Burmese authorities have detained her primary personal physician, Dr. Tin Myo Win. We urge the Burmese regime to allow Aung San Suu Kyi to receive immediate medical care from Dr. Tin Myo Win. We further call on the regime to permit Aung San Suu Kyi to meet with her personal attorney immediately.
As the anniversary of her detention approaches, we are reminded that the house arrest of Aung San Suu Kyi is unjust. We join with the calls of the international community and urge her immediate release, along with the release of all the more than 2100 political prisoners the Burmese regime currently holds.
PRN: 2009/442
What Is Macroeconomics? Why Study It?
Paraphrasing Macroeconomics: Understanding the Wealth of Nations. By David Miles, Imperial College, and Andrew Scott, London Business School. Chichester, UK: John Wiley & Sons, 2005
Soft start:
- [M]acroeconomics is far more than just an intellectual toolkit for understanding current events. It is also about understanding the long-term forces that drive the economy and shape the business environment
- [M]acroeconomics is about the economy as a whole ... how the whole economy evolves over time rather than on any one sector, region, or firm. Yet macroeconomics also considers the important issues from the perspective of the firm and/or the individual consumer. It is the overall, or aggregate, implications of tens of thousands of individual decisions that companies and households make that generates the macroeconomic outcomes.
- Economics is the study of the allocation of scarce resources ... Not all these needs can be satisfied, but economics should be able to help you (and society) meet as many of them as possible.
- Market economies allocate resources through prices. Prices tell producers what the demand for a particular product is—if prices are high, then producers know the good is in demand, and they can increase production. If prices are low, producers know that demand for the product is weak, and they should cut back production. Thus the market ensures that society produces more of the goods that people want and less of those that they do not.
- Broadly speaking, economics has two components: microeconomics and macroeconomics. ... microeconomics essentially examines how individual units, whether they be consumers or
firms, decide how to allocate resources and whether those decisions are desirable.
- Macroeconomics studies the economy as a whole; it looks at the aggregate outcomes of
all the decisions that consumers, firms, and the government make in an economy. Macroeconomics is about aggregate variables such as the overall levels of output, consumption, employment, and prices—and how they move over time and between countries.
- In terms of prices, microeconomics focuses on, for instance, the price of a particular firm’s product, whereas macroeconomics focuses on the exchange rate (the price of one country’s money in terms of that of another country) or the interest rate (the price of spending today rather than tomorrow).
The Difference between Macro and Microeconomics
[A] gray area exists between micro and macroeconomics that relates to aggregation—at what point do the actions of a number of firms cease to be a microeconomic issue and become a macroeconomic issue?
- another way of outlining the differences ... In microeconomics the focus is on a small group of agents, say a group of consumers or two firms battling over a particular market. ... economists pay a great deal of attention to the behavior of the agents the model is focusing on ... make assumptions about what consumers want or how much they have to spend, or about whether the two firms are competing over prices or market share, and whether one firm is playing an aggressive strategy, and so on. The result is a detailed analysis of the way particular firms or consumers should behave in a given situation.
- [T]his microeconomic analysis does not explain what is happening in the wider economic environment. Think about consumers’ choice of what goods to consume. In addition to consumers’ own income and the price of the goods they wish to purchase, their decisions depend on an enormous amount of other information. How high is unemployment? Is the government going to increase taxes? Is the exchange rate about to collapse, requiring a sharp increase in interest rates? ... [I]f imported materials are important for the firm’s production process, then a depreciating currency will lead to higher import costs, reducing profit margins even before the firm engages in a price war.
- While none of these background influences—shifts in interest rates or movements in the exchange rate—are under the control of the firm or consumer, they still influence their decisions.
Macroeconomics analyzes the backdrop of economic conditions against which firms and consumers make decisions.
- The economy, as a whole, represents the outcome of decisions that millions of individual
firms and consumers make ... The inflation rate reflects the number of firms that are increasing prices and the amount by which each firm is raising prices ... all of the individual pricing decisions that millions of firms make determine the macroeconomic environment.
- While microeconomics is mainly concerned with studying in detail the decisions of a few agents, taking as given the basic economic backdrop, macroeconomics is about studying how the decisions of all the agents who make up the economy create this backdrop.
- Consider, for instance, the issue of whether a firm should adopt the latest developments in information technology (IT), which promise to increase labor productivity by, say, 20%. A microeconomic analysis of this topic would focus mainly on the costs the firm faces in adopting this technology and the likely productivity and profit gains that it would create. Macroeconomics would consider this IT innovation in the context of the whole economy. In particular, it would examine how, if many firms were to adopt this technology, costs in the whole economy would fall and the demand for skilled labor would rise... this would lead to an increase in wages and the firm’s payroll costs... [could] also shift demand away from unskilled towards skilled workers, causing the composition of unemployment and relative wages to change.
- The microeconomic analysis is one where the firm alone is contemplating adopting a new technology, and the emphasis is on the firm’s pricing and employment decisions, probably holding wages fixed... the analysis assumes the firm’s decisions do not influence the background economic environment. [T]he macroeconomic analysis examines the consequences when many firms implement the new technology and investigates how this affects economy-wide output, wages, and unemployment. [W]hich [form of analysis] is more appropriate depends on the issue to be analyzed and the question that needs to be answered.
Why to study macroeconomics - limitations, relevance
- Understanding macroeconomics is not simply a useful aspect of the public relations role of the business person; nor is it solely related to better understanding government policy.
- Economists distinguish between two types of uncertainty: aggregate and idiosyncratic. Aggregate uncertainty affects all firms and sectors in the economy; idiosyncratic uncertainty affects only a few individuals, firms, or industries. Macroeconomics is essentially about the aggregate sources of uncertainty that affect firms, workers, and consumers.
- [W]hich source of uncertainty is more important for individual health ... ? Evidence (covering firms and consumers) shows that the biggest source of uncertainty in the short term for most firms is the idiosyncratic component. All firms should worry about loss through illness of key personnel, major clients canceling contracts, litigation, fire and theft, and so forth.
- For households, or individuals, idiosyncratic risk is also generally more important than systematic (or aggregate) uncertainty. Whether you pass an exam; how well you get along with your first boss; whether you avoid serious illness in your forties and fifties—for [most these] are likely to be more important for their standard of living over their lifetime than ... aggregate output or ... inflation.
- Consider ... unemployment. In recessions unemployment rises, but not everyone becomes unemployed. Most people carry on with their regular job even through the worst recessions. ...
Therefore, the aggregate measure of unemployment, while important, gives an incomplete
picture of what is happening to individuals in the labor market. Idiosyncratic factors are significant—even during the worst recession some firms ... will be doing well and hiring workers; it is just that more firms are doing badly.
- This does not mean macroeconomics is unimportant to business. Netherlands case in
the early 1980s, and ... the early 1990s, p. 9
- Aggregate uncertainty is also important because it generates a type of risk that, by definition, all firms and consumers share ... the only source of uncertainty that is fully portable between jobs in different industries is aggregate uncertainty.
- [O]nly a small part of corporate uncertainty in any one year is due to aggregate or macroeconomic uncertainty. However, the further ahead one looks, the more important aggregate uncertainty becomes.
C O N C E P T U A L Q U E S T I O N S
1. (Section 1.1) What factors do you think explain why the United States is so rich and Bangladesh is so poor? What do you think accounts for the growth that most economies have shown?
Answer: Despite ideological disputes, proposals to tax the rich more in some Swiss cantons or NY State, and calling big business owners locusts (some SPD candidate), etc., there is a consensus that (see Obama's inauguration, 2009), a relatively free market economy and the rule of law are essential for prosperity. We can summarize Bangladesh plight saying that the country have neither of those essentials, nor many other factors for growth. They even had a mutiny in the Army this year - that is not precisely what investors need to have confidence.
2. (1.3) Figure 1.5 shows the pattern of bankruptcies and interest rates in the Netherlands. What do you think might account for this pattern? What can firms do to try to minimize this cyclical risk of bankruptcy?
A.: It is a good explanation that those pikes in interest rates were costly for many companies. As to try to minimize that risk and the real effect of that risk, I cannot think of anything of value: if rates go from 7 to 12 pct, or from 3 to 6 pct, what can you do? It is a tragedy.
3. (1.3) Figure 1.6 shows the real price of oil since 1913. What other industries besides automobile manufacturers are affected by fluctuations in oil prices, and how are they affected? What are the effects on individual consumers? How do you suppose that national economies of oil-producing nations are affected by changes in oil prices? What about the economies of countries that use a lot of imported oil?
A.: Transportation of all goods, food producers, almost anyone, including individuals and countries that import oil, will see their monthly bills go up for the same or less productive work, less customers and less spending of those customers. Exporting oil countries, to some extent, get more for less, so they can pay debt (to foreign investors) and debts (pending pensions, civil servants' paychecks, etc.).
4. (1.4) Consider the differing impact of microeconomic and macroeconomic factors in the near term prospects of
(a) a graduating student
(b) a restaurant in a village
(c) a restaurant in an airport
(d) a manufacturer of low-price cars
(e) a manufacturer of luxury sports cars
A N A L Y T I C A L Q U E S T I O N S
1. (Section 1.1) Consider the data in Figure 1.2. What growth rate will Bangladesh have to
show to catch up with the 2002 U.K. and U.S. per capita income level within 10 years? 20
years? 30 years? How would population growth affect your calculations?
2. (1.3) Consider an economy made up of 5 equal sized firms (labeled A to E). Under one scenario the output of each firm alternates between
Firm A B C D E
Output 1 2 3 4 5
And
Firm A B C D E
Output 5 4 3 2 1
What is the balance between idiosyncratic and aggregate risk in this economy?
A.: aggregate risk is flat, since final output, number of employees, etc., is the same after the change than before it. But idiosyncratic damage is big for company E, and gains for company A are enormous too.
How does your answer change if each firm oscillates between
Firm A B C D E
Output 3 3 3 3 3
And
Firm A B C D E
Output 4 4 4 4 4
A.: aggregate risk is lower if output is not eaten by price changes, and the country is richer than it was. Also, idiosyncratic risk is lower, since all companies earn more, but also the employees probably will get a bigger chunk of the pie, so in the end there will be a pressure on costs that will transmit to the consumer.
Soft start:
- [M]acroeconomics is far more than just an intellectual toolkit for understanding current events. It is also about understanding the long-term forces that drive the economy and shape the business environment
- [M]acroeconomics is about the economy as a whole ... how the whole economy evolves over time rather than on any one sector, region, or firm. Yet macroeconomics also considers the important issues from the perspective of the firm and/or the individual consumer. It is the overall, or aggregate, implications of tens of thousands of individual decisions that companies and households make that generates the macroeconomic outcomes.
- Economics is the study of the allocation of scarce resources ... Not all these needs can be satisfied, but economics should be able to help you (and society) meet as many of them as possible.
- Market economies allocate resources through prices. Prices tell producers what the demand for a particular product is—if prices are high, then producers know the good is in demand, and they can increase production. If prices are low, producers know that demand for the product is weak, and they should cut back production. Thus the market ensures that society produces more of the goods that people want and less of those that they do not.
- Broadly speaking, economics has two components: microeconomics and macroeconomics. ... microeconomics essentially examines how individual units, whether they be consumers or
firms, decide how to allocate resources and whether those decisions are desirable.
- Macroeconomics studies the economy as a whole; it looks at the aggregate outcomes of
all the decisions that consumers, firms, and the government make in an economy. Macroeconomics is about aggregate variables such as the overall levels of output, consumption, employment, and prices—and how they move over time and between countries.
- In terms of prices, microeconomics focuses on, for instance, the price of a particular firm’s product, whereas macroeconomics focuses on the exchange rate (the price of one country’s money in terms of that of another country) or the interest rate (the price of spending today rather than tomorrow).
The Difference between Macro and Microeconomics
[A] gray area exists between micro and macroeconomics that relates to aggregation—at what point do the actions of a number of firms cease to be a microeconomic issue and become a macroeconomic issue?
- another way of outlining the differences ... In microeconomics the focus is on a small group of agents, say a group of consumers or two firms battling over a particular market. ... economists pay a great deal of attention to the behavior of the agents the model is focusing on ... make assumptions about what consumers want or how much they have to spend, or about whether the two firms are competing over prices or market share, and whether one firm is playing an aggressive strategy, and so on. The result is a detailed analysis of the way particular firms or consumers should behave in a given situation.
- [T]his microeconomic analysis does not explain what is happening in the wider economic environment. Think about consumers’ choice of what goods to consume. In addition to consumers’ own income and the price of the goods they wish to purchase, their decisions depend on an enormous amount of other information. How high is unemployment? Is the government going to increase taxes? Is the exchange rate about to collapse, requiring a sharp increase in interest rates? ... [I]f imported materials are important for the firm’s production process, then a depreciating currency will lead to higher import costs, reducing profit margins even before the firm engages in a price war.
- While none of these background influences—shifts in interest rates or movements in the exchange rate—are under the control of the firm or consumer, they still influence their decisions.
Macroeconomics analyzes the backdrop of economic conditions against which firms and consumers make decisions.
- The economy, as a whole, represents the outcome of decisions that millions of individual
firms and consumers make ... The inflation rate reflects the number of firms that are increasing prices and the amount by which each firm is raising prices ... all of the individual pricing decisions that millions of firms make determine the macroeconomic environment.
- While microeconomics is mainly concerned with studying in detail the decisions of a few agents, taking as given the basic economic backdrop, macroeconomics is about studying how the decisions of all the agents who make up the economy create this backdrop.
- Consider, for instance, the issue of whether a firm should adopt the latest developments in information technology (IT), which promise to increase labor productivity by, say, 20%. A microeconomic analysis of this topic would focus mainly on the costs the firm faces in adopting this technology and the likely productivity and profit gains that it would create. Macroeconomics would consider this IT innovation in the context of the whole economy. In particular, it would examine how, if many firms were to adopt this technology, costs in the whole economy would fall and the demand for skilled labor would rise... this would lead to an increase in wages and the firm’s payroll costs... [could] also shift demand away from unskilled towards skilled workers, causing the composition of unemployment and relative wages to change.
- The microeconomic analysis is one where the firm alone is contemplating adopting a new technology, and the emphasis is on the firm’s pricing and employment decisions, probably holding wages fixed... the analysis assumes the firm’s decisions do not influence the background economic environment. [T]he macroeconomic analysis examines the consequences when many firms implement the new technology and investigates how this affects economy-wide output, wages, and unemployment. [W]hich [form of analysis] is more appropriate depends on the issue to be analyzed and the question that needs to be answered.
Why to study macroeconomics - limitations, relevance
- Understanding macroeconomics is not simply a useful aspect of the public relations role of the business person; nor is it solely related to better understanding government policy.
- Economists distinguish between two types of uncertainty: aggregate and idiosyncratic. Aggregate uncertainty affects all firms and sectors in the economy; idiosyncratic uncertainty affects only a few individuals, firms, or industries. Macroeconomics is essentially about the aggregate sources of uncertainty that affect firms, workers, and consumers.
- [W]hich source of uncertainty is more important for individual health ... ? Evidence (covering firms and consumers) shows that the biggest source of uncertainty in the short term for most firms is the idiosyncratic component. All firms should worry about loss through illness of key personnel, major clients canceling contracts, litigation, fire and theft, and so forth.
- For households, or individuals, idiosyncratic risk is also generally more important than systematic (or aggregate) uncertainty. Whether you pass an exam; how well you get along with your first boss; whether you avoid serious illness in your forties and fifties—for [most these] are likely to be more important for their standard of living over their lifetime than ... aggregate output or ... inflation.
- Consider ... unemployment. In recessions unemployment rises, but not everyone becomes unemployed. Most people carry on with their regular job even through the worst recessions. ...
Therefore, the aggregate measure of unemployment, while important, gives an incomplete
picture of what is happening to individuals in the labor market. Idiosyncratic factors are significant—even during the worst recession some firms ... will be doing well and hiring workers; it is just that more firms are doing badly.
- This does not mean macroeconomics is unimportant to business. Netherlands case in
the early 1980s, and ... the early 1990s, p. 9
- Aggregate uncertainty is also important because it generates a type of risk that, by definition, all firms and consumers share ... the only source of uncertainty that is fully portable between jobs in different industries is aggregate uncertainty.
- [O]nly a small part of corporate uncertainty in any one year is due to aggregate or macroeconomic uncertainty. However, the further ahead one looks, the more important aggregate uncertainty becomes.
C O N C E P T U A L Q U E S T I O N S
1. (Section 1.1) What factors do you think explain why the United States is so rich and Bangladesh is so poor? What do you think accounts for the growth that most economies have shown?
Answer: Despite ideological disputes, proposals to tax the rich more in some Swiss cantons or NY State, and calling big business owners locusts (some SPD candidate), etc., there is a consensus that (see Obama's inauguration, 2009), a relatively free market economy and the rule of law are essential for prosperity. We can summarize Bangladesh plight saying that the country have neither of those essentials, nor many other factors for growth. They even had a mutiny in the Army this year - that is not precisely what investors need to have confidence.
2. (1.3) Figure 1.5 shows the pattern of bankruptcies and interest rates in the Netherlands. What do you think might account for this pattern? What can firms do to try to minimize this cyclical risk of bankruptcy?
A.: It is a good explanation that those pikes in interest rates were costly for many companies. As to try to minimize that risk and the real effect of that risk, I cannot think of anything of value: if rates go from 7 to 12 pct, or from 3 to 6 pct, what can you do? It is a tragedy.
3. (1.3) Figure 1.6 shows the real price of oil since 1913. What other industries besides automobile manufacturers are affected by fluctuations in oil prices, and how are they affected? What are the effects on individual consumers? How do you suppose that national economies of oil-producing nations are affected by changes in oil prices? What about the economies of countries that use a lot of imported oil?
A.: Transportation of all goods, food producers, almost anyone, including individuals and countries that import oil, will see their monthly bills go up for the same or less productive work, less customers and less spending of those customers. Exporting oil countries, to some extent, get more for less, so they can pay debt (to foreign investors) and debts (pending pensions, civil servants' paychecks, etc.).
4. (1.4) Consider the differing impact of microeconomic and macroeconomic factors in the near term prospects of
(a) a graduating student
(b) a restaurant in a village
(c) a restaurant in an airport
(d) a manufacturer of low-price cars
(e) a manufacturer of luxury sports cars
A N A L Y T I C A L Q U E S T I O N S
1. (Section 1.1) Consider the data in Figure 1.2. What growth rate will Bangladesh have to
show to catch up with the 2002 U.K. and U.S. per capita income level within 10 years? 20
years? 30 years? How would population growth affect your calculations?
2. (1.3) Consider an economy made up of 5 equal sized firms (labeled A to E). Under one scenario the output of each firm alternates between
Firm A B C D E
Output 1 2 3 4 5
And
Firm A B C D E
Output 5 4 3 2 1
What is the balance between idiosyncratic and aggregate risk in this economy?
A.: aggregate risk is flat, since final output, number of employees, etc., is the same after the change than before it. But idiosyncratic damage is big for company E, and gains for company A are enormous too.
How does your answer change if each firm oscillates between
Firm A B C D E
Output 3 3 3 3 3
And
Firm A B C D E
Output 4 4 4 4 4
A.: aggregate risk is lower if output is not eaten by price changes, and the country is richer than it was. Also, idiosyncratic risk is lower, since all companies earn more, but also the employees probably will get a bigger chunk of the pie, so in the end there will be a pressure on costs that will transmit to the consumer.
WaPo: The White House should join lawmakers in reforming the state secrets doctrine
Securing Lawsuits. WaPo Editorial
The White House should join lawmakers in reforming the state secrets doctrine.
WaPo, Monday, May 11, 2009
ON CONSECUTIVE days last month, a federal appeals court and the president of the United States revealed that they had come to the same conclusion: The state secrets doctrine, which has been used to shut down litigation that the government claims to be risky for national security, needs to be revamped.
During an April 29 news conference, President Obama called the doctrine "overbroad." "I think it is appropriate to say that there are going to be cases in which national security interests are genuinely at stake and that you can't litigate without revealing covert activities or classified information that would genuinely compromise our safety," Mr. Obama said, but he added, "There should be some additional tools, so that it's not such a blunt instrument."
Yet the Obama administration seized on the most blunt interpretation of the state secrets doctrine this year in a lawsuit brought by five men who sued Jeppesen DataPlan, claiming that the Boeing subsidiary helped the Bush administration carry out extraordinary renditions that led to their torture. The Obama Justice Department -- like the Bush administration -- argued that no part of the case could be litigated without the threat of compromising national security.
The day before the president's news conference, the U.S. Court of Appeals for the 9th Circuit roundly rejected the administration's assertions. In an April 28 opinion, the court ruled that a trial judge should proceed with the case and evaluate individual claims of government secrecy. If a piece of evidence is deemed too sensitive, it may be stricken, but the plaintiff may still try to prove his case using unclassified evidence.
The 9th Circuit's decision squarely conflicts with a 2007 decision of the Richmond-based 4th Circuit to throw out the case of Khaled al-Masri, a German national who was seized in 2004 by U.S. operatives and allegedly tortured. The Justice Department could appeal the 9th Circuit decision, so as to allow the Supreme Court to resolve the conflict. But a better course would be to begin working with lawmakers to fine-tune the proposed State Secrets Protection Act.
The bill, originally championed by Sen. Edward M. Kennedy (D-Mass.) and recently reintroduced by Senate Judiciary Committee Chairman Patrick J. Leahy (D-Vt.), would allow judges to privately review information that the government claims is too sensitive for public dissemination. If a specific piece of evidence was deemed too sensitive, the bill would allow the government to provide unclassified summaries of evidence to plaintiffs' lawyers with appropriate security clearances. If even that proved unworkable, the judge could exclude the evidence, but the entire case would not have to be dismissed.
The executive's prerogatives to protect national security must be respected, as must the rights of private litigants to have a fighting chance in court. Passage of the State Secrets Protection Act would ensure that these factors are weighed fairly no matter who sits in the Oval Office.
The White House should join lawmakers in reforming the state secrets doctrine.
WaPo, Monday, May 11, 2009
ON CONSECUTIVE days last month, a federal appeals court and the president of the United States revealed that they had come to the same conclusion: The state secrets doctrine, which has been used to shut down litigation that the government claims to be risky for national security, needs to be revamped.
During an April 29 news conference, President Obama called the doctrine "overbroad." "I think it is appropriate to say that there are going to be cases in which national security interests are genuinely at stake and that you can't litigate without revealing covert activities or classified information that would genuinely compromise our safety," Mr. Obama said, but he added, "There should be some additional tools, so that it's not such a blunt instrument."
Yet the Obama administration seized on the most blunt interpretation of the state secrets doctrine this year in a lawsuit brought by five men who sued Jeppesen DataPlan, claiming that the Boeing subsidiary helped the Bush administration carry out extraordinary renditions that led to their torture. The Obama Justice Department -- like the Bush administration -- argued that no part of the case could be litigated without the threat of compromising national security.
The day before the president's news conference, the U.S. Court of Appeals for the 9th Circuit roundly rejected the administration's assertions. In an April 28 opinion, the court ruled that a trial judge should proceed with the case and evaluate individual claims of government secrecy. If a piece of evidence is deemed too sensitive, it may be stricken, but the plaintiff may still try to prove his case using unclassified evidence.
The 9th Circuit's decision squarely conflicts with a 2007 decision of the Richmond-based 4th Circuit to throw out the case of Khaled al-Masri, a German national who was seized in 2004 by U.S. operatives and allegedly tortured. The Justice Department could appeal the 9th Circuit decision, so as to allow the Supreme Court to resolve the conflict. But a better course would be to begin working with lawmakers to fine-tune the proposed State Secrets Protection Act.
The bill, originally championed by Sen. Edward M. Kennedy (D-Mass.) and recently reintroduced by Senate Judiciary Committee Chairman Patrick J. Leahy (D-Vt.), would allow judges to privately review information that the government claims is too sensitive for public dissemination. If a specific piece of evidence was deemed too sensitive, the bill would allow the government to provide unclassified summaries of evidence to plaintiffs' lawyers with appropriate security clearances. If even that proved unworkable, the judge could exclude the evidence, but the entire case would not have to be dismissed.
The executive's prerogatives to protect national security must be respected, as must the rights of private litigants to have a fighting chance in court. Passage of the State Secrets Protection Act would ensure that these factors are weighed fairly no matter who sits in the Oval Office.
Saturday, May 9, 2009
WaPo: The administration's inflexible policy on lobbyists and lobbying is having some perverse effects
Cutting Off Competence. WaPo Editorial
The administration's inflexible policy on lobbyists and lobbying is having some perverse effects.
WaPo, Saturday, May 9, 2009
IN THE WAKE of the Jack Abramoff scandal, President Obama was right to err on the side of strictness in restricting lobbyists entering government, and we supported his rule. But we think it's worth asking whether the costs are outweighing the benefits.
The president was right to slow the revolving door so that those who serve in his administration cannot cash in quickly after leaving. The rules will prevent senior officials from lobbying the executive branch -- not just the departments in which they served -- for the remainder of Mr. Obama's service.
On the entry side of the revolving door, the administration barred those who had been registered lobbyists in the past two years from serving in departments that they had lobbied, even if their government work would not involve issues on which they had lobbied. This limitation had its silly aspects -- you want health-care experts at the Department of Health and Human Services, for example, and some very good health-care experts have been registered lobbyists -- but the administration built in some needed flexibility by allowing for waivers.
However, after an early waiver given to Raytheon Corp.'s chief in-house lobbyist, William J. Lynn, to become deputy defense secretary, the administration was bombarded with accusations of hypocrisy. The lesson that Team Obama took from this was not to use its waivers more wisely but to crack down on them -- and to broaden the prohibition, in practice, to exclude lobbyist candidates from consideration even for jobs in departments or agencies that they hadn't lobbied. As a result, too many qualified candidates have been denied positions for which they are suited simply because of a lobbyist taint.
This approach could have the perverse consequence of driving lobbying underground and reducing the openness that the Obama administration says it wants to promote. The decision about whether to register as a lobbyist isn't always clear-cut; in the past, many people registered out of an abundance of caution. Now, some are saying privately that they will avoid registering if at all possible, shedding less sunlight on lobbying activities.
The Obama administration is also making a mistake by barring lobbyists from, well, lobbying it in some circumstances. The administration's rules on distributing stimulus funds bar registered lobbyists from telephoning or meeting with government officials about specific projects; they can make contact only in writing, with documents to be posted on the government's Web site. We understand the good-government impetus here. But why distinguish between lobbyists and corporate executives or local government officials seeking the funds, who have the biggest interests at stake? The rules are up for review soon. They should be rethought.
The administration's inflexible policy on lobbyists and lobbying is having some perverse effects.
WaPo, Saturday, May 9, 2009
IN THE WAKE of the Jack Abramoff scandal, President Obama was right to err on the side of strictness in restricting lobbyists entering government, and we supported his rule. But we think it's worth asking whether the costs are outweighing the benefits.
The president was right to slow the revolving door so that those who serve in his administration cannot cash in quickly after leaving. The rules will prevent senior officials from lobbying the executive branch -- not just the departments in which they served -- for the remainder of Mr. Obama's service.
On the entry side of the revolving door, the administration barred those who had been registered lobbyists in the past two years from serving in departments that they had lobbied, even if their government work would not involve issues on which they had lobbied. This limitation had its silly aspects -- you want health-care experts at the Department of Health and Human Services, for example, and some very good health-care experts have been registered lobbyists -- but the administration built in some needed flexibility by allowing for waivers.
However, after an early waiver given to Raytheon Corp.'s chief in-house lobbyist, William J. Lynn, to become deputy defense secretary, the administration was bombarded with accusations of hypocrisy. The lesson that Team Obama took from this was not to use its waivers more wisely but to crack down on them -- and to broaden the prohibition, in practice, to exclude lobbyist candidates from consideration even for jobs in departments or agencies that they hadn't lobbied. As a result, too many qualified candidates have been denied positions for which they are suited simply because of a lobbyist taint.
This approach could have the perverse consequence of driving lobbying underground and reducing the openness that the Obama administration says it wants to promote. The decision about whether to register as a lobbyist isn't always clear-cut; in the past, many people registered out of an abundance of caution. Now, some are saying privately that they will avoid registering if at all possible, shedding less sunlight on lobbying activities.
The Obama administration is also making a mistake by barring lobbyists from, well, lobbying it in some circumstances. The administration's rules on distributing stimulus funds bar registered lobbyists from telephoning or meeting with government officials about specific projects; they can make contact only in writing, with documents to be posted on the government's Web site. We understand the good-government impetus here. But why distinguish between lobbyists and corporate executives or local government officials seeking the funds, who have the biggest interests at stake? The rules are up for review soon. They should be rethought.
Friday, May 8, 2009
Australia prepares for U.S. decline
A Pacific Warning. WSJ Editorial
Australia prepares for U.S. decline.
WSJ, May 08, 2009
Since World War II, U.S. military dominance has underpinned the Asia-Pacific region's prosperity and relative peace. So it's cause for concern when one of America's closest allies sees that power ebbing amid unstable nuclear regimes such as Pakistan and North Korea and the expanding military power of China.
In the preface to a sweeping defense review released Saturday, Australian Defense Minister Joel Fitzgibbon writes: "The biggest changes to our outlook . . . have been the rise of China, the emergence of India and the beginning of the end of the so-called unipolar moment; the almost two-decade-long period in which the pre-eminence of our principal ally, the United States, was without question."
Australia isn't forecasting the end of U.S. dominance soon; the report predicts that will continue through 2030. There are also a few bright spots, such as a stronger India and the emergence of Indonesia as a stable democratic ally.
But without sustained U.S. defense spending and focus on the Asia-Pacific, it's unclear which nation will ultimately dominate the region -- and that could have profound effects on security and trade. The clearest challenge comes from China, which the Pentagon estimates spent $105 billion to $150 billion in 2008 bulking up its forces. Australia also worries about instability among its Pacific island neighbors, terrorism, the proliferation of weapons of mass destruction and emerging threats like cyber war.
In response to this outlook, Canberra is retooling its defense. It is doubling the size of its submarine fleet to 12 from six and buying about 100 Joint Strike Fighters, three destroyers and eight frigates. The ships and subs will be equipped with cruise missiles. It will also upgrade its army and special forces units and look for new ways to cooperate with the U.S. and other regional democratic powers.
Prime Minister Kevin Rudd said Saturday: "Some have argued that in the global economic recession we should reduce defense spending to ease the pressure on the budget. But the government believes the opposite to be true. In a period of global instability Australia must invest in a strong, capable and well resourced defense force."
Australia currently spends around $13.1 billion a year on defense, not counting money for new equipment. The new policy paper says spending will increase by 3% annually until 2018, which isn't much. But the importance of Canberra's message is about priorities. Australia is worried about the end of the "unipolar moment." Americans and Asians should be worried too.
Australia prepares for U.S. decline.
WSJ, May 08, 2009
Since World War II, U.S. military dominance has underpinned the Asia-Pacific region's prosperity and relative peace. So it's cause for concern when one of America's closest allies sees that power ebbing amid unstable nuclear regimes such as Pakistan and North Korea and the expanding military power of China.
In the preface to a sweeping defense review released Saturday, Australian Defense Minister Joel Fitzgibbon writes: "The biggest changes to our outlook . . . have been the rise of China, the emergence of India and the beginning of the end of the so-called unipolar moment; the almost two-decade-long period in which the pre-eminence of our principal ally, the United States, was without question."
Australia isn't forecasting the end of U.S. dominance soon; the report predicts that will continue through 2030. There are also a few bright spots, such as a stronger India and the emergence of Indonesia as a stable democratic ally.
But without sustained U.S. defense spending and focus on the Asia-Pacific, it's unclear which nation will ultimately dominate the region -- and that could have profound effects on security and trade. The clearest challenge comes from China, which the Pentagon estimates spent $105 billion to $150 billion in 2008 bulking up its forces. Australia also worries about instability among its Pacific island neighbors, terrorism, the proliferation of weapons of mass destruction and emerging threats like cyber war.
In response to this outlook, Canberra is retooling its defense. It is doubling the size of its submarine fleet to 12 from six and buying about 100 Joint Strike Fighters, three destroyers and eight frigates. The ships and subs will be equipped with cruise missiles. It will also upgrade its army and special forces units and look for new ways to cooperate with the U.S. and other regional democratic powers.
Prime Minister Kevin Rudd said Saturday: "Some have argued that in the global economic recession we should reduce defense spending to ease the pressure on the budget. But the government believes the opposite to be true. In a period of global instability Australia must invest in a strong, capable and well resourced defense force."
Australia currently spends around $13.1 billion a year on defense, not counting money for new equipment. The new policy paper says spending will increase by 3% annually until 2018, which isn't much. But the importance of Canberra's message is about priorities. Australia is worried about the end of the "unipolar moment." Americans and Asians should be worried too.
Thursday, May 7, 2009
Review of Mansoor's Baghdad at Sunrise: Rediscovering counterinsurgency in Iraq
The Learning Curve, by Mackubin Thomas Owens
Rediscovering counterinsurgency in Iraq.
The Weekly Standard, May 11, 2009, Volume 014, Issue 32
Review of Baghdad at Sunrise
A Brigade Commander's War in Iraq
by Peter R. Mansoor
Yale, 416 pp., $28
Some years ago, the late Carl Builder of RAND wrote a book entitled The Masks of War, in which he demonstrated the importance of the organizational cultures of the various military services. His point was that each service possesses a preferred way of fighting that is not easily changed.
Since the 1930s the culture of the U.S. Army has emphasized "big wars." This is the legacy of Emory Upton, an innovative 19th-century officer who became a protégé of William Tecumseh Sherman when Sherman became general-in-chief of the Army after the Civil War. Upton believed that the traditional constabulary focus of the Army was outdated. Dispatched on a world tour by Sherman, Upton was especially impressed by Prussian military policy, Prussia's ability to conduct war against the armies of other military powers, and its emphasis on professionalism. Certainly Prussia's overwhelming successes against Denmark, Austria, and France in the Wars of German Unification (1864-71) made the Prussian Army the new exemplar of military excellence in Europe.
Upon his return home, Upton proposed a number of radical reforms, including replacing the citizen-soldier model with one based on a professional soldiery, reducing civilian "interference" in military affairs, and abandoning the emphasis on the constabulary operations that had characterized Army roles during most of the 19th century (with the exception of the Mexican and Civil wars) in favor of preparing for a conflict with a potential foreign enemy.
Given the tenor of the time, all of his proposals were rejected. In ill health, Upton resigned from the Army and, in 1881, committed suicide. But the triumph of progressivism, a political program that placed a great deal of reliance on scientific expertise and professionalism, the end of the Army's constabulary duties on the Western frontier, and the problems associated with mobilizing for and fighting the Spanish American War, made Upton's proposed reforms more attractive, especially within the officer corps. In 1904 Secretary of War Elihu Root published Upton's Military Policy of the United States, and while many of Upton's more radical proposals remained unacceptable to republican America, the idea of reorienting the Army away from constabulary duties to a mission focused on defeating the conventional forces of other states caught on.
While the Army returned to constabulary duties after World War I, Upton's spirit now permeated the professional culture. World War II vindicated Upton's vision, and his view continued to govern Army thinking throughout the Cold War. The American Army that entered Iraq in 2003 was still Emory Upton's Army. Focused as it has been on state-versus-state warfare, Upton's army has not cared much for counterinsurgency, and this was apparent during the first years of the Iraq War. It is also the theme of several recent books on the conflict.
Baghdad at Sunrise is one of the best, written by a colonel who commanded the 1st Brigade of the 1st Armored Division during a particularly difficult year (May 2003-July 2004), a period that saw the rapid coalition victory over Saddam Hussein give way to a vicious insurgency that came close to defeating the United States in Iraq. A genuine soldier-scholar, Colonel Mansoor provides the unique perspective of a midlevel ground commander adapting to the requirements of fighting an insurgency under the most difficult conditions.
His perspective is enhanced by the fact that, two-and-a-half years after redeploying his brigade to Germany, he returned as executive officer to Gen. David Petraeus as Petraeus implemented the "surge" and the counter- insurgency strategy that helped turn the situation around in Iraq. Mansoor not only observed but helped to implement the Army's painful transition from an organization beholden to Emory Upton to one that recognized the necessity to adapt to an enemy who refused to fight the Upton way.
The conventional wisdom holds that it was civilian interference, especially on the part of Donald Rumsfeld, that was to blame for the difficulties U.S. forces faced in Iraq during the first years of the campaign. According to the dominant narrative, Rumsfeld willfully ignored military advice and initiated the war with a force that was too small. He ignored the need to prepare for post-conflict stability operations, and he failed to adapt to the new circumstances once things began to go wrong, not foreseeing the insurgency that engulfed the country.
It is undeniable that Rumsfeld made many critical mistakes. But the uniformed military was no more prescient than he. Did Rumsfeld insist on an early attack with a smaller force than that recommended by many uniformed officers? Yes. But the plan he pushed was a version of a scheme developed by an Army officer, Col. Douglas MacGregor. The military objective of this plan was not to occupy the country but to liberate Iraq from Saddam and turn governance over to liberal Iraqis. The approach was popular with both Rumsfeld and the military because both took their bearings from the Weinberger Doctrine, a set of rules for the use of force drafted in the 1980s which emphasized the quick, overwhelming application of military force to defeat an enemy, leaving postwar affairs to others.
Did Rumsfeld ignore postwar planning? Again, yes. But in doing so he was merely ratifying the preferences of a uniformed military that had internalized the Weinberger emphasis on an "exit strategy." The fact is that if generals are thinking about an exit strategy they are not thinking about "war termination"--how to convert military success into political success. This cultural aversion to stability operations is reflected in the fact that operational planning for Operation Iraqi Freedom took 18 months while planning for postwar stabilization began half-heartedly only a couple of months before the invasion.
Did Rumsfeld foresee the insurgency and the shift from conventional to guerrilla war? No. But neither did his critics in the uniformed services. Mansoor makes this point clear by observing that, for at least the three decades before the Iraq war, the professional military education system all but ignored counterinsurgency operations. This cultural aversion to counter- insurgency lay at the heart of the difficult years in Iraq (2003-07), and in the absence of a counterinsurgency doctrine the Army fell back on what it knew: conventional offensive operations designed to kill the enemy without protecting the population.
The Army's predisposition toward offensive operations was reinforced in the 1990s by a sort of operational "happy talk" that convinced many (who should have known better) that the American edge in emerging technologies, especially informational technologies, would permit the United States to conduct short, decisive, and relatively bloodless campaigns. This was the lesson many learned from the first Gulf war, and the result was an approach that goes under the name of Rapid Decisive Operations. Mansoor observes that Rapid Decisive Operations misunderstood the timeless nature of war: "What we learned [in Iraq]," he writes, "was that the real objective of the war was not merely the collapse of the old regime but the creation of a stable government." As the old saying goes, in war the enemy has a vote, and in the case of Iraq, our adversaries voted not to fight the kind of war Americans preferred.
As the conflict morphed into an insurgency, U.S. ground troops responded by going after the insurgents, adapting conventional tactics to a guerrilla war. In The Gamble Thomas Ricks quotes a speech by an Army officer that captures the essence of the U.S. approach in Iraq until 2007: "Anytime you fight, you always kill the other sonofabitch. Do not let him live today so he will fight you tomorrow. Kill him today."
This approach made sense when the insurgents stood and fought, as they did in Falluja in April and November 2004. It also made sense during the subsequent "rivers campaign" of 2005, designed to destroy the insurgency in al Anbar Province by depriving it of its base and infrastructure in the Sunni Triangle and the "ratlines" west and northwest of Falluja. It unquestionably killed thousands of insurgents, including Abu Musab al Zarqawi, the leader of Al Qaeda in Iraq, as well as many of his top lieutenants, and led to the capture of many more. Intelligence from captured insurgents, as well as from Zarqawi's computer, had a cascading effect, permitting the coalition to maintain pressure on the insurgency.
But while successful in disrupting insurgent operations, there were too few troops to maintain control of the towns of al Anbar. The insurgents, abandoning their Falluja approach of standing and fighting the Americans, simply melted away, only to return after coalition troops had departed. Thus, while soldiers and Marines were chasing insurgents from sanctuary to sanctuary, they were not providing security for the Iraqi population, leaving them at the mercy of the insurgents who terrorized and intimidated them.
As the insurgency metastasized in 2005 the United States had three military alternatives: continue offensive operations along the lines of those in Anbar after Falluja; adopt a counterinsurgency approach; or emphasize the training of Iraqi troops in order to effect a transition to Iraqi control of military operations. Gen. John Abizaid of Central Command, and Gen. George Casey, the overall commander in Iraq, chose the third option, supported by Rumsfeld and Joint Chiefs chairman Gen. Richard Myers.
But while moving toward Iraqi control was a logical option for the long run, it did little to solve the proximate problem of the insurgency, which had generated sectarian violence. Based on the belief of many senior commanders, especially General Abizaid, that U.S. troops were an "antibody" to Iraqi culture, U.S. forces were consolidated on large "forward operating bases," maintaining a presence only by means of motorized patrols that were particularly vulnerable to attacks by IEDs. In so doing, we ceded territory and population alike to the insurgents. Mansoor describes this approach as a mistake: "Security of the population is the fundamental basis of any successful counterinsurgency strategy."
The withdrawal of American forces to forward operating bases also contributed to a "kick-in-the-door" mentality among troops when they did interact with Iraqis. This was completely at odds with effective counterinsurgency practice, seriously undermining attempts to pacify the country. And yet, despite many difficulties (including resistance from above), some Army and Marine commanders had been implementing a counterinsurgency approach on their own initiative; that is to say, forming partnerships with the Sunni sheikhs in al Anbar province who had tired of al Qaeda's reign of terror in the Sunni Triangle. By providing security to the people in cooperation with the sheikhs, the Americans were able to isolate Al Qaeda in Iraq. And as U.S commanders were struggling with the insurgency, the Army and Marine Corps were developing a counterinsurgency doctrine based on this insight, and an operational strategy that would successfully be applied as part of the surge in 2007.
As a close associate of General Petraeus, Colonel Mansoor helped serve as midwife to the remarkable shift in Iraq arising from a more general application of the lessons that he had learned during his 2003-04 command. This new approach rejected the position articulated by Petraeus's predecessor, General Casey, who had told President George W. Bush in 2006 that "to win, we have to draw down." And General Abizaid of Central Command, sticking to his belief that American soldiers were an "antibody" to Iraqi culture, seconded Casey.
But Petraeus agreed with Mansoor's observation that "counterinsurgency is a thinking soldier's war," requiring "the counterinsurgent to adapt faster than the insurgent." The time for applying a new approach was at hand, and to his credit, President Bush saw the necessity for change and took action.
One of the debates triggered by our experience in Iraq concerns U.S. force structure. As Mansoor puts it, "If we accept the premise that [counterinsurgency and] stability operations [are] of primary concern, then the Army's organization for combat should [be] different." This debate pits the "long war" school against "traditionalists." The former argues that Iraq and Afghanistan are most characteristic of the protracted and ambiguous wars America will fight in the future, and that the military should be developing a force designed to fight the "long war" on terrorism, which envisions the necessity of preparing for small wars, or insurgencies.
The traditionalists concede that irregular warfare will occur more frequently in the future and that fighting small wars is difficult. But traditionalists also conclude that such conflicts do not threaten U.S. strategic interests, while large-scale conflicts, which they believe remain a real possibility, will threaten strategic interests. They fear that the Long War School's focus on small wars and insurgencies will transform the Army back into a constabulary force, whose new capability for conducting stability operations and "nation-building" would be purchased at a high cost: the inability to conduct large-scale conventional war.
This is by no means a parochial debate, of interest only to the uniformed military, and its outcome has implications for broader national security policy: A force structure aligned with the requirement to fight conventional wars would make it more difficult for the United States to fight small wars. This may be a legitimate choice for the United States, but it is one that should be made by policymakers, and not delegated to the uniformed military. To do so would permit military decisions to constrain policy and strategy questions that lie well within the purview of civilian authority, and our experiences in Vietnam and Iraq demonstrate the dangers of leaving military doctrine and force structure strictly to the military.
Mackubin Thomas Owens is editor of Orbis, the journal of the Foreign Policy Research Institute, and professor of national security affairs at the Naval War College.
Rediscovering counterinsurgency in Iraq.
The Weekly Standard, May 11, 2009, Volume 014, Issue 32
Review of Baghdad at Sunrise
A Brigade Commander's War in Iraq
by Peter R. Mansoor
Yale, 416 pp., $28
Some years ago, the late Carl Builder of RAND wrote a book entitled The Masks of War, in which he demonstrated the importance of the organizational cultures of the various military services. His point was that each service possesses a preferred way of fighting that is not easily changed.
Since the 1930s the culture of the U.S. Army has emphasized "big wars." This is the legacy of Emory Upton, an innovative 19th-century officer who became a protégé of William Tecumseh Sherman when Sherman became general-in-chief of the Army after the Civil War. Upton believed that the traditional constabulary focus of the Army was outdated. Dispatched on a world tour by Sherman, Upton was especially impressed by Prussian military policy, Prussia's ability to conduct war against the armies of other military powers, and its emphasis on professionalism. Certainly Prussia's overwhelming successes against Denmark, Austria, and France in the Wars of German Unification (1864-71) made the Prussian Army the new exemplar of military excellence in Europe.
Upon his return home, Upton proposed a number of radical reforms, including replacing the citizen-soldier model with one based on a professional soldiery, reducing civilian "interference" in military affairs, and abandoning the emphasis on the constabulary operations that had characterized Army roles during most of the 19th century (with the exception of the Mexican and Civil wars) in favor of preparing for a conflict with a potential foreign enemy.
Given the tenor of the time, all of his proposals were rejected. In ill health, Upton resigned from the Army and, in 1881, committed suicide. But the triumph of progressivism, a political program that placed a great deal of reliance on scientific expertise and professionalism, the end of the Army's constabulary duties on the Western frontier, and the problems associated with mobilizing for and fighting the Spanish American War, made Upton's proposed reforms more attractive, especially within the officer corps. In 1904 Secretary of War Elihu Root published Upton's Military Policy of the United States, and while many of Upton's more radical proposals remained unacceptable to republican America, the idea of reorienting the Army away from constabulary duties to a mission focused on defeating the conventional forces of other states caught on.
While the Army returned to constabulary duties after World War I, Upton's spirit now permeated the professional culture. World War II vindicated Upton's vision, and his view continued to govern Army thinking throughout the Cold War. The American Army that entered Iraq in 2003 was still Emory Upton's Army. Focused as it has been on state-versus-state warfare, Upton's army has not cared much for counterinsurgency, and this was apparent during the first years of the Iraq War. It is also the theme of several recent books on the conflict.
Baghdad at Sunrise is one of the best, written by a colonel who commanded the 1st Brigade of the 1st Armored Division during a particularly difficult year (May 2003-July 2004), a period that saw the rapid coalition victory over Saddam Hussein give way to a vicious insurgency that came close to defeating the United States in Iraq. A genuine soldier-scholar, Colonel Mansoor provides the unique perspective of a midlevel ground commander adapting to the requirements of fighting an insurgency under the most difficult conditions.
His perspective is enhanced by the fact that, two-and-a-half years after redeploying his brigade to Germany, he returned as executive officer to Gen. David Petraeus as Petraeus implemented the "surge" and the counter- insurgency strategy that helped turn the situation around in Iraq. Mansoor not only observed but helped to implement the Army's painful transition from an organization beholden to Emory Upton to one that recognized the necessity to adapt to an enemy who refused to fight the Upton way.
The conventional wisdom holds that it was civilian interference, especially on the part of Donald Rumsfeld, that was to blame for the difficulties U.S. forces faced in Iraq during the first years of the campaign. According to the dominant narrative, Rumsfeld willfully ignored military advice and initiated the war with a force that was too small. He ignored the need to prepare for post-conflict stability operations, and he failed to adapt to the new circumstances once things began to go wrong, not foreseeing the insurgency that engulfed the country.
It is undeniable that Rumsfeld made many critical mistakes. But the uniformed military was no more prescient than he. Did Rumsfeld insist on an early attack with a smaller force than that recommended by many uniformed officers? Yes. But the plan he pushed was a version of a scheme developed by an Army officer, Col. Douglas MacGregor. The military objective of this plan was not to occupy the country but to liberate Iraq from Saddam and turn governance over to liberal Iraqis. The approach was popular with both Rumsfeld and the military because both took their bearings from the Weinberger Doctrine, a set of rules for the use of force drafted in the 1980s which emphasized the quick, overwhelming application of military force to defeat an enemy, leaving postwar affairs to others.
Did Rumsfeld ignore postwar planning? Again, yes. But in doing so he was merely ratifying the preferences of a uniformed military that had internalized the Weinberger emphasis on an "exit strategy." The fact is that if generals are thinking about an exit strategy they are not thinking about "war termination"--how to convert military success into political success. This cultural aversion to stability operations is reflected in the fact that operational planning for Operation Iraqi Freedom took 18 months while planning for postwar stabilization began half-heartedly only a couple of months before the invasion.
Did Rumsfeld foresee the insurgency and the shift from conventional to guerrilla war? No. But neither did his critics in the uniformed services. Mansoor makes this point clear by observing that, for at least the three decades before the Iraq war, the professional military education system all but ignored counterinsurgency operations. This cultural aversion to counter- insurgency lay at the heart of the difficult years in Iraq (2003-07), and in the absence of a counterinsurgency doctrine the Army fell back on what it knew: conventional offensive operations designed to kill the enemy without protecting the population.
The Army's predisposition toward offensive operations was reinforced in the 1990s by a sort of operational "happy talk" that convinced many (who should have known better) that the American edge in emerging technologies, especially informational technologies, would permit the United States to conduct short, decisive, and relatively bloodless campaigns. This was the lesson many learned from the first Gulf war, and the result was an approach that goes under the name of Rapid Decisive Operations. Mansoor observes that Rapid Decisive Operations misunderstood the timeless nature of war: "What we learned [in Iraq]," he writes, "was that the real objective of the war was not merely the collapse of the old regime but the creation of a stable government." As the old saying goes, in war the enemy has a vote, and in the case of Iraq, our adversaries voted not to fight the kind of war Americans preferred.
As the conflict morphed into an insurgency, U.S. ground troops responded by going after the insurgents, adapting conventional tactics to a guerrilla war. In The Gamble Thomas Ricks quotes a speech by an Army officer that captures the essence of the U.S. approach in Iraq until 2007: "Anytime you fight, you always kill the other sonofabitch. Do not let him live today so he will fight you tomorrow. Kill him today."
This approach made sense when the insurgents stood and fought, as they did in Falluja in April and November 2004. It also made sense during the subsequent "rivers campaign" of 2005, designed to destroy the insurgency in al Anbar Province by depriving it of its base and infrastructure in the Sunni Triangle and the "ratlines" west and northwest of Falluja. It unquestionably killed thousands of insurgents, including Abu Musab al Zarqawi, the leader of Al Qaeda in Iraq, as well as many of his top lieutenants, and led to the capture of many more. Intelligence from captured insurgents, as well as from Zarqawi's computer, had a cascading effect, permitting the coalition to maintain pressure on the insurgency.
But while successful in disrupting insurgent operations, there were too few troops to maintain control of the towns of al Anbar. The insurgents, abandoning their Falluja approach of standing and fighting the Americans, simply melted away, only to return after coalition troops had departed. Thus, while soldiers and Marines were chasing insurgents from sanctuary to sanctuary, they were not providing security for the Iraqi population, leaving them at the mercy of the insurgents who terrorized and intimidated them.
As the insurgency metastasized in 2005 the United States had three military alternatives: continue offensive operations along the lines of those in Anbar after Falluja; adopt a counterinsurgency approach; or emphasize the training of Iraqi troops in order to effect a transition to Iraqi control of military operations. Gen. John Abizaid of Central Command, and Gen. George Casey, the overall commander in Iraq, chose the third option, supported by Rumsfeld and Joint Chiefs chairman Gen. Richard Myers.
But while moving toward Iraqi control was a logical option for the long run, it did little to solve the proximate problem of the insurgency, which had generated sectarian violence. Based on the belief of many senior commanders, especially General Abizaid, that U.S. troops were an "antibody" to Iraqi culture, U.S. forces were consolidated on large "forward operating bases," maintaining a presence only by means of motorized patrols that were particularly vulnerable to attacks by IEDs. In so doing, we ceded territory and population alike to the insurgents. Mansoor describes this approach as a mistake: "Security of the population is the fundamental basis of any successful counterinsurgency strategy."
The withdrawal of American forces to forward operating bases also contributed to a "kick-in-the-door" mentality among troops when they did interact with Iraqis. This was completely at odds with effective counterinsurgency practice, seriously undermining attempts to pacify the country. And yet, despite many difficulties (including resistance from above), some Army and Marine commanders had been implementing a counterinsurgency approach on their own initiative; that is to say, forming partnerships with the Sunni sheikhs in al Anbar province who had tired of al Qaeda's reign of terror in the Sunni Triangle. By providing security to the people in cooperation with the sheikhs, the Americans were able to isolate Al Qaeda in Iraq. And as U.S commanders were struggling with the insurgency, the Army and Marine Corps were developing a counterinsurgency doctrine based on this insight, and an operational strategy that would successfully be applied as part of the surge in 2007.
As a close associate of General Petraeus, Colonel Mansoor helped serve as midwife to the remarkable shift in Iraq arising from a more general application of the lessons that he had learned during his 2003-04 command. This new approach rejected the position articulated by Petraeus's predecessor, General Casey, who had told President George W. Bush in 2006 that "to win, we have to draw down." And General Abizaid of Central Command, sticking to his belief that American soldiers were an "antibody" to Iraqi culture, seconded Casey.
But Petraeus agreed with Mansoor's observation that "counterinsurgency is a thinking soldier's war," requiring "the counterinsurgent to adapt faster than the insurgent." The time for applying a new approach was at hand, and to his credit, President Bush saw the necessity for change and took action.
One of the debates triggered by our experience in Iraq concerns U.S. force structure. As Mansoor puts it, "If we accept the premise that [counterinsurgency and] stability operations [are] of primary concern, then the Army's organization for combat should [be] different." This debate pits the "long war" school against "traditionalists." The former argues that Iraq and Afghanistan are most characteristic of the protracted and ambiguous wars America will fight in the future, and that the military should be developing a force designed to fight the "long war" on terrorism, which envisions the necessity of preparing for small wars, or insurgencies.
The traditionalists concede that irregular warfare will occur more frequently in the future and that fighting small wars is difficult. But traditionalists also conclude that such conflicts do not threaten U.S. strategic interests, while large-scale conflicts, which they believe remain a real possibility, will threaten strategic interests. They fear that the Long War School's focus on small wars and insurgencies will transform the Army back into a constabulary force, whose new capability for conducting stability operations and "nation-building" would be purchased at a high cost: the inability to conduct large-scale conventional war.
This is by no means a parochial debate, of interest only to the uniformed military, and its outcome has implications for broader national security policy: A force structure aligned with the requirement to fight conventional wars would make it more difficult for the United States to fight small wars. This may be a legitimate choice for the United States, but it is one that should be made by policymakers, and not delegated to the uniformed military. To do so would permit military decisions to constrain policy and strategy questions that lie well within the purview of civilian authority, and our experiences in Vietnam and Iraq demonstrate the dangers of leaving military doctrine and force structure strictly to the military.
Mackubin Thomas Owens is editor of Orbis, the journal of the Foreign Policy Research Institute, and professor of national security affairs at the Naval War College.
The Justice Department, torture and the Demjanjuk deportation case
The Justice Department’s Torture Hypocrisy. By Andrew C. McCarthy
Investigate Bush lawyers’ torture analysis one day, cite it favorably the next.
NRO, May 6, 2009 1:30 PM
Investigate Bush lawyers’ torture analysis one day, cite it favorably the next.
NRO, May 6, 2009 1:30 PM
Federal President's attitude on free trade with Latin America
A Welcome Shift. By Jaime Daremblum
Obama appears to be moving in the right direction on free trade with Latin America.
The Weekly Standard, May 07, 2009 12:00:00 AM
Obama appears to be moving in the right direction on free trade with Latin America.
The Weekly Standard, May 07, 2009 12:00:00 AM
Federal President's attitude toward the rule of law, Chrysler & UAW
White House puts UAW ahead of property rights. By Michael Barone
Washington Examiner, May 05, 2009
Last Friday, the day after Chrysler filed for bankruptcy, I drove past the company’s headquarters on Interstate 75 in Auburn Hills, Mich.
As I glanced at the pentagram logo I felt myself tearing up a little bit. Anyone who grew up in the Detroit area, as I did, can’t help but be sad to see a once great company fail.
But my sadness turned to anger later when I heard what bankruptcy lawyer Tom Lauria said on a WJR talk show that morning. “One of my clients,” Lauria told host Frank Beckmann, “was directly threatened by the White House and in essence compelled to withdraw its opposition to the deal under threat that the full force of the White House press corps would destroy its reputation if it continued to fight.”
Lauria represented one of the bondholder firms, Perella Weinberg, which initially rejected the Obama deal that would give the bondholders about 33 cents on the dollar for their secured debts while giving the United Auto Workers retirees about 50 cents on the dollar for their unsecured debts.
This of course is a violation of one of the basic principles of bankruptcy law, which is that secured creditors — those who lended money only on the contractual promise that if the debt was unpaid they’d get specific property back — get paid off in full before unsecured creditors get anything. Perella Weinberg withdrew its objection to the settlement, but other bondholders did not, which triggered the bankruptcy filing.
After that came a denunciation of the objecting bondholders as “speculators” by Barack Obama in his news conference last Thursday. And then death threats to bondholders from parties unknown.
The White House denied that it strong-armed Perella Weinberg. The firm issued a statement saying it decided to accept the settlement, but it pointedly did not deny that it had been threatened by the White House. Which is to say, the threat worked.
The same goes for big banks that have received billions in government Troubled Asset Relief Program money. Many of them want to give back the money, but the government won’t let them. They also voted to accept the Chrysler settlement. Nice little bank ya got there, wouldn’t want anything to happen to it.
Left-wing bloggers have been saying that the White House’s denial of making threats should be taken at face value and that Lauria’s statement is not evidence to the contrary. But that’s ridiculous. Lauria is a reputable lawyer and a contributor to Democratic candidates. He has no motive to lie. The White House does.
Think carefully about what’s happening here. The White House, presumably car czar Steven Rattner and deputy Ron Bloom, is seeking to transfer the property of one group of people to another group that is politically favored. In the process, it is setting aside basic property rights in favor of rewarding the United Auto Workers for the support the union has given the Democratic Party. The only possible limit on the White House’s power is the bankruptcy judge, who might not go along.
Michigan politicians of both parties joined Obama in denouncing the holdout bondholders. They point to the sad plight of UAW retirees not getting full payment of the health care benefits the union negotiated with Chrysler. But the plight of the beneficiaries of the pension funds represented by the bondholders is sad too. Ordinarily you would expect these claims to be weighed and determined by the rule of law. But not apparently in this administration.
Obama’s attitude toward the rule of law is apparent in the words he used to describe what he is looking for in a nominee to replace Justice David Souter. He wants “someone who understands justice is not just about some abstract legal theory,” he said, but someone who has “empathy.” In other words, judges should decide cases so that the right people win, not according to the rule of law.
The Chrysler negotiations will not be the last occasion for this administration to engage in bailout favoritism and crony capitalism. There’s a May 31 deadline to come up with a settlement for General Motors. And there will be others. In the meantime, who is going to buy bonds from unionized companies if the government is going to take their money away and give it to the union? We have just seen an episode of Gangster Government. It is likely to be part of a continuing series.
Washington Examiner, May 05, 2009
Last Friday, the day after Chrysler filed for bankruptcy, I drove past the company’s headquarters on Interstate 75 in Auburn Hills, Mich.
As I glanced at the pentagram logo I felt myself tearing up a little bit. Anyone who grew up in the Detroit area, as I did, can’t help but be sad to see a once great company fail.
But my sadness turned to anger later when I heard what bankruptcy lawyer Tom Lauria said on a WJR talk show that morning. “One of my clients,” Lauria told host Frank Beckmann, “was directly threatened by the White House and in essence compelled to withdraw its opposition to the deal under threat that the full force of the White House press corps would destroy its reputation if it continued to fight.”
Lauria represented one of the bondholder firms, Perella Weinberg, which initially rejected the Obama deal that would give the bondholders about 33 cents on the dollar for their secured debts while giving the United Auto Workers retirees about 50 cents on the dollar for their unsecured debts.
This of course is a violation of one of the basic principles of bankruptcy law, which is that secured creditors — those who lended money only on the contractual promise that if the debt was unpaid they’d get specific property back — get paid off in full before unsecured creditors get anything. Perella Weinberg withdrew its objection to the settlement, but other bondholders did not, which triggered the bankruptcy filing.
After that came a denunciation of the objecting bondholders as “speculators” by Barack Obama in his news conference last Thursday. And then death threats to bondholders from parties unknown.
The White House denied that it strong-armed Perella Weinberg. The firm issued a statement saying it decided to accept the settlement, but it pointedly did not deny that it had been threatened by the White House. Which is to say, the threat worked.
The same goes for big banks that have received billions in government Troubled Asset Relief Program money. Many of them want to give back the money, but the government won’t let them. They also voted to accept the Chrysler settlement. Nice little bank ya got there, wouldn’t want anything to happen to it.
Left-wing bloggers have been saying that the White House’s denial of making threats should be taken at face value and that Lauria’s statement is not evidence to the contrary. But that’s ridiculous. Lauria is a reputable lawyer and a contributor to Democratic candidates. He has no motive to lie. The White House does.
Think carefully about what’s happening here. The White House, presumably car czar Steven Rattner and deputy Ron Bloom, is seeking to transfer the property of one group of people to another group that is politically favored. In the process, it is setting aside basic property rights in favor of rewarding the United Auto Workers for the support the union has given the Democratic Party. The only possible limit on the White House’s power is the bankruptcy judge, who might not go along.
Michigan politicians of both parties joined Obama in denouncing the holdout bondholders. They point to the sad plight of UAW retirees not getting full payment of the health care benefits the union negotiated with Chrysler. But the plight of the beneficiaries of the pension funds represented by the bondholders is sad too. Ordinarily you would expect these claims to be weighed and determined by the rule of law. But not apparently in this administration.
Obama’s attitude toward the rule of law is apparent in the words he used to describe what he is looking for in a nominee to replace Justice David Souter. He wants “someone who understands justice is not just about some abstract legal theory,” he said, but someone who has “empathy.” In other words, judges should decide cases so that the right people win, not according to the rule of law.
The Chrysler negotiations will not be the last occasion for this administration to engage in bailout favoritism and crony capitalism. There’s a May 31 deadline to come up with a settlement for General Motors. And there will be others. In the meantime, who is going to buy bonds from unionized companies if the government is going to take their money away and give it to the union? We have just seen an episode of Gangster Government. It is likely to be part of a continuing series.
WSJ Editorial Page on difficulties with Guantanamo and detainees
Obama's Gitmo Mess. WSJ Editorial
So where is the Pentagon going to send the Yemenis?
WSJ, May 07, 2009
On his second day in office, President Obama ordered the Pentagon to mothball Guantanamo within one year, purportedly to reclaim the "moral high ground." That earned applause from the anti-antiterror squadrons, yet it is now causing all kinds of practical and political problems in what used to be known as the war on terror.
This mess grew even more chaotic this week, when Democrats refused the Administration's $50 million budget request to transfer some of the remaining 241 Gitmo detainees to a prison likely to be somewhere in the U.S. and perhaps to a new one built with taxpayer dollars. "What do we do with the 50 to 100 -- probably in that ballpark -- who we cannot release and cannot try?" Defense Secretary Robert Gates recently asked Congress.
The best answer is Gitmo. But the antiwar left wants terrorists treated like garden-variety criminals in the civilian courts or maybe military courts martial. The not-so-minor problem is that even states that send leftists to Congress don't want to host Gitmo-II. Think California, where Alcatraz could be an option. The abandoned San Francisco Bay prison has Gitmo's virtue of relative isolation -- but Senator Dianne Feinstein, the chairman of the Intelligence Committee, claims it is a national treasure. The terrorist-next-door problem is also rising to a high boil in Kansas politics, given that Fort Leavenworth is being eyed too.
More urgently, the Administration risks losing all control once enemy combatants set foot on formal U.S. soil, which the courts could determine entitles the terrorists to the same Constitutional protections as U.S. citizens. One federal judge has already ordered that 17 detainees -- the Uighurs, a Chinese ethnic minority -- be released domestically. Another judge has ruled that the Supreme Court's 5-4 Boumediene decision, which granted detainees the right to file habeas petitions in U.S. courts, extends to Bagram Air Base in Afghanistan, where the military is holding three times as many prisoners as Guantanamo.
In his Boumediene dissent, Chief Justice John Roberts indicted the majority's "set of shapeless procedures to be defined by federal courts at some future date," and was he ever right. How will judges prevent the public disclosure of classified material? What about Miranda rights, or evidence obtained under battlefield conditions?
Such questions nearly scuttled the Justice Department's case against Ali Saleh Kahlah al-Marri, which flamed out last week with a sentence of only 15 years. According to the plea agreement, al-Marri entered the U.S. on September 10, 2001 on orders from Khalid Sheikh Mohammed to begin research on chemical weapons and potential targets. Prosecutors were hampered by the possibility of disclosing intelligence sources and methods, as well as (yet another) political flare-up about interrogation and detention.
For these reasons and more, the Obama Administration has done a 180-degree turn on George W. Bush's military commissions. Mr. Obama called this meticulous legal process "an enormous failure" during his campaign and suspended it when he cashiered Gitmo, but now Mr. Gates says it is "still very much on the table." The Administration may soon announce that it will be reactivated, with a few torques to the rules of secrecy and evidence to attempt to appease the human-rights lobby.
The hardest Gitmo cases are those prisoners who are known to be dangerous or were actively involved in terror networks but haven't committed crimes per se. Others involve evidence that is insufficient for successful prosecutions but sufficient enough to determine that release or transfer would pose a grave security risk. Many of these detainees are Yemeni, and the Yemeni government is demanding that Washington repatriate them.
That would be an unmitigated disaster, whatever Yemen's promises of rehabilitation. Director of National Intelligence Dennis Blair recently reported that Yemen "is re-emerging as a jihadist battleground and potential regional base of operations for al Qaeda to plan internal and external attacks, train terrorists and facilitate the movement of operatives."
Terror groups have conducted some 20 attacks on U.S. or Western targets in Yemen, the most recent in September against the U.S. embassy, which killed six guards and four civilians. The recidivism rate of those detainees who the military has judged to be good candidates for release from Gitmo is already high, and the danger for the 90 or so Yemenis and others ought to be unacceptable.
Which brings us back to Gitmo's new location, if it ever gets one. Since 1987, the political system has been deadlocked over burying a negligible amount of nuclear waste deep within a remote mountain in Nevada, so it's hard to imagine how it will deal with a terrorist problem that is far more -- how to put it? -- radioactive. Safe to say that any new setting will not be in a 2012 swing state, and you don't have to be a cynic to wonder if it will have two Republican Senators. Mr. Obama could have avoided this mess had he kept his Gitmo options open, but to adapt a famous phrase, the President broke Guantanamo so now he owns the inmates.
So where is the Pentagon going to send the Yemenis?
WSJ, May 07, 2009
On his second day in office, President Obama ordered the Pentagon to mothball Guantanamo within one year, purportedly to reclaim the "moral high ground." That earned applause from the anti-antiterror squadrons, yet it is now causing all kinds of practical and political problems in what used to be known as the war on terror.
This mess grew even more chaotic this week, when Democrats refused the Administration's $50 million budget request to transfer some of the remaining 241 Gitmo detainees to a prison likely to be somewhere in the U.S. and perhaps to a new one built with taxpayer dollars. "What do we do with the 50 to 100 -- probably in that ballpark -- who we cannot release and cannot try?" Defense Secretary Robert Gates recently asked Congress.
The best answer is Gitmo. But the antiwar left wants terrorists treated like garden-variety criminals in the civilian courts or maybe military courts martial. The not-so-minor problem is that even states that send leftists to Congress don't want to host Gitmo-II. Think California, where Alcatraz could be an option. The abandoned San Francisco Bay prison has Gitmo's virtue of relative isolation -- but Senator Dianne Feinstein, the chairman of the Intelligence Committee, claims it is a national treasure. The terrorist-next-door problem is also rising to a high boil in Kansas politics, given that Fort Leavenworth is being eyed too.
More urgently, the Administration risks losing all control once enemy combatants set foot on formal U.S. soil, which the courts could determine entitles the terrorists to the same Constitutional protections as U.S. citizens. One federal judge has already ordered that 17 detainees -- the Uighurs, a Chinese ethnic minority -- be released domestically. Another judge has ruled that the Supreme Court's 5-4 Boumediene decision, which granted detainees the right to file habeas petitions in U.S. courts, extends to Bagram Air Base in Afghanistan, where the military is holding three times as many prisoners as Guantanamo.
In his Boumediene dissent, Chief Justice John Roberts indicted the majority's "set of shapeless procedures to be defined by federal courts at some future date," and was he ever right. How will judges prevent the public disclosure of classified material? What about Miranda rights, or evidence obtained under battlefield conditions?
Such questions nearly scuttled the Justice Department's case against Ali Saleh Kahlah al-Marri, which flamed out last week with a sentence of only 15 years. According to the plea agreement, al-Marri entered the U.S. on September 10, 2001 on orders from Khalid Sheikh Mohammed to begin research on chemical weapons and potential targets. Prosecutors were hampered by the possibility of disclosing intelligence sources and methods, as well as (yet another) political flare-up about interrogation and detention.
For these reasons and more, the Obama Administration has done a 180-degree turn on George W. Bush's military commissions. Mr. Obama called this meticulous legal process "an enormous failure" during his campaign and suspended it when he cashiered Gitmo, but now Mr. Gates says it is "still very much on the table." The Administration may soon announce that it will be reactivated, with a few torques to the rules of secrecy and evidence to attempt to appease the human-rights lobby.
The hardest Gitmo cases are those prisoners who are known to be dangerous or were actively involved in terror networks but haven't committed crimes per se. Others involve evidence that is insufficient for successful prosecutions but sufficient enough to determine that release or transfer would pose a grave security risk. Many of these detainees are Yemeni, and the Yemeni government is demanding that Washington repatriate them.
That would be an unmitigated disaster, whatever Yemen's promises of rehabilitation. Director of National Intelligence Dennis Blair recently reported that Yemen "is re-emerging as a jihadist battleground and potential regional base of operations for al Qaeda to plan internal and external attacks, train terrorists and facilitate the movement of operatives."
Terror groups have conducted some 20 attacks on U.S. or Western targets in Yemen, the most recent in September against the U.S. embassy, which killed six guards and four civilians. The recidivism rate of those detainees who the military has judged to be good candidates for release from Gitmo is already high, and the danger for the 90 or so Yemenis and others ought to be unacceptable.
Which brings us back to Gitmo's new location, if it ever gets one. Since 1987, the political system has been deadlocked over burying a negligible amount of nuclear waste deep within a remote mountain in Nevada, so it's hard to imagine how it will deal with a terrorist problem that is far more -- how to put it? -- radioactive. Safe to say that any new setting will not be in a 2012 swing state, and you don't have to be a cynic to wonder if it will have two Republican Senators. Mr. Obama could have avoided this mess had he kept his Gitmo options open, but to adapt a famous phrase, the President broke Guantanamo so now he owns the inmates.
Regulation Didn't Save Canada's Banks
Regulation Didn't Save Canada's Banks. By Marie-Josee Kravis
Our neighbors to the north keep government out of lending decisions.
WSJ, May 07, 2009
Canada's five largest banks would pass the U.S. government stress test brilliantly. They were profitable in the last quarter of 2008, are well capitalized now, and have had no problems raising additional private capital. On average only 7% of their mortgage portfolios consisted of subprime loans (versus 20% in the U.S.). And no major Canadian bank has required direct government infusions of capital.
Advocates of increased regulation of U.S. financial markets have concluded that more stringent rules governing leverage and capital ratios account for Canada's impressive performance. They champion such measures here. In a Toronto speech earlier this year about reforming the U.S. banking system, former Fed chairman and Obama administration adviser Paul Volcker said the model he is considering "looks more like the Canadian system than it does the American system."
Nevertheless, Canadian banks operate in a very different context. Copying the Canadian banking system in this country, without understanding how its banking and housing sectors operate, would be a mistake.
Start with the housing sector. Canadian banks are not compelled by laws such as our Community Reinvestment Act to lend to less creditworthy borrowers. Nor does Canada have agencies like Fannie Mae and Freddie Mac promoting "affordable housing" through guarantees or purchases of high-risk and securitized loans. With fewer incentives to sell off their mortgage loans, Canadian banks held a larger share of them on their balance sheets. Bank-held mortgages tend to perform more soundly than securitized ones.
In the U.S., Federal Housing Administration programs allowed mortgages with only a 3% down payment, while the Federal Home Loan Bank provided multiple subsidies to finance borrowing. In Canada, if a down payment is less than 20% of the value of a home, the mortgage holder must purchase mortgage insurance. Mortgage interest is not tax deductible.
The differences do not end there. A homeowner in the U.S. can simply walk away from his loan if the balance on his mortgage exceeds the value of his house. The lender has no recourse except to take the house in satisfaction of the debt. Canadian mortgage holders are held strictly responsible for their home loans and banks can launch claims against their other assets.
And yet Canada's homeownership rate equals that in the U.S. (Both fluctuate, in the mid to high 60% range.)
For obvious political reasons, debate in Washington spotlights the need for future financial regulation while glossing over the role of government housing and other regulatory policies in the current crisis. This is dangerous: Without a thorough review of relevant government housing policies, laws and regulations, layering new reforms on top of our current system may only set the stage for another housing crisis in the future.
In response to the current crisis the Canadian government has thus far bought about $55 billion (Canadian) of insured loans from financial institutions (a substantial sum, given that Canada's economy is one-tenth the size of the U.S. economy). It has also played a central role supporting the availability of credit and removing potentially distressed assets from bank balance sheets. Still, these interventions have not arrested a substantial slump in Canadian GDP. Last week the Bank of Canada announced that first quarter 2009 GDP had fallen 7.3%. Bank of Canada Governor Mark Carney (Canada's Ben Bernanke) explained the sharp slowdown in growth: "[I]f we had to boil it down to one issue, it is the slowness with which other G-7 countries have dealt with the problems in their banks."
When it comes to comparing the track record of the U.S. and Canadian banking systems, it is worth noting that Canada's regulations did not prohibit the sale or purchase of asset-backed securities. Early in this decade, Canada's Toronto-Dominion bank was among the world's top 10 holders of securitized assets. The decision to exit these products four to five years ago, Toronto-Dominion's CEO Ed Clarke told me, was simple: "They became too complex. If I cannot hold them for my mother-in-law, I cannot hold them for my clients." No regulator can compete with this standard.
Tighter leverage limits in Canada may have dimmed the incentives for its banks to pursue securitization as brashly as their American counterparts. But regulations cannot take all the credit. Even with leverage ratios held on average at 18 to 1 (versus 26 to 1 for U.S. commercial banks and up to 40 to 1 for U.S. investment banks), Canadian banks would not be as healthy as they are had they not disposed of their more problematic securitized assets four to five years ago. Nothing in Canada's regulations banned risk-taking. Good, prudent management prevented excess.
Those who blame financial deregulation for the breakdown of U.S. markets should note that Canada shed its version of Glass-Steagall more than 20 years ago. Major banks thereafter rapidly bought and absorbed investment banks.
At that time, Canada established the Office of the Superintendent of Financial Institutions (OSFI) to provide common, consistent and more centralized regulation for federally regulated banks, insurance companies and pension funds. To this day OSFI is almost obsessively concerned with risk management, leaving social and economic objectives, such as access to affordable housing and diversity, to institutions better-suited to attain those goals.
Those desirous of importing Canadian banking regulations to the U.S. should first delve more deeply into the actual practices of our northern neighbor's housing and financial system. Choosing selectively often leads to choosing poorly.
Ms. Kravis is a fellow at the Hudson institute.
Our neighbors to the north keep government out of lending decisions.
WSJ, May 07, 2009
Canada's five largest banks would pass the U.S. government stress test brilliantly. They were profitable in the last quarter of 2008, are well capitalized now, and have had no problems raising additional private capital. On average only 7% of their mortgage portfolios consisted of subprime loans (versus 20% in the U.S.). And no major Canadian bank has required direct government infusions of capital.
Advocates of increased regulation of U.S. financial markets have concluded that more stringent rules governing leverage and capital ratios account for Canada's impressive performance. They champion such measures here. In a Toronto speech earlier this year about reforming the U.S. banking system, former Fed chairman and Obama administration adviser Paul Volcker said the model he is considering "looks more like the Canadian system than it does the American system."
Nevertheless, Canadian banks operate in a very different context. Copying the Canadian banking system in this country, without understanding how its banking and housing sectors operate, would be a mistake.
Start with the housing sector. Canadian banks are not compelled by laws such as our Community Reinvestment Act to lend to less creditworthy borrowers. Nor does Canada have agencies like Fannie Mae and Freddie Mac promoting "affordable housing" through guarantees or purchases of high-risk and securitized loans. With fewer incentives to sell off their mortgage loans, Canadian banks held a larger share of them on their balance sheets. Bank-held mortgages tend to perform more soundly than securitized ones.
In the U.S., Federal Housing Administration programs allowed mortgages with only a 3% down payment, while the Federal Home Loan Bank provided multiple subsidies to finance borrowing. In Canada, if a down payment is less than 20% of the value of a home, the mortgage holder must purchase mortgage insurance. Mortgage interest is not tax deductible.
The differences do not end there. A homeowner in the U.S. can simply walk away from his loan if the balance on his mortgage exceeds the value of his house. The lender has no recourse except to take the house in satisfaction of the debt. Canadian mortgage holders are held strictly responsible for their home loans and banks can launch claims against their other assets.
And yet Canada's homeownership rate equals that in the U.S. (Both fluctuate, in the mid to high 60% range.)
For obvious political reasons, debate in Washington spotlights the need for future financial regulation while glossing over the role of government housing and other regulatory policies in the current crisis. This is dangerous: Without a thorough review of relevant government housing policies, laws and regulations, layering new reforms on top of our current system may only set the stage for another housing crisis in the future.
In response to the current crisis the Canadian government has thus far bought about $55 billion (Canadian) of insured loans from financial institutions (a substantial sum, given that Canada's economy is one-tenth the size of the U.S. economy). It has also played a central role supporting the availability of credit and removing potentially distressed assets from bank balance sheets. Still, these interventions have not arrested a substantial slump in Canadian GDP. Last week the Bank of Canada announced that first quarter 2009 GDP had fallen 7.3%. Bank of Canada Governor Mark Carney (Canada's Ben Bernanke) explained the sharp slowdown in growth: "[I]f we had to boil it down to one issue, it is the slowness with which other G-7 countries have dealt with the problems in their banks."
When it comes to comparing the track record of the U.S. and Canadian banking systems, it is worth noting that Canada's regulations did not prohibit the sale or purchase of asset-backed securities. Early in this decade, Canada's Toronto-Dominion bank was among the world's top 10 holders of securitized assets. The decision to exit these products four to five years ago, Toronto-Dominion's CEO Ed Clarke told me, was simple: "They became too complex. If I cannot hold them for my mother-in-law, I cannot hold them for my clients." No regulator can compete with this standard.
Tighter leverage limits in Canada may have dimmed the incentives for its banks to pursue securitization as brashly as their American counterparts. But regulations cannot take all the credit. Even with leverage ratios held on average at 18 to 1 (versus 26 to 1 for U.S. commercial banks and up to 40 to 1 for U.S. investment banks), Canadian banks would not be as healthy as they are had they not disposed of their more problematic securitized assets four to five years ago. Nothing in Canada's regulations banned risk-taking. Good, prudent management prevented excess.
Those who blame financial deregulation for the breakdown of U.S. markets should note that Canada shed its version of Glass-Steagall more than 20 years ago. Major banks thereafter rapidly bought and absorbed investment banks.
At that time, Canada established the Office of the Superintendent of Financial Institutions (OSFI) to provide common, consistent and more centralized regulation for federally regulated banks, insurance companies and pension funds. To this day OSFI is almost obsessively concerned with risk management, leaving social and economic objectives, such as access to affordable housing and diversity, to institutions better-suited to attain those goals.
Those desirous of importing Canadian banking regulations to the U.S. should first delve more deeply into the actual practices of our northern neighbor's housing and financial system. Choosing selectively often leads to choosing poorly.
Ms. Kravis is a fellow at the Hudson institute.
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